UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
1-12897
-------
(Commission File Number)
PROVIDIAN FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware 94-2933952
- ------------------------------- --------------------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
201 Mission Street, San Francisco, California 94105
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(415) 543-0404
--------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of April 28, 2000, there were 142,488,533 shares of the registrant's
Common Stock, par value $0.01 per share, outstanding.
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
FORM 10-Q
INDEX
March 31, 2000
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (unaudited):
Condensed Consolidated Statements of Financial
Condition.............................................3
Condensed Consolidated Statements of Income............4
Condensed Consolidated Statements of Changes in
Shareholders' Equity..................................5
Condensed Consolidated Statements of Cash Flows........6
Notes to Condensed Consolidated Financial
Statements............................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................26
Item 6. Exhibits and Reports on Form 8-K..........................27
Signatures....................................................................28
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
<CAPTION>
(Unaudited)
March 31 December 31
(dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 313,725 $ 182,915
Federal funds sold and securities
purchased under resale agreements 1,232,428 1,298,000
Investment securities:
Available-for-sale 1,580,677 455,238
Held-to-maturity 809,786 126,258
Loans receivable, less allowance for credit losses of $1,160,360
at March 31, 2000 and $1,028,377 at December 31, 1999 11,483,501 10,545,173
Premises and equipment, net 171,003 149,194
Interest receivable 119,920 108,087
Due from securitizations 662,214 614,217
Deferred taxes 625,588 571,040
Other assets 310,147 290,755
-------------------------------------------
Total assets $17,308,989 $14,340,877
===========================================
LIABILITIES
Deposits:
Non-interest bearing $ 62,862 $ 63,890
Interest bearing 13,058,968 10,474,233
-------------------------------------------
13,121,830 10,538,123
Short-term borrowings 216,281 126,289
Long-term borrowings 899,951 958,056
Deferred fee revenue 562,409 578,607
Accrued expenses and other liabilities 838,769 647,326
-------------------------------------------
Total liabilities 15,639,240 12,848,401
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 $0.01 per share (authorized: 800,000,000
shares; issued and outstanding: March 31, 2000--142,456,720
shares; December 31, 1999--142,066,407 shares) 954 954
Retained earnings 1,532,351 1,394,293
Cumulative other comprehensive income 1,179 (2,161)
Common stock held in treasury--at cost: (March 31, 2000--
663,260 shares; December 31, 1999--1,053,573 shares) (24,735) (60,610)
-------------------------------------------
Total shareholders' equity 1,509,749 1,332,476
-------------------------------------------
Total liabilities and shareholders' equity $17,308,989 $14,340,877
===========================================
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
March 31
(dollars in thousands, except per share data) 2000 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME
Loans $ 576,726 $ 279,125
Federal funds sold and securities
purchased under resale agreements 31,735 5,704
Other 19,438 6,787
---------------------------------
Total interest income 627,899 291,616
INTEREST EXPENSE
Deposits 185,887 64,439
Borrowings 18,771 16,062
---------------------------------
Total interest expense 204,658 80,501
Net interest income 423,241 211,115
Provision for credit losses 361,213 182,073
---------------------------------
Net interest income after provision
for credit losses 62,028 29,042
NON-INTEREST INCOME
Servicing and securitizations 154,083 131,211
Credit product fee income 546,418 341,810
Other 27,039 4,235
---------------------------------
727,540 477,256
NON-INTEREST EXPENSE
Salaries and employee benefits 174,980 95,987
Solicitation and advertising 112,122 99,447
Occupancy, furniture, and equipment 30,599 15,304
Data processing and communication 40,618 24,762
Other 140,752 81,606
---------------------------------
499,071 317,106
---------------------------------
Income before income taxes 290,497 189,192
Income tax expense 116,179 75,646
---------------------------------
Net Income $ 174,318 $ 113,546
=================================
Earnings per common share - basic $ 1.23 $ 0.80
=================================
Earnings per common share - assuming dilution $ 1.20 $ 0.78
=================================
Cash dividends paid per common share $ 0.05 $ 0.05
=================================
Weighted average common shares
outstanding - basic (000) 141,640 141,247
=================================
Weighted average common shares
outstanding - assuming dilution (000) 145,250 145,502
=================================
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, 1998 $ 954 $ - $ 866,005 $ (320) $ (63,452) $ 803,187
Comprehensive income:
Net Income 113,546 113,546
Other comprehensive income, net of income tax:
Unrealized gain on securities net of
income taxes of ($94) 159 159
-----------
Comprehensive income 113,705
Cash dividend: Common - $0.05 per share (7,089) (7,089)
Purchase of 275,496 common shares for treasury 19,348 (27,617) (8,269)
Exercise of stock options and other awards (26,230) 3,979 29,858 7,607
Issuance of restricted and unrestricted stock less
forfeited shares (404) 8,495 8,091
Deferred compensation related to grant of
restricted and unrestricted stock less
amortization of $2,164 (5,925) (5,925)
Net tax effect from employee stock plans 13,211 13,211
----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 $ 954 $ - $ 976,441 $ (161) $ (52,716) $ 924,518
==================================================================================
BALANCE AT DECEMBER 31, 1999 $ 954 $ - $1,394,293 $ (2,161) $ (60,610) $1,332,476
Comprehensive income:
Net Income 174,318 174,318
Other comprehensive income, net of income tax:
Unrealized gain on securities net of
income taxes of ($2,340) 3,510 3,510
Foreign currency translation adjustments
net of income taxes of $113 (170) (170)
-----------
Other comprehensive income 3,340
-----------
Comprehensive income 177,658
Cash dividend: Common - $0.05 per share (7,121) (7,121)
Purchase of 31,485 common shares for treasury - (2,342) (2,342)
Exercise of stock options and other awards 23,395 (29,139) 7,999 2,255
Issuance of restricted and unrestricted stock less
forfeited shares (8,701) 30,218 21,517
Deferred compensation related to grant of
restricted and unrestricted stock less
amortization of $3,134 (18,383) (18,383)
Net tax effect from employee stock plans 3,689 3,689
----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2000 $ 954 $ - $1,532,351 $ 1,179 $ (24,735) $1,509,749
==================================================================================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
PROVIDIAN FINANCIAL CORPORATION AND SUBSIDIARIES
<CAPTION>
Three Months Ended
March 31
(dollars in thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 174,318 $ 113,546
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 361,213 182,073
Depreciation and amortization of premises and equipment 11,489 7,418
Amortization of net loan acquisition costs 7,443 11,201
Amortization of deferred compensation
related to restricted and unrestricted stock 3,134 2,164
Amortization of deferred fee revenue (211,341) (118,405)
Increase in deferred income tax benefit (56,775) (64,709)
Increase in deferred fee revenue 195,143 190,311
Increase in interest receivable (11,833) (9,433)
Net increase in other assets (27,081) (52,156)
Net increase in accrued expenses and other liabilities 195,132 40,702
----------------------------
Net cash provided by operating activities 640,842 302,712
INVESTING ACTIVITIES
Net (increase) decrease in money market instrument investments (683,528) 119,867
Net cash used for loan originations and principal
collections on loans receivable (1,310,885) (1,048,735)
Net increase (decrease) in securitized loans 11,307 (20,187)
Portfolio acquisitions - (127,119)
Increase in due from securitizations (47,997) (2,205)
Purchases of investment securities (1,140,930) (71,046)
Proceeds from maturities of investment securities 21,341 45,372
Decrease (increase) in federal funds sold and securities purchased
under resale agreements 65,572 (302,925)
Net purchases of premises and equipment (33,298) (16,033)
-----------------------------
Net cash used by investing activities (3,118,418) (1,423,011)
FINANCING ACTIVITIES
Net increase in deposits 2,583,707 543,031
Proceeds from issuance of term federal funds 330,000 430,000
Repayment of term federal funds (230,009) (447,500)
Decrease in other short-term borrowings (9,999) -
(Decrease) increase in long-term borrowings (58,105) 549,502
Purchase of treasury stock (2,342) (8,269)
Dividends paid (7,121) (7,089)
Proceeds from exercise of stock options 2,255 7,607
-----------------------------
Net cash provided by financing activities 2,608,386 1,067,282
-----------------------------
Net increase (decrease) in cash and cash equivalents 130,810 (53,017)
Cash and cash equivalents at beginning of period 182,915 176,348
-----------------------------
Cash and cash equivalents at end of period $ 313,725 $ 123,331
=============================
See Notes to Condensed Consolidated Financial Statements.
</TABLE>
<PAGE>
PROVIDIAN FINANCIAL CORPORATION
Notes to Condensed Consolidated Financial Statements
March 31, 2000 (Unaudited)
Note 1 - Basis of Presentation
The condensed consolidated financial statements include the accounts of
Providian Financial Corporation and its wholly owned subsidiaries (the
"Company"). The Company's subsidiaries offer a range of consumer lending
products, deposit products and membership products marketed through direct mail,
Internet and other channels. 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 month period
ended March 31, 2000 are not necessarily indicative of the results for the year
ended December 31, 2000. The notes to the financial statements contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999 should
be read in conjunction with these condensed consolidated financial statements.
All significant intercompany balances and transactions have been eliminated.
Certain prior period amounts have been reclassified to conform to the 2000
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
March 31
(dollars in thousands, except per share data) 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 174,318 $ 113,546
=====================================
Weighted average common shares outstanding--
basic 141,640 141,247
Effect of dilutive securities
Restricted stock issued--non vested 619 518
Employee stock options (1) 2,745 3,737
Forward purchase contracts 246 --
-------------------------------------
Dilutive potential common shares 3,610 4,255
-------------------------------------
Adjusted weighted average common shares and
assumed conversions 145,250 145,502
=====================================
Earnings per common share--basic $ 1.23 $ 0.80
=====================================
Earnings per common share--assuming dilution $ 1.20 $ 0.78
=====================================
</TABLE>
(1) During the three months ended March 31, 2000, options to purchase
2,921,000 shares of the Company's common stock were not included in
the computation of diluted earnings per common share, because the
exercise price of the options was greater than the average market
price of the common shares and, therefore, the inclusion of such
options would be antidilutive.
Note 3 - Loans Receivable and Allowance for Credit Losses
The following is a summary of the Company's loans receivable at March 31,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
(dollars in thousands) March 31, 2000 December 31,1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Credit cards $ 11,024,843 $ 10,075,185
Home loans 1,637,979 1,520,795
Other 18,025 13,974
--------------------------------------
12,680,847 11,609,954
Allowance for credit losses (1,160,360) (1,028,377)
Net deferred origination fees (36,986) (36,404)
--------------------------------------
$ 11,483,501 $ 10,545,173
======================================
</TABLE>
The activity in the allowance for credit losses for the three months ended
March 31, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
(dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,028,377 $ 451,245
Provision for credit losses 361,213 182,073
Allowance acquired -- 14,310
Foreign currency translation (11) --
Credit losses (255,082) (115,506)
Recoveries 25,863 15,533
--------------------------------------
Net credit losses (229,219) (99,973)
--------------------------------------
Balance at end of period $ 1,160,360 $ 547,655
======================================
</TABLE>
Note 4 - Shareholders' Equity
The Company is party to several agreements to purchase, on a forward basis,
shares of its common stock. At the Company's election, the agreements 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. As of March 31, 2000, the
agreements covered 2,256,613 shares of the Company's common stock at a weighted
forward price of $83.7642 per share. During the three months ended March 31,
2000, the Company did not make any settlements of the forward purchase
agreements. If the agreements had been settled on a net share basis at the March
31, 2000 market price of the Company's common stock ($86.625 per share), the
Company would have received approximately 74,525 shares of its common stock from
the counterparties.
Note 5 - Cumulative Other Comprehensive Income
The components of cumulative other comprehensive income, net of related
tax, for the three months ended March 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Cumulative
Unrealized Foreign Other
Gain/(Loss) Currency Comprehensive
(dollars in thousands) on Securities Translation Income
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1, 1999 $ (320) $ -- $ (320)
Other comprehensive income 253 -- 253
Tax benefit (expense) (94) -- (94)
-----------------------------------------------
Balance, March 31, 1999 $ (161) $ -- $ (161)
===============================================
Balance, January 1, 2000 $ (2,207) $ 46 $ (2,161)
Other comprehensive income 5,850 (283) 5,567
Tax benefit (expense) (2,340) 113 (2,227)
-----------------------------------------------
Balance, March 31, 2000 $ 1,303 $ (124) $ 1,179
===============================================
</TABLE>
Note 6 - Segment Information
The operations of the Company consist of two primary segments: Credit
Card and Emerging Businesses. The Credit Card segment includes credit cards and
secured credit cards. Credit Card customer relationships are initiated through
direct marketing and other distribution channels or credit card portfolio
acquisitions from other financial institutions. The Emerging Businesses segment
represents home loans, First Select, which specializes in the purchase of
delinquent loans for collection, and other new business initiatives. Membership
services revenue, which is derived from both Credit Card and Emerging Businesses
customers, is included in the respective segment summary financial information.
It is the Company's practice to analyze its financial performance on a
managed basis. Segment information is presented below on the Company's managed
loan portfolios. The Company securitizes certain loans and records such
securitizations as sales, which has the effect of removing such loans from the
Company's consolidated statements of financial condition.
The following is a summary of the Company's segment activity on a managed
basis for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Credit Emerging
(dollars in thousands) Card Businesses Other Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three Months Ended March 31, 2000
Revenue $ 1,205,947 52,245 20,612 $ 1,278,804
Profit or loss $ 399,682 3,071 (53,123) $ 349,630
Assets $ 19,756,941 2,167,853 296,360 $ 22,221,154
Three Months Ended March 31, 1999
Revenue $ 986,882 42,428 402 $ 1,029,712
Profit or loss $ 231,092 (26,477) (698) $ 203,917
Assets $ 13,143,110 1,203,648 -- $ 14,346,758
</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 March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31
(dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Total segment profits $ 349,630 $ 203,917
Corporate and other (59,133) (14,725)
--------------------------------------
Income before income taxes $ 290,497 $ 189,192
======================================
</TABLE>
<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 finance products, including credit cards, deposits, and membership
products. The Company through its subsidiary, GetSmart.com, Inc. offers an
online marketplace that provides consumer and business financial product
information and lender connections through proprietary search and application
technology. The Company offers its lending and deposit 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 in the United States and in the United
Kingdom. 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. The Company's market focus is to seek out profitable consumer
segments and apply its risk adjusted, return driven approach to customer
segmentation and pricing. The Company believes this strategy has been
responsible for its continued overall superior financial performance.
On February 29, 2000, the Company announced a realignment of resources
previously dedicated to its home loan business. The Company expects to utilize
these resources, including employees and facilities, in its credit card and
e-commerce businesses, which are experiencing rapid growth and have greater
potential returns. The Company plans to provide access to home loan products
online through its GetSmart.com Web site to new and existing customers. As a
result, the Company will refer home loans to other lenders rather than
originating them. The Company does not expect this realignment of resources to
have a material impact on its financial condition or results of operations.
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, and litigation. These and other risks
and uncertainties are described in detail in the Company's 1999 Annual Report on
Form 10-K under the heading "Cautionary Statements," and in other filings made
by the Company with the Securities and Exchange Commission. 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 March 31, 2000 was $174.3 million, an
increase of 54% over net income of $113.5 million for the three months ended
March 31, 1999. The key drivers to this first quarter performance came from
growth in outstanding loan balances and customer accounts combined with improved
customer retention.
As of March 31, 2000, managed loans, which include reported and securitized
loans, were $22.1 billion, an increase of $1.1 billion, or 5.1%, over the
balance at December 31, 1999. This growth was achieved through increases in the
Company's loan originations, improved customer retention and increased purchase
activity from existing customers facilitated by the Company's ability to upgrade
proven customers to higher line products.
The Company's managed net interest margin on loans remained relatively
stable at 12.19% for the first quarter of 2000 compared to 12.26% for the same
period in 1999. The managed net credit loss rate for the first quarter of 2000
decreased to 7.18% from 7.62% for the same period in 1999; however the managed
net credit loss rate is up from 6.78% for the fourth quarter 1999. The increase
quarter over quarter reflects account seasoning within the managed portfolio.
Consistent with the Company's expectations, the 30+ day managed delinquency rate
for the first quarter of 2000 increased to 5.72% from 5.66% for the fourth
quarter of 1999 and 4.91% for the first quarter of 1999. This account seasoning
is expected to result in a continued increase in the Company's managed net
credit loss rate, rising to an 8% range by the end of 2000. The dollar
contribution to managed revenue from non-interest income in the first quarter
increased more than 56% over the same period in 1999 to $648.5 million, due to
increased revenue from membership products and loan activity fees. 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 $182 million during the first quarter of 2000 to
$499.1 million, reflecting expenses associated with servicing a greater number
of customers and maintaining an employee base that has grown by 66% over that
period.
The Company's return on reported assets was 4.24% for the first quarter of
2000, down from 5.78% for the same period in 1999. This decrease is primarily
the result of the Company's decision to strengthen its balance sheet liquidity
by increasing its investment security portfolio. The Company continued to
maintain the overall strength of its balance sheet during the first quarter of
2000, with improved earnings, combined with a high level of capital retention.
This provided a return on equity of 48.90% for the first quarter of 2000 down
only slightly from 52.19% for the same period in 1999.
Managed Consumer Loan Portfolio and the Impact of Securitization
The Company securitizes credit card, home loan and 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 Company's consolidated statement of financial condition. It is, however,
the Company's practice to analyze its financial performance on a managed basis.
To perform this analysis, the Company uses an adjusted income statement and
statement of financial condition, which add back the effect of securitizations.
The following table summarizes the Company's managed loan portfolio:
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------------
(dollars in thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Period-End Balances:
Reported consumer loans $ 12,680,847 $ 6,857,160
Securitized consumer loans 9,427,700 7,483,655
--------------------------------
Total managed consumer loan portfolio $ 22,108,547 $ 14,340,815
================================
Average Balances:
Reported consumer loans $ 12,196,433 $ 6,283,115
Securitized consumer loans 9,383,946 7,502,226
--------------------------------
Total average managed consumer loan portfolio $ 21,580,379 $ 13,785,341
================================
Operating Data and Ratios:
Reported:
Average earning assets $ 15,621,788 $ 7,232,188
Return on average assets 4.24% 5.78%
Net interest margin (1) 10.84% 11.68%
Managed:
Average earning assets $ 25,005,734 $ 14,734,414
Return on average assets 2.71% 2.98%
Net interest margin (1) 10.56% 11.81%
(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. The Company receives the
proceeds of the sale, and the securitized loans are removed from the Company's
consolidated statements of financial condition. In certain cases, the Company
has retained a subordinated interest in the pool of assets included in a
securitization, with a right to receive collections allocated to such
subordinated interest after payment to investors. Such retained interests are
recorded at fair value and are included in "Due from securitization" on the
Company's consolidated statements of financial condition. At the time it enters
into a securitization, the Company recognizes an "interest-only strip
receivable" asset, which is the present value of the projected excess servicing
income during the period the securitized loans are projected to be outstanding.
"Excess servicing income" refers to the excess of the finance charge and fee
revenue generated by the securitized loans over the sum of the interest paid to
investors, related credit losses, servicing fees, and other transaction
expenses. During the revolving period of a securitization, an additional
interest-only strip receivable is recognized each month, as additional
receivables are generated in the accounts that are in the securitized pool to
replenish the investors' share of principal collections on the securitized
loans. Revenue resulting from excess servicing income is recognized each month
first as a reduction of the interest-only strips receivable and then, to the
extent the amount received exceeds the related component of the interest-only
strips receivable, as servicing and securitization income.
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 consolidated statements of
financial condition as loans receivable at par less the associated allowance for
credit losses. Periodically, the Company transfers new loans receivable into a
securitized pool in order to maintain the seller's interest above an agreed-upon
minimum.
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 effect of securitization accounting 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. For the three months ended
March 31, 2000 and 1999 securitization accounting had the effect of: reducing
net interest income by $237.0 million and $223.8 million; reducing the provision
for credit losses by $158.0 million and $162.8 million; and increasing
non-interest income by $79.0 million and $61.0 million. Because credit losses on
the securitized loans are reflected as a reduction in servicing and
securitization income rather than a reduction of the allowance for credit
losses, the Company's provision for credit losses is lower than would be the
case had such loans not been securitized.
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 on loans plus non-interest 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 March
31, 2000 were $918.7 million and 17.03%, compared to $576.0 million and 16.72%
for the same period in 1999. The increase in managed risk adjusted revenue and
return reflects a decrease in managed net credit loss rates, which were 7.18%
for the three months ended March 31, 2000, compared to 7.62% for the quarter
ended March 31, 1999, reflecting strong asset growth and declining credit loss
rates on high line portfolios.
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 net interest income and interest earned from securitized loans and
spread accounts less interest paid to securitization investors.
Managed net interest income for the three months ended March 31, 2000 was
$660.3 million, compared to $434.9 million for the same period in 1999,
representing an increase of $225.4 million, or 52%. Managed net interest margin
on average managed earning assets decreased to 10.56% for the three months ended
March 31, 2000, from 11.81% for the same period in 1999. The decrease was the
result of the Company's decision to increase liquidity utilizing its investment
portfolio. Managed net interest margin on average managed loans decreased
slightly to 12.19% for the three months ended March 31, 2000, from 12.26% for
the same period in 1999. The decrease in managed net interest margin was the
result of increased borrowing rates for the Company being substantially offset
by increases in finance charge yields. During the course of the past year, the
federal funds rate has been increased 125 basis points. The higher finance
charge yields resulted from an increase in the number of lower line credit card
accounts, 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 reported interest income,
interest expense, net interest spread, and average balances for the three months
ended March 31, 2000 and 1999. 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 March 31
-------------------------------------------------------------------------------
2000 1999
-------------------------------------- ---------------------------------------
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 $ 12,196,433 $ 576,726 18.91% 6,283,115 279,125 17.77%
Interest-earning cash 127,871 1,809 5.66% 95,724 1,171 4.89%
Federal funds sold 2,192,817 31,735 5.79% 479,005 5,704 4.76%
Investment securities 1,104,667 17,629 6.38% 374,344 5,616 6.00%
-------------------------------------------------------------------------------
Total interest-earning assets 15,621,788 $ 627,899 16.08% 7,232,188 $ 291,616 16.13%
Allowance for loan losses (1,101,701) (506,711)
Other assets 1,921,220 1,128,962
-------------- --------------
Total assets $ 16,441,307 $ 7,854,439
============== ==============
LIABILITIES AND EQUITY:
Interest-bearing liabilities
Deposits $ 12,337,384 185,887 6.03% 4,928,978 64,439 5.23%
Borrowings 1,155,204 18,771 6.50% 1,061,815 16,062 6.05%
-------------------------------------------------------------------------------
Total interest-bearing liabilities 13,492,588 $ 204,658 6.07% 5,990,793 $ 80,501 5.37%
Other liabilities 1,362,668 833,356
-------------- --------------
Total liabilities 14,855,256 6,824,149
Capital securities 160,000 160,000
Equity 1,426,051 870,290
-------------- --------------
Total liabilities and equity $ 16,441,307 $ 7,854,439
============== ==============
NET INTEREST SPREAD: 10.01% 10.76%
========= ==========
Interest income to
average interest-earning assets 16.08% 16.13%
Interest expense to
average interest-earning assets 5.24% 4.45%
--------- ----------
Net interest margin 10.84% 11.68%
========= ==========
</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 March 31
2000 vs. 1999
--------------------------------------------
Increase Change due to (1)
----------------------------
(dollars in thousands) (Decrease) Volume Rate
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Consumer loans $ 297,601 $ 278,609 $ 18,992
Federal funds sold 26,031 24,547 1,484
Other securities 12,651 12,070 581
--------------------------------------------
Total interest income 336,283 315,226 21,057
Interest Expense:
Deposits 121,448 110,230 11,218
Borrowings 2,709 1,468 1,241
--------------------------------------------
Total interest expense 124,157 111,698 12,459
--------------------------------------------
Net interest income $ 212,126 $ 203,528 $ 8,598
============================================
(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 table.
</TABLE>
Non-Interest Income
Non-interest income, which consists primarily of servicing and
securitization income and credit product fee income, represented approximately
54% of gross reported revenues for the three months ended March 31, 2000. Total
non-interest income increased 52.4%, or $250.3 million, to $727.5 million for
the three months ended March 31, 2000, compared to $477.3 million for the same
period in 1999. This increase is primarily attributable to increased credit
product fee income realized from membership services revenue and loan activity
fees resulting from an increased customer base.
Servicing and Securitization Income
Servicing and securitization income relates directly to securitized loans.
It includes a servicing fee, which generally offsets the Company's cost of
servicing the securitized loans, excess servicing income, and gains or losses
from the transfer of financial assets (see "--Managed Consumer Loan Portfolio
and the Impact of Securitization"). To the extent subsequent cash flows for
excess servicing income exceed the projected amounts, which were recorded at
present value, the Company will recognize additional servicing and
securitization income during the period in which the servicing is provided.
As of March 31, 2000, securitizations outstanding provided $9.7 billion in
funding, representing 38% of total managed funding, compared with $7.4 billion,
or 46%, as of March 31, 1999. The decrease in securitizations outstanding as a
percentage of total managed funding as of March 31, 2000 was due to the
Company's efforts to diversify its funding sources and increase deposit funding.
A more detailed discussion of the Company's funding sources and the role of
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, it will vary based upon the
same factors that affect those items. 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").
For the three months ended March 31, 2000, servicing and securitization
income increased $22.9 million from the same period in 1999, to $154.1 million.
Excess servicing yields on securitized loans improved for the first quarter of
2000 due to decreases in net credit loss rates which were partially offset by
decreased finance charge and fee yields on securitized loans.
Credit Product Fee Income
Credit product fee income includes loan activity fees, loan performance
fees, and membership services revenue. For the three months ended March 31,
2000, credit product fee income increased 59.9% to $546.4 million, compared to
$341.8 million for the same period in 1999. The Company expects credit product
fee income growth to moderate in 2000. Certain fee revenue realized from
securitized loans is not included in credit product fee income but instead is
recorded as part of servicing and securitization income.
Strong growth in new customers, customers that purchased membership
products, and rising loan activity fee volume contributed to the increase in
credit product fee income during the quarter ended March 31, 2000 over the first
quarter of 1999. For the three months ended March 31, 2000 and 1999, loan
activity fees, which include interchange income and cash advance, annual
membership, and processing fees, totaled $242.7 million and $152.0 million. Loan
activity fee income increased as account growth resulted in increased annual
membership fees, cash advance fees, and interchange income. Loan performance
fees include late fees, returned check fees, and overlimit charges. For the
three months ended March 31, 2000 and 1999, loan performance fees totaled $106.6
million and $95.8 million, reflecting increased overlimit income consistent with
growth in the account base offset in part by a decrease in late fee income.
Membership services revenue results primarily from the sale of various
proprietary membership products that complement the Company's credit 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
March 31, 2000 and 1999, membership services revenue totaled $197.1 million and
$94.0 million. The increase reflects the overall increase in the Company's
customer base and increased sales of membership products to existing customers.
Non-Interest Expense
Non-interest expense includes employee salaries and benefits; loan
solicitation and advertising costs; occupancy, furniture, and equipment costs;
data processing and communication costs; and other non-interest expense. Loan
solicitation and advertising costs include printing, postage, telemarketing,
list processing, and credit bureau costs paid to third parties in connection
with account solicitation efforts. The Company also incurs advertising costs to
promote its consumer financial products. In accordance with GAAP, the Company
has capitalized only the direct nonsolicitation costs (loan origination 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 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
March 31, 2000 and 1999, the Company amortized loan origination costs of $7.4
million and $11.2 million. For the three months ended March 31, 2000 and 1999,
total loan solicitation costs, including amortized loan origination costs, were
$112.1 million and $99.4 million. The increase in loan solicitation costs
reflects new marketing initiatives, including television and Internet
advertising campaigns.
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 months ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended March 31
-------------------------------------
(dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-interest expense
Salaries and employee benefits $ 174,980 $ 95,987
Solicitation and advertising 112,122 99,447
Occupancy, furniture, and equipment 30,599 15,304
Data processing and communication 40,618 24,762
Other 140,752 81,606
-------------------------------------
Total $ 499,071 $ 317,106
=====================================
</TABLE>
Impact of Year 2000
The Company has not experienced any material disruption in its operations
as a result of the Year 2000 date rollover. Monitoring and validation are
scheduled to continue through the end of 2000 to verify that all systems and
applications continue to function properly.
The Company incurred $13.8 million in Year 2000 project expenses through
March 31, 2000. The Company has funded all Year 2000-related costs through
operating cash flows. Year 2000 costs have been expensed as incurred, and such
costs have not had a material impact on the Company's financial results or
condition.
Income Taxes
The Company recognized income tax expense of $116.2 million and $75.6
million for the three months ended March 31, 2000 and 1999. The Company's
effective tax rate was 40.0% for the three months ended March 31, 2000 and 1999.
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 loans receivable
(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
segmentation and underwriting criteria used, account management, seasoning, and
demographic and other factors.
The level of net credit losses directly affects earnings when reserves are
established through recognition of provisions for credit losses. Provisions for
credit losses generally depend on historical levels of net 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 an allowance
for credit losses inherent in the existing portfolio (see "--Allowance and
Provision for Credit Losses"). As net credit losses are experienced, the
previously established reserve is used to absorb the credit losses.
Additionally, the Company adjusts the allowance for credit losses to reflect the
sale of securitized loans and the removal of the related net book value from the
consolidated statements of financial condition.
The Company's policy is to recognize principal credit losses on all
delinquent unsecured loans (including the unsecured portion of any partially
secured credit card loans) 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 but
in no case later than 180 days after such loans become delinquent. 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. After a loan is charged off, the Company
continues collection activity, to the extent legally permissible. Any
collections on previously charged off loans are recognized as recoveries when
realized.
Delinquencies
The following table presents the delinquency trends of the Company's
reported and managed consumer loan portfolios as of March 31, 2000 and 1999. An
account is contractually delinquent if the minimum payment is not received by
the next billing date. Total 30+ day delinquencies on managed loans increased to
5.72% as of March 31, 2000 from 5.66% as of December 31, 1999 and 4.91% as of
March 31, 1999. This increase reflects the overall change in the loan portfolio
composition and account seasoning in lower line credit card asset classes.
<TABLE>
<CAPTION>
March 31
--------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------
% of % of
Total Total
(dollars in thousands) Loans Loans Loans Loans
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Reported:
Loans outstanding $ 12,680,847 100.00% $ 6,857,160 100.00%
Loans delinquent:
30 - 59 days 248,800 1.96% 108,549 1.58%
60 - 89 days 203,678 1.61% 83,352 1.22%
90 or more days 440,397 3.47% 176,615 2.57%
-------------------------------------------------------------------------
Total $ 892,875 7.04% $ 368,516 5.37%
=========================================================================
Managed:
Loans outstanding $ 22,108,547 100.00% $14,340,815 100.00%
Loans delinquent:
30 - 59 days 375,875 1.70% 224,887 1.57%
60 - 89 days 288,082 1.30% 158,902 1.11%
90 or more days 601,185 2.72% 320,885 2.23%
-------------------------------------------------------------------------
Total $ 1,265,142 5.72% $ 704,674 4.91%
=========================================================================
</TABLE>
Net Credit Losses
Net credit losses for consumer loans represent the principal amount of
losses from customers who have not paid their existing loan balances (including
charged-off bankrupt and deceased customer accounts) less current period
recoveries. The principal amounts of such losses include cash advances,
purchases, and certain financed membership product sales. The principal amounts
of such losses 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 expense.
The annualized managed net credit loss rate decreased to 7.18% as of March
31, 2000, compared to 7.62% as of March 31, 1999, reflecting asset growth and
improved credit loss rates on the Company's higher line portfolios partially
offset by increased credit loss rates on the Company's lower line credit card
portfolios. The continued seasoning of the Company's lower line asset classes is
expected to result in an increase in the managed net credit loss rate during
subsequent quarters. The Company's pricing for finance charge and fee income
incorporates an expected higher credit loss rate when appropriate, consistent
with the Company's risk adjusted return approach.
The following table presents the Company's net credit losses 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
March 31
-------------------------------------
(dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Reported:
Average loans outstanding $ 12,196,433 $ 6,283,115
Net credit losses $ 229,219 $ 99,973
Net credit losses as a percentage
of average loans outstanding 7.52% 6.36%
Managed:
Average loans outstanding $ 21,580,379 $ 13,785,341
Net credit losses $ 387,267 $ 262,759
Net credit losses as a percentage
of average loans outstanding 7.18% 7.62%
</TABLE>
Allowance and Provision for Credit Losses
The Company maintains the allowance for credit losses at a level estimated
to be adequate to absorb credit losses, net of recoveries, inherent in the
existing reported loan portfolio. The allowance for credit losses is maintained
for reported loans only (see "--Managed Consumer Loan Portfolio and the Impact
of Securitization"). Accordingly, the entire allowance is allocated to
designated portfolios or pools of the Company's reported loans.
As part of the quantitative evaluation of the allowance for credit losses,
the Company segregates loans by portfolio type. These include portfolios of
various types of credit card and home loan products and acquired loan
portfolios. The quantitative factors the Company uses to establish
portfolio-level reserves are historical delinquencies, historical credit loss
rates, level of security (if applicable), customer characteristics, and other
factors. Home loans that are 90 or more days past due are also evaluated
individually for collectibility in order to establish an allowance for credit
losses. Loan portfolios are grouped into credit card and home loan pools, and
certain qualitative factors are applied to those pools, consistent with
applicable bank regulatory guidelines. In evaluating the need to establish
additional allowances on a pool or portfolio, the Company takes into
consideration qualitative factors, including general economic conditions, trends
in loan portfolio volume and seasoning, geographic concentrations, and recent
modifications to loan review and underwriting procedures. The Company compares
actual credit loss performance against estimated credit losses, and may modify
its loan loss allowance evaluation model accordingly.
The following table sets forth the activity in the allowance for credit
losses for the three months ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------
(dollars in thousands) 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 1,028,377 $ 451,245
Provision for credit losses 361,213 182,073
Allowance acquired - 14,310
Foreign currency translation (11) -
Credit losses (255,082) (115,506)
Recoveries 25,863 15,533
-------------------------------------
Net credit losses (229,219) (99,973)
-------------------------------------
Balance at end of period $ 1,160,360 $ 547,655
=====================================
Allowance for credit losses to loans at period-end 9.15% 7.99%
</TABLE>
The allowance for credit losses increased to $1,160.4 million, or 9.15% of
reported loans, as of March 31, 2000, from $1,028.4 million, or 8.86 % of
reported loans, as of December 31, 1999 and $547.7 million, or 7.99% of reported
loans, as of March 31, 1999. The increase in the allowance for credit losses as
a percentage of reported loans reflects an increase in lower line credit card
loans, which are generally expected to experience higher credit loss rates (see
"--Risk Adjusted Revenue and Return").
Funding and Liquidity
The Company funds its assets through a diversified mix of funding products
designed to appeal to a broad range of investors, with the goal of generating
funding at the lowest cost possible while maintaining liquidity at prudent
levels and managing interest rate risk.
The primary goal of the Company's liquidity management 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, including diversification of funding sources, dispersion of
maturities, maintenance of a prudent investment portfolio and cash balances, and
maintenance of committed credit facilities.
Funding Sources and Maturities
The Company seeks to fund its assets by diversifying its distribution
channels and offering a variety of funding products. Among the products offered
are 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 maturity terms for its funding products that range from
one week to 30 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 utilized and by the rates
offered on different products. The Company seeks to maintain a balanced
distribution of maturities, avoiding undue concentration in any one period. The
Company monitors existing funding maturities and loan growth projections with
the goal of ensuring that liquidity levels are adequate to support maturities.
The following table summarizes the contractual maturities of deposits at
the Company as of March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-----------------------------------------------------------------------------------------
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 $ 735,834 $ 309,356 $ 1,045,190 $ 675,158 $ 271,852 $ 947,010
Over three months through 12 months 2,124,962 2,894,045 5,019,007 2,080,048 2,084,568 4,164,616
Over one year through five years 1,941,346 3,663,269 5,604,615 1,426,006 2,609,582 4,035,588
Over five years - 429,448 429,448 - 330,000 330,000
Deposits without contractual maturity 978,031 45,539 1,023,570 999,753 61,156 1,060,909
-----------------------------------------------------------------------------------------
Total deposits $5,780,173 $7,341,657 $13,121,830 $5,180,965 $5,357,158 $10,538,123
=========================================================================================
</TABLE>
Deposits increased to $13.1 billion as of March 31, 2000 from $10.5 billion as
of December 31, 1999. This increase is attributable to the Company's continuing
strategy to maintain a large deposit funding base and strong demand for
FDIC-insured deposits.
The Company securitizes loans in order to diversify funding sources and to
obtain an efficient all-in cost of funds, including the cost of capital. The
securitizations are diversified across the public and private securitization
markets and across maturity terms. Pools of securitized loans provide cash flow
for securities sold to investors under legal structures that generally provide
for an interest-only (revolving) period and a principal repayment (amortization
or accumulation) period. During an amortization or accumulation period, payments
on the securitized loans are distributed or accumulated for payment to the
securitization investors, and the portion of the securitized pool of assets
reported on the Company's statement of financial condition will increase.
Private securitizations generally utilize commercial paper-based conduit
facilities and other variable funding programs to securitize loans receivable.
The conduit facilities and variable funding programs are generally renewable
annually. Balances securitized under conduit and variable funding facilities
totaled approximately $3.1 billion as of March 31, 2000.
During the first three months of 2000, the Company completed one term
securitization totaling approximately $525 million.
The Company's term securitizations are expected to amortize over the
periods indicated below, based on currently outstanding securitized loans as of
March 31, 2000:
Amount
Amortizing
Year (dollars in millions)
----------------------------------------------------------------------
2000 $ 410
2001 1,130
2002 1,783
2003 1,612
2004 961
2005 89
The Company believes that it can attract deposits, borrow funds from other
sources, and issue additional asset-backed securities to replace the funding
reflected in the amortization schedule summarized above, although no assurances
can be given to that effect.
The Company, through one of its banking subsidiaries, maintains a program
for the issuance of senior and subordinated debt instruments. Under this
program, the Company from time to time may issue fixed or variable rate debt
instruments in the aggregate principal amount of up to $4.0 billion, with
maturities ranging from seven days to 15 years.
The following table shows the Company's unsecured funding availability and
outstandings as of March 31, 2000:
<TABLE>
<CAPTION>
March 31, 2000
-------------------------------------------------------------
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)(3) 2/98 $ 4,000,000 $ 899,836 2/13
Short-term credit facilities (three 364-day facilities) Various 250,000 -- Various
Short-term U.K. credit facility (364-day facility)(4) 4/99 39,883 15,953 4/01
Revolving credit facility 1/99 750,000 -- 1/03
Providian Financial shelf registration 6/98 2,000,000 -- --
Capital Securities 2/97 160,000 160,000 2/27
</TABLE>
(1) Short-term bank notes issued under the bank note program and short-term and
long-term credit facilities are revolving funding sources. Funding
availability is subject to market conditions and contractual provisions.
(2) Includes availability to issue up to $500 million of subordinated bank
notes, none outstanding as of March 31, 2000.
(3) Bank notes currently outstanding under the bank note program are
medium-term senior bank notes.
(4) (pound)25 million sterling facility in dollars using exchange rate as of
March 31, 2000.
Investments
The Company maintains cash reserves to provide adequate short-term
liquidity. The Company also maintains a portfolio of high-quality investment
securities such as U.S. government and agency obligations, mortgage-backed
securities, commercial paper, interest-earning deposits with other banks,
federal funds sold, and other cash equivalents. Investment securities increased
to $2,390.5 million as of March 31, 2000 from $581.5 million as of December 31,
1999, due to steps taken to enhance the Company's liquidity position, funding
opportunistically at attractive rates in the deposit market. Federal funds sold
and securities purchased under resale agreements decreased to $1.2 billion as of
March 31, 2000 from $1.3 billion as of December 31, 1999.
Credit Facilities
The Company has additional backup liquidity in the form of a $750 million
(reduced from $1.0 billion as of December 31, 1999) unsecured committed
revolving credit facility from a group of financial institutions, which is
scheduled to expire in January 2003. Pursuant to this credit facility, the
Company's two banking subsidiaries, Providian National Bank and Providian Bank,
as borrowers, have access to revolving loans, which bear interest determined by
a competitive bid process or based on the federal funds rate, the London
Interbank Offered Rate (LIBOR), or the prime rate, plus a spread. The Company
guarantees the prompt and complete payment, when due, of the borrowers'
obligations under the credit facility. During the first quarter of 2000, there
were no borrowings under the credit facility. The Company is also a party to
three separate 364-day lines of credit totaling $250 million, under which
short-term borrowings are available for general corporate purposes. The Company
did not borrow funds under these 364-day lines of credit during the first
quarter of 2000. The United Kingdom branch of Providian National Bank is a party
to a sterling denominated 364-day line of credit in the amount of (pound)25
million ($39.9 million equivalent based on the exchange rate at March 31, 2000),
under which short-term borrowings are available for general corporate purposes.
The Company guarantees the prompt and complete payment, when due, of the
borrower's obligations under the sterling facility.
The Company follows a contingency funding plan that defines tests for
management to monitor the Company's liquidity position and prescribes
management's actions in response to various circumstances.
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 shareholders' 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 March 31, 2000, 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 10.42% 15.06%
Tier 1 9.06% 13.76%
Leverage 9.51% 6.36%
</TABLE>
The Company's banking subsidiaries' capital amounts and classifications are also
subject to qualitative judgments by the regulators with respect to components,
risk weightings, and other factors.
Asset/Liability Risk Management
The composition of the Company's consolidated statements of financial
condition consist primarily of investments in interest-earning assets (loans
receivable and investment securities) that 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 have a fixed yield or float at a spread
above the prime rate. While the Company's fixed rate credit card receivables
have no stated maturity or repricing period, the Company may adjust the rate
charged after providing notice to the customer. Interest rates on the Company's
liabilities are generally indexed to LIBOR or bear a fixed rate until maturity.
This asset/liability structure exposes 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; and (b) basis risk, which arises from
changing spread relationships between yield curves and indexes.
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 reported and managed assets and liabilities
in its measurement and management. To measure exposure to interest rate changes,
the Company uses net interest income (NII) and market value of portfolio equity
(MVPE) simulation analysis.
The following table presents the estimated effects of positive and negative
parallel shifts in interest rates as calculated at March 31, 2000 and takes into
consideration the Company's current hedging activity:
<TABLE>
<CAPTION>
March 31, 2000 (1)
----------------------------
Change in Interest Rates Percentage Change In
----------------------------
(in basis points) NII (2) MVPE (3)
---------------------------------------------------------------------------------------------------
<S> <C> <C>
+200 0.8% (4.3)%
Flat 0% 0%
-200 (0.8)% 5.4%
</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.
As part of its interest rate risk measurement process, the Company must make
reasonable estimates about how its customers and competitors will respond to
changes in market interest rates. In addition, 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.
Therefore, the table above should be viewed as the Company's best estimate as to
the general effect of broad and sustained interest rate movements on the
Company's net income and portfolio value.
The Company seeks to mitigate earnings volatility associated with interest
rate movement by generally matching the repricing characteristics of reported
and managed 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 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.
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 swap and cap agreements purchased for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------------------
(dollars in thousands) 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Swap agreements:
Beginning balance $ 880,000 $ 635,500
Additions 100,000 -
Maturities - -
-------------------------------------
Ending balance $ 980,000 $ 635,500
=====================================
Interest rate caps:
Beginning balance $ 644,878 $ 671,000
Additions 96,750 50,000
Maturities 98,701 52,000
-------------------------------------
Ending balance $ 642,927 $ 669,000
=====================================
</TABLE>
Notional amounts of swaps outstanding have increased to offset, in part, the
growth of fixed rate deposits. 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 derivative counterparties to reduce the credit exposure arising from its
hedging transactions.
<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 began an
investigation into the Company's sales and collections practices, including the
marketing of certain membership services products and the posting of customer
payments. In November 1999, the Company received an inquiry from the Connecticut
Attorney General's Office seeking information in connection with a civil
investigation into the Company's credit card issuance and billing practices. The
remedies available to the San Francisco District Attorney's Office and the
Connecticut Attorney General's Office include, but are not limited to, damages,
penalties, fines and/or injunctive relief. The Company continues to cooperate
and have discussions with the San Francisco District Attorney's Office. The
Comptroller has recently joined these discussions. There can be no certainty as
to the outcome of these discussions. The Company also has met with and is
cooperating with the Connecticut Attorney General's Office.
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 in August 1999 in California state court in San Francisco
against the Company, Providian National Bank 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, adding
products and charging fees without customer authorization, changing rates and
terms without proper notice or authorization, and misleading or deceptive sales
practices. A few similar actions filed in other California counties have been
transferred to San Francisco County and coordinated with the Consolidated
Action.
As of May 12, 2000, six similar putative class actions were pending in
state courts, three of which were filed in San Francisco Superior Court and are
expected to be coordinated with the Consolidated Action. Another similar state
case, filed in San Mateo County, California, was not coordinated with the
Consolidated Action and will proceed separately. In addition, one putative class
action was filed in Cook County, Illinois. The Company's motions to dismiss this
action have been granted three times, although the plaintiff has filed another
motion for leave to amend. Another putative class action is pending in Bullock
County, Alabama. As of May 12, 2000, one consolidated putative class action was
pending in federal court. The federal action (the "Multidistrict Action") is a
consolidation of several different actions that had been filed in various
federal courts, and have been transferred by the Federal Judicial Panel on
Multidistrict Litigation to the Eastern District of Pennsylvania. A consolidated
complaint in the Multidistrict Action was filed on February 4, 2000.
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 or improper 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 those statements,
refusal to honor cancellation requests, improper obtaining of credit reports,
breached promises to raise credit limits, and breached promises of high credit
limits.
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. By order dated February 8, 2000, the Federal Judicial
Panel on Multidistrict Litigation transferred the consolidated securities cases
to the Eastern District of Pennsylvania for inclusion with the Multidistrict
Action currently pending in that court.
The lawsuits described above are at a very early stage. No specific measure
of damages has been demanded. 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 the claims made against it. 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 6. Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K.
Exhibit 12.1 Computation of Earnings to Fixed Charges and Ratio of
Earnings 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 February 3, 2000 with respect to
its Registration Statement on Form S-3.
(e) Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements.
<TABLE>
<CAPTION>
Three Months
Ended
March 31 Year Ended December 31
---------------------------------------------------------
(dollars in thousands) 2000 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS TO FIXED CHARGES:
Excluding interest on deposits 13.34 9.83 10.88 14.20 5.93 4.90
Including interest on deposits 2.39 2.99 2.93 2.66 2.34 2.34
EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK:(1)
Excluding interest on deposits 13.34 9.83 10.88 13.28 5.19 4.32
Including interest on deposits 2.39 2.99 2.93 2.63 2.25 2.24
(1) Preferred stock dividend requirements are adjusted to represent a pretax
earnings equivalent.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Providian Financial Corporation
-------------------------------
(Registrant)
Date: May 15, 2000 /s/ David J. Petrini
--------------------
David J. Petrini
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Signatory)
Date: May 15, 2000 /s/ Daniel Sanford
------------------
Daniel Sanford
Senior Vice President and Controller
(Chief Accounting Officer and Duly
Authorized Signatory)
<PAGE>
EXHIBIT INDEX
Exhibit No.
Exhibit 12.1 Computation of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock
Dividend Requirements.
Exhibit 27.1 Financial Data Schedule
<TABLE>
PROVIDIAN FINANCIAL CORPORATION
Select Financial Data
<CAPTION>
Three Months
Ended
March 31 Year Ended December 31
-----------------------------------------------------------
(dollars in thousands) 2000 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
a. Ratio of Earnings to Fixed Charges
INCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $ 290,497 $ 917,425 $ 490,563 $ 311,300 $ 257,251 $ 214,863
Fixed charges 209,430 460,588 254,006 187,843 192,536 160,183
----------------------------------------------------------------------
Earnings, for computation purposes $ 499,927 $1,378,013 $ 744,569 $ 499,143 $ 449,787 $ 375,046
======================================================================
FIXED CHARGES:
Interest on borrowings $ 18,771 $ 92,334 $ 42,931 $ 18,858 $ 49,208 $ 52,732
Interest on deposits 185,887 356,736 204,335 164,252 140,361 105,151
Portion of rents representative of the 4,772 11,518 6,740 4,733 2,967 2,300
interest factor ----------------------------------------------------------------------
Fixed charges, including interest on deposits,
for computation purposes $ 209,430 $ 460,588 $ 254,006 $ 187,843 $ 192,536 $160,183
======================================================================
Ratio of earnings to fixed charges, including
interest on deposits 2.39 2.99 2.93 2.66 2.34 2.34
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $ 290,497 $ 917,425 $ 490,563 $ 311,300 $ 257,251 $214,863
Fixed charges 23,543 103,852 49,671 23,591 52,175 55,032
----------------------------------------------------------------------
Earnings, for computation purposes $ 314,040 $1,021,277 $ 540,234 $ 334,891 $ 309,426 $269,895
======================================================================
FIXED CHARGES:
Interest on borrowings $ 18,771 $ 92,334 $ 42,931 $ 18,858 $ 49,208 $ 52,732
Portion of rents representative of the 4,772 11,518 6,740 4,733 2,967 2,300
interest factor ----------------------------------------------------------------------
Fixed charges, excluding interest on deposits,
for computation purposes $ 23,543 $ 103,852 $ 49,671 $ 23,591 $ 52,175 $ 55,032
======================================================================
Ratio of earnings to fixed charges, excluding
interest on deposits 13.34 9.83 10.88 14.20 5.93 4.90
b. Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements
INCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $ 290,497 $ 917,425 $ 490,563 $ 311,300 $ 257,251 $214,863
Fixed charges 209,430 460,588 254,006 187,843 192,536 160,183
----------------------------------------------------------------------
Earnings, for computation purposes $ 499,927 $1,378,013 $ 744,569 $ 499,143 $ 449,787 $375,046
======================================================================
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
Interest on borrowings $ 18,771 $ 92,334 $ 42,931 $ 18,858 $ 49,208 $ 52,732
Interest on deposits 185,887 356,736 204,335 164,252 140,361 105,151
Portion of rents representative of the 4,772 11,518 6,740 4,733 2,967 2,300
interest factor ----------------------------------------------------------------------
Fixed charges, including interest on deposits,
for computation purposes $ 209,430 $ 460,588 $ 254,006 $ 187,843 $192,536 $160,183
Preferred stock dividend requirements - - - 1,636 7,397 7,397
----------------------------------------------------------------------
Fixed charges and preferred stock dividend requirements,
including interest on deposits, for
computation purposes $ 209,430 $ 460,588 $ 254,006 $ 189,479 $199,932 $167,580
======================================================================
Ratio of earnings to fixed charges and preferred stock
dividend requirements, including interest on deposits 2.39 2.99 2.93 2.63 2.25 2.24
EXCLUDING INTEREST ON DEPOSITS:
EARNINGS:
Income before income taxes $ 290,497 $ 917,425 $ 490,563 $ 311,300 $257,251 $214,863
Fixed charges 23,543 103,852 49,671 23,591 52,175 55,032
----------------------------------------------------------------------
Earnings, for computation purposes $ 314,040 $1,021,277 $ 540,234 $ 334,891 $309,426 $269,895
======================================================================
FIXED CHARGES AND PREFERRED STOCK:
DIVIDEND REQUIREMENTS
Interest on borrowings $ 18,771 $ 92,334 $ 42,931 $ 18,858 $ 49,208 $ 52,732
Portion of rents representative of the 4,772 11,518 6,740 4,733 2,967 2,300
Interest factor ----------------------------------------------------------------------
Fixed charges, excluding interest on deposits,
for computation purposes $ 23,543 $ 103,852 $ 49,671 $ 23,591 $ 52,175 $ 55,032
Preferred stock dividend requirements - - - 1,636 7,397 7,397
----------------------------------------------------------------------
Fixed charges and preferred stock dividend requirements,
excluding interest on deposits, for
computation purposes $ 23,543 $ 103,852 $ 49,671 $ 25,227 $ 59,571 $ 62,429
======================================================================
Ratio of earnings to fixed charges and preferred stock
dividend requirements, excluding interest on deposits 13.34 9.83 10.88 13.28 5.19 4.32
</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 THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 313,725
<SECURITIES> 2,390,463
<RECEIVABLES> 12,643,861
<ALLOWANCES> 1,160,360
<INVENTORY> 0
<CURRENT-ASSETS> 0 <F1>
<PP&E> 171,003
<DEPRECIATION> 0 <F2>
<TOTAL-ASSETS> 17,308,989
<CURRENT-LIABILITIES> 0 <F1>
<BONDS> 0
0
0
<COMMON> 954
<OTHER-SE> 1,508,795
<TOTAL-LIABILITY-AND-EQUITY> 17,308,989
<SALES> 0
<TOTAL-REVENUES> 1,355,439
<CGS> 0
<TOTAL-COSTS> 499,071
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 361,213
<INTEREST-EXPENSE> 204,658
<INCOME-PRETAX> 290,497
<INCOME-TAX> 116,179
<INCOME-CONTINUING> 174,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174,318
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.20
<FN>
<F1> Non-classified balance sheet
<F2> PP&E shown net
</FN>
</TABLE>
