UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from to
Commission file Number 1-6707
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Providian Corporation
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(Exact name of Registrant as specified in its charter)
Delaware 51-0108922
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 West Market Street, Louisville, Kentucky 40202
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (502) 560-2000
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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 and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of October 31, 1996.
Class Shares Outstanding
- ----------------------------------------- -------------------------------
Common Stock, $1.00 par value 93,705,798
<PAGE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PROVIDIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<CAPTION>
September 30,1996 December 31,
(Unaudited) 1995
-------------- ---------------
(Dollars in millions)
<S> <C> <C>
Assets
Investments:
Bonds and stocks, available for sale, at fair value
(Amortized cost of $10,585 and $10,566
in 1996 and 1995, respectively) $ 10,733 $ 11,158
Trading account securities, at fair value 92 105
Commercial mortgage loans 2,770 2,740
Residential mortgage loans 2,809 3,063
Consumer loans, net 2,845 2,968
Consumer loans held for securitization 520 123
Policy loans 483 454
Other investments 599 605
-------- --------
Total Investments 20,851 21,216
Cash and cash equivalents 791 708
Deferred policy and loan acquisition costs 1,527 1,481
Value of insurance in force purchased 242 256
Goodwill 204 214
Separate account assets 2,798 2,070
Other assets 917 894
-------- --------
======== ========
Total Assets $ 27,330 $ 26,839
======== ========
Liabilities and Shareholders' Equity
Liabilities:
Benefit reserves and other policy liabilities $ 9,664 $ 9,894
Policyholder contract deposits 6,637 6,858
Banking deposits 2,620 2,158
Separate account liabilities 2,798 2,070
Long-term debt issued by:
Corporate 738 721
Bancorp 50 --
Deferred federal income tax 351 505
Other liabilities 1,477 1,572
-------- --------
Total Liabilities 24,335 23,778
Commitments and Contingencies
Company-Obligated Mandatorily Redeemable
Preferred Securities of Providian LLC 100 100
Shareholders' Equity:
Common stock, $1 par 115 115
Additional paid-in capital 46 50
Net unrealized investment gain 94 359
Retained earnings 3,009 2,770
Common stock held in treasury - at cost:
1996 - 21,713,000 shares;
1995 - 20,967,000 shares (364) (330)
Unearned restricted stock (5) (3)
-------- --------
Total Shareholders' Equity 2,895 2,961
-------- --------
======== ========
Total Liabilities and Shareholders' Equity $ 27,330 $ 26,839
======== ========
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
<PAGE>
Item 1. -- (Continued)
<TABLE>
PROVIDIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Nine Months Three Months
-------------------------- ------------------------
Period Ended September 30 1996 1995 1996 1995
--------- --------- --------- -------
(Amounts in millions, except per common share)
<S> <C> <C> <C> <C>
Revenues:
Premiums and other considerations $ 899 $ 903 $ 293 $ 297
Investment income, net of expenses 1,420 1,395 484 463
Consumer loan servicing fees 195 176 74 77
Realized investment loss (9) (70) (8) (19)
Other income, net 150 107 49 39
------- ------- ------- -------
Total Revenues 2,655 2,511 892 857
Benefits and Expenses:
Benefits and claims 691 657 218 206
Increase in benefit and contract reserves 593 674 203 234
Commissions, net 67 61 22 21
General, administrative and other expenses, net 552 495 198 175
Amortization of deferred policy and loan acquistion costs,
value of insurance in force purchased and goodwill 220 187 71 64
Interest expense 89 82 30 27
------- ------- ------- -------
Total Benefits and Expenses 2,212 2,156 742 727
------- ------- ------- -------
Income before Federal Income Tax 443 355 150 130
Federal Income Tax 130 108 42 40
------- ------- ------- -------
Net Income before Dividends on Company-Obligated Mandatorily
Redeemable Preferred Securities of Providian LLC 313 247 108 90
Dividends on Company-Obligated Mandatorily Redeemable
Preferred Securities of Providian LLC 4 4 2 1
------- ------- ------- -------
Net Income $ 309 $ 243 $ 106 $ 89
======= ======= ======= =======
Net Income per Common Share $ 3.29 $ 2.52 $ 1.13 $ .93
======= ======= ======= =======
Cash Dividends per Common Share $ .75 $ .675 $ .25 $ .225
======= ======= ======= =======
Weighted Average Number of Common Shares
Outstanding During the Period 93.7 96.2 93.6 95.3
======= ======= ======= =======
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
<PAGE>
Item 1. -- (Continued)
<TABLE>
PROVIDIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Nine Months Ended September 30 1996 1995
------------- -----------
(Dollars in millions)
<S> <C> <C>
Net Cash Flows provided by Operations $ 1,026 $ 1,069
Cash Flows from Investment Activities:
Investments sold or matured 5,406 4,204
Cost of securities and mortgage loans acquired (5,064) (4,095)
Additions to operating property (44) (23)
Net increase in consumer loans (2,314) (1,758)
Proceeds from securitization of loans 1,990 1,549
Purchase of securitized consumer loans (39) (241)
All other investment activities (103) 226
------- -------
Net Cash Flows used in Investment Activities (168) (138)
Cash Flows from Financing Activities:
Net increase (decrease) in short-term borrowings (466) 130
Policyholder contract deposits 1,215 1,570
Withdrawals of policyholder contract deposits (2,263) (2,452)
Net increase in banking deposits 462 34
Issuance of long-term debt by:
Corporate 63 84
Bancorp 50 -
Repayment of long-term debt (46) (79)
Net borrowings on Providian Bancorp
revolving line of credit 326 203
Purchase of common stock for treasury (55) (94)
Dividends on common stock (70) (65)
Proceeds from exercise of stock options 9 10
------- -------
Net Cash Flows used in Financing Activities (775) (659)
------- -------
Net Increase in Cash and Cash Equivalents 83 272
Cash and Cash Equivalents at Beginning of Period 708 573
------- -------
Cash and Cash Equivalents at End of Period $ 791 $ 845
======= =======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
PROVIDIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and in
conformity with generally accepted accounting principles and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. All such
adjustments are of a normal recurring nature. Certain 1995 amounts have
been reclassified to conform to the current year presentation. These
reclassifications did not have a significant effect on the Company's
financial position, results of operations or cash flows. The results of
operations for the nine-month period ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year
ending December 31, 1996. These unaudited condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and footnotes included in the Company's annual report on Form
10-K for the year ended December 31, 1995.
B. Per common share amounts have been calculated using net income divided by
the weighted average number of common shares outstanding during the
nine-month period. Fully diluted net income per common share is not
presented as it approximates net income per common share.
C. Consumer loans have been reduced by the sale, without recourse, of
unsecured receivables under asset securitization plans during 1996 of
$1,990.0 million. At September 30, 1996, there were $520.0 million of
consumer loans in process of securitization. Total consumer receivables
outstanding under securitization plans were $5.1 billion at September 30,
1996.
D. An analysis of the allowance for loan losses on consumer and mortgage loans
for the nine-month periods ended September 30, 1996 and 1995 is as follows:
Consumer Mortgage
<TABLE>
<CAPTION>
------------------- ------------------
Nine Months Ended September 30 1996 1995 1996 1995
--------- -------- ------- --------
(Dollars in millions)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 93 $ 76 $ 50 $ 52
Current period provision 90 42 6 13
Current period chargeoffs,
net of recoveries (76) (46) (5) (18)
======= ======= ======= =======
Balance at end of period $ 107 $ 72 $ 51 $ 47
======= ======= ======= =======
</TABLE>
<PAGE>
E. During the nine months ended September 30, 1996, Providian Bancorp had
net borrowings of $326.0 million from its revolving line of credit
agreement. Outstanding borrowings under the agreement were $647.0
million at September 30, 1996.
The amount available under Providian Bancorp's revolving line of credit
was increased from $800.0 million to $1.2 billion during May 1996.
F. During the nine months ended September 30, 1996, the Company issued
$63.0 million of Series D medium-term notes with maturities of 10 to 30
years and interest rates ranging from 6.31 percent to 7.44 percent. In
addition, long-term debt totaling $45.8 million matured during the nine
months ended September 30, 1996.
Providian Bancorp issued $50.0 million of notes with a maturity of
three years and an interest rate of 5.74 percent during the nine months
ended September 30, 1996.
G. During the nine months ended September 30, 1996, the Company repurchased
1,255,980 shares of its common stock at an average price of $43.56 per
share.
H. In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125), which is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. The provisions of SFAS No. 125 which relate
to accounting for transfers and servicing of financial assets are
applicable to the Company's loan securitization activities. Management has
not yet determined the impact that the adoption of SFAS No. 125 will have
on the Company's consolidated financial statements.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This item presents specific comments on material changes to the Company's
results of operations, financial condition, liquidity and capital resources for
the periods reflected in the condensed consolidated financial statements filed
with this report. This analysis should be read in conjunction with the financial
statements, footnotes and management's discussion and analysis included in the
Company's annual report on Form 10-K for the year ended December 31, 1995, and
the Company's quarterly reports on Form 10-Q for the quarters ended March 31,
1996 and June 30, 1996.
Results of Operations
The following discussion compares the results of operations for the nine months
ended September 30, 1996, to the nine months ended September 30, 1995. The
nature of and reasons for any significant variation between the quarters ended
September 30, 1996, and September 30, 1995, are the same as those discussed
below for the respective nine month periods, except where otherwise noted
herein.
Consolidated Results
Providian's net income for the quarter ended September 30, 1996, was $1.13 per
common and common equivalent share (hereinafter called "per common share"), up
21.5 percent from the $0.93 per common share reported for the same period in
1995. Net income for the nine months ended September 30, 1996, was $3.29 per
common share, up 30.6 percent from the $2.52 per common share reported for the
same period in 1995. Net income for the quarter ended September 30, 1996,
included pretax realized losses of $8.3 million, comprised of realized losses on
investments and securities of $5.7 million and $2.6 million in provisions for
mortgage loan losses. Net income for the nine months ended September 30, 1996,
included pretax realized losses of $8.9 million, comprised of $3.2 million of
realized losses on investments and securities and $5.7 million in provisions for
mortgage loan losses. Pretax realized losses were $19.3 million and $69.6
million for the quarter and nine months, respectively, in 1995. The losses for
the nine months ended September 30, 1995, included losses of $56.1 million on
futures transactions used as an economic hedge of the available for sale debt
securities portfolio during that period.
Earnings, as discussed herein, exclude realized investment gains and losses and
related deferred acquisition cost amortization, net of taxes. Earnings for the
quarter ended September 30, 1996, were $1.19 per common share, up 13.3 percent
from the $1.05 per common share reported in the same period in 1995. Earnings
for the nine months ended September 30, 1996, were $3.36 per common share, up
11.6 percent from the $3.01 per common share reported in the same period in
1995. The discussion under "Business Segment Results" highlights the key items
which contributed to the overall growth in earnings.
Revenues, as discussed herein, exclude realized investment gains and losses.
Revenues for the quarter ended September 30, 1996, were $900.3 million, up 2.7
percent from the $876.6 million reported in the same period in 1995. Revenues
for the nine months were $2.7 billion, up 3.2 percent from the $2.6 billion
reported in the same period in 1995. The increases were primarily a result of
higher revenues from significant growth in total managed loans at Providian
Bancorp, partially offset by lower investment income at Providian Capital
Management, primarily due to lower spread-based policyholder balances. Providian
Bancorp's revenues, primarily investment income and consumer loan servicing
fees, increased $52.5 million for the quarter, or 26.2 percent, and $131.8
million for the nine months, or 22.9 percent, from the same periods in 1995.
Providian Capital Management's revenues, primarily investment income, decreased
$22.5 million for the quarter, or 8.0 percent, and $37.3 million for the nine
months, or 4.5 percent, from the same periods in 1995.
Total benefits and expenses increased $15.1 million for the quarter ended
September 30, 1996, or 2.1 percent, and $56.0 million for the nine months ended
September 30, 1996, or 2.6 percent, from the same periods in 1995. Benefits and
reserves decreased $18.8 million for the quarter, or 4.3 percent, and $47.2
million for the nine months, or 3.5 percent, from the same periods in 1995. The
decreases are primarily due to Providian Capital Management's lower credited
rates on reduced policyholder balances, partially offset by Providian Bancorp's
growth in average deposits on hand. General, administrative and other expenses
were up $23.4 million for the quarter, or 13.4 percent, and $57.6 million for
the nine months, or 11.7 percent, from the same periods in 1995. The increases
primarily reflect an increase in the provision for loan losses by Providian
Bancorp to address significant on-balance sheet loan growth and higher credit
loss rates, as well as increased marketing activity. Amortization increased $6.5
million for the quarter, or 10.2 percent, and $32.9 million for the nine months,
or 17.6 percent, from the same periods in 1995. The increases are primarily due
to the normal amortization of increased deferred acquisition costs at Providian
Bancorp as well as the accelerated amortization of a portion of such costs in
connection with the securitization of a portion of Providian Bancorp's home
equity loan portfolio.
Business Segment Results
Providian Bancorp
Providian Bancorp continued its strong performance with pretax earnings of $56.1
million for the quarter and $162.8 million for the nine months ended September
30, 1996, up 17.0 percent and 19.5 percent, respectively, from the same periods
in 1995. These results reflect strong growth in unsecured and home equity loans,
partially offset by lower net interest margins and higher net credit losses.
Total managed loans, including $5.1 billion of securitized receivables and
$520.0 million of receivables in the process of securitization, were $8.6
billion as of September 30, 1996, up 39.5 percent over September 30, 1995,
balances. Managed unsecured receivables grew $2.0 billion from September 30,
1995, as a result of the continued success of the Primary Lender program.
Additionally, the managed home equity loan portfolio, including $415.0 million
of securitized receivables, was $874.5 million as of September 30, 1996, up
$232.7 million from September 30, 1995.
The net interest margin on managed unsecured receivables for the quarter ended
September 30, 1996, decreased to 10.97 percent from the 12.21 percent for the
same period in 1995. The net interest margin on managed unsecured receivables
for the nine months ended September 30, 1996, was 11.09 percent, down from 12.57
percent for the same period in 1995. The decreases resulted from the
three-month, zero percent introductory rate feature offered to attract new
customers into the Primary Lender program. Loan loss reserves related to
on-balance sheet unsecured receivables, excluding receivables held for
securitization, were 4.15 percent at September 30, 1996, compared to 3.97
percent at December 31, 1995, and 3.89 percent at September 30, 1995. The net
credit loss rate for managed unsecured receivables for the quarter increased to
5.53 percent from 4.38 percent for the same period in 1995. The net credit loss
rate for managed unsecured receivables for the nine months was 5.37 percent, up
from 4.39 percent for the same period in 1995. Balances past-due greater than 31
days related to on-balance sheet unsecured receivables were 2.29 percent at
September 30, 1996, compared to 2.41 percent at December 31, 1995, and 2.49
percent at September 30, 1995. Managed unsecured receivable balances past-due
greater than 31 days were 3.71 percent at September 30, 1996, compared to 3.22
percent at December 31, 1995, and 2.94 percent at September 30, 1995. These
increases in net credit losses and past-due balances on managed unsecured
receivables are consistent with industry trends and Providian's expectations.
Providian Direct Insurance
Providian Direct Insurance pretax earnings were $23.1 million for the quarter
and $67.3 million for the nine months ended September 30, 1996, down 21.3
percent and 22.1 percent, respectively, from the same periods in 1995. The
quarterly results included losses in the Property and Casualty segment of $0.7
million, compared to income of $2.6 million in the same period in 1995,
primarily due to declining premiums and higher amortization of deferred
acquisition costs. The nine-month results included losses in the Property and
Casualty segment of $5.1 million, compared to income of $7.3 million in 1995,
primarily attributable to unfavorable claims experience and increased reserves
in the auto line due in part to severe winter storms during late 1995 and the
first quarter of 1996. Additionally, Health earnings were down $2.5 million for
the quarter and $7.7 million for the nine months, primarily from the anticipated
run-off of the Medicare Supplement in force block of business.
Premiums and fee-based revenues were $166.4 million for the quarter and $506.4
million for the nine months ended September 30, 1996, down 3.0 percent and 2.0
percent, respectively, from the same periods in 1995. The premium decline was
primarily due to the repositioning of the military auto business, the strategic
withdrawal from the homeowners business and the anticipated run-off of the
Medicare Supplement in force block of business. Sales declined $15.7 million, or
44.9 percent, for the third quarter and $28.4 million, or 28.9 percent, for the
nine months, reflecting the discontinuance of a Life and Health partnership
arrangement, a decline in direct Health sales and the repositioning of the
military auto business.
<PAGE>
Providian Agency Group
Providian Agency Group pretax earnings were $48.4 million for the quarter ended
September 30, 1996, up 5.7 percent from the same period in 1995, and $141.6
million for the nine months ended September 30, 1996, up 4.1 percent from the
same period in 1995. The increases reflect the continuing effects of expense
management initiatives and favorable Health claims experience. For the nine
month comparison, these favorable results were partially offset by higher
mortality experience in the first half of 1996.
Total premiums and fee-based revenues were essentially even with 1995. However,
total sales declined 18.1 percent for the quarter and 7.2 percent for the nine
months ended September 30, 1996, primarily due to the higher volume of sales
during 1995 associated with the initial roll-out of the First Health AdvantageSM
fee-based product and lower 1996 Marketing Partnership sales associated with two
discontinued partnerships. The combined Life and Health policy termination rate
of 14.3 percent for the nine months was up from the 14.2 percent rate for the
same period in 1995. Including fee-based products in 1996, the termination rate
was 14.8 percent, up from 14.3 percent for the nine months ended September 30,
1995, due to fee-based product terminations.
Providian Capital Management
Providian Capital Management pretax earnings were $39.5 million for the quarter
ended September 30, 1996, up 12.2 percent from the same period in 1995, and
$118.0 million for the nine months ended September 30, 1996, up 21.5 percent
from the same period in 1995. The quarterly earnings increase is primarily due
to the impact of lower credited rates, lower expenses and reduced amortization
of acquisition costs, partially offset by lower investment yields. The
nine-month earnings increase is primarily attributable to lower credited rates
and growth in fee-based earnings, partially offset by lower investment yields
and spread-based deposits. Profit margins on spread-based deposits for the
quarter and nine months ended September 30, 1996, were 113 basis points and 112
basis points, respectively, which were significantly improved from the 93 basis
points and 88 basis points, respectively, in the same periods in 1995.
Providian Capital Management's Individual fee-based deposits continued growing
steadily with balances of $2.1 billion at September 30, 1996, an increase of
50.7 percent over September 30, 1995 balances. Group fee-based Trust GIC
customer balances have grown to $13.1 billion as of September 30, 1996, up 18.6
percent over last year. Individual and Group spread-based deposits declined 6.3
percent and 8.1 percent, respectively, from September 30, 1995. Although sales
of Group products improved in the quarter, individual spread-based sales
remained challenging due to the large amount of funds flowing into the equity
market and a very competitive pricing environment.
<PAGE>
Analysis of Financial Condition
Significant variations between September 30, 1996, and December 31, 1995,
balance sheet items are discussed below.
Assets
Cash and invested assets were $21.6 billion at September 30, 1996, down $282.2
million, or 1.3 percent, from December 31, 1995. The decrease in invested assets
is due to the decline in market value of the Company's available for sale bond
and stock portfolio, reflecting increases in market interest rates during 1996.
Residential mortgage loans decreased $254.0 million, or 8.3 percent, as a result
of the sale of $125.0 million of loans, and from payoffs exceeding purchases
during 1996. Consumer loans, including those held for securitization, increased
$274.0 million, or 8.9 percent, primarily due to the continued success of the
Primary Lender program. Separate account assets and liabilities increased $727.6
million, or 35.1 percent, primarily due to variable annuity sales of $430.2
million and related fund growth of $155.5 million. (For additional information
on the Company's invested assets see the section titled "Asset/Liability
Review").
Liabilities
Banking deposits increased $462.2 million, or 21.4 percent, as Providian Bancorp
utilized them to fund receivable growth. Providian Bancorp also issued $50.0
million of three-year notes (see Note F to the accompanying condensed
consolidated financial statements and the section titled "Liquidity and Capital
Resources"). Deferred federal income tax decreased by $153.9 million, or 30.5
percent, from year end due primarily to the $142.7 million change in deferred
taxes associated with the market value decline on the available for sale bond
and stock portfolio.
Shareholders' Equity
The net unrealized investment gain component of shareholders' equity decreased
$265.1 million from December 31, 1995, reflecting the decrease in the fair value
of the Company's available for sale investment portfolio. The adjustments to
record the effect of the unrealized investment gain on shareholders' equity and
the related balance sheet accounts were as follows:
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 Change
---------------- ---------------- ---------------
(Dollars in millions)
Unrealized investment gain
<S> <C> <C> <C>
Unrealized investment gain
on available for sale securities $ 148.5 $ 592.6 $(444.1)
Adjusted by:
Decrease in deferred
policy acquisition costs (3.8) (40.1) 36.3
Increase in deferred
federal income taxes (50.6) (193.3) 142.7
---------------- ---------------- ---------------
Net unrealized investment gain
on available for sale securities $ 94.1 $ 359.2 $(265.1)
================ ================ ===============
</TABLE>
Asset/Liability Review
Excluding Providian Bancorp, invested assets related to insurance operations
were $17.8 billion, compared to $18.5 billion at December 31, 1995. The
distribution of invested assets at September 30, 1996, has not changed
significantly from December 31, 1995.
Exposure to below investment grade bonds at September 30, 1996, was 5.0 percent,
up slightly from 4.9 percent at December 31, 1995. Default and loss experience
in the securities portfolio was excellent with no significant losses as a result
of impairments this year. As of September 30, 1996, there was a minimal amount
of securities in the bond or preferred stock portfolios that were delinquent as
to interest or dividends.
Problem commercial mortgage loans (based on the American Council of Life
Insurance definition, which includes loans past due 60 days or more, loans in
the process of foreclosure, restructured loans and real estate acquired through
foreclosure) as of September 30, 1996, amounted to 3.15 percent of total
commercial loans, up from 2.96 percent at December 31, 1995. The industry
average for problem commercial mortgage loans was 15.25 percent at June 30, 1996
(the most recently published statistic). Problem residential mortgage loans
(based on Mortgage Bankers Association (MBA) standards, which are based on the
number of loans that are past due 30 days or more, and loans in the process of
foreclosure) were 3.56 percent at September 30, 1996, compared to 3.30 percent
at December 31, 1995. The MBA average for problem residential mortgage loans was
5.22 percent at June 30, 1996 (the most recently published statistic). Loans on
which the Company has discontinued the accrual of interest and restructured
loans accruing interest as of September 30, 1996, and December 31, 1995, were as
follows:
<PAGE>
<TABLE>
<CAPTION>
Commercial Loans Residential Loans
----------------------------------- -------------------------------------
September 30, December 31, September 30, December 31,
1996 1995 1996 1995
----------------- ---------------- ---------------- -------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Non-accrual loans $33.8 $28.5 $30.3 $31.8
Restructured loans,
accruing interest 20.7 14.5 - -
================= ================ ================ ===================
$54.5 $43.0 $30.3 $31.8
================= ================ ================ ===================
</TABLE>
As of September 30, 1996, there were approximately $95.3 million of commercial
mortgage loans with identified potential problems which could cause these loans
to be included in a problem category in the future; however, the Company does
not anticipate any material additional losses to arise from these loans.
Liquidity and Capital Resources
Providian Corporation is a legal entity, separate and distinct from its
subsidiaries and has no business operations. The primary sources of cash to meet
its obligations, including principal and interest payments with respect to
indebtedness, are dividends and other statutorily permitted payments from its
subsidiaries. Management believes that overall sources of cash and liquidity
available to Providian Corporation and its subsidiaries ("the Company") will
continue to be sufficient to satisfy its foreseeable financial obligations.
Net consolidated cash flows from operations were $1.0 billion during the nine
months ended September 30, 1996, and $1.1 billion for the same period of 1995.
These substantial levels come from a base of cash flows from insurance premiums
(particularly from the home service Providian Agency Group operations, which are
very predictable and relatively immune to disintermediation), from banking
operations and from other product sales. See the accompanying condensed
consolidated statements of cash flows for additional information regarding
liquidity and funding.
Investment commitments are planned to coincide with expected cash flows. Normal
day to day cash variations are met by a commercial paper program, supplemented
by committed lines of credit. Commercial paper borrowings averaged $111.3
million during the nine months at a weighted average interest rate of 5.43
percent. Commercial paper outstanding at September 30, 1996, was $49.7 million.
Excluding Providian Bancorp, the Company has committed lines of credit of $750.0
million which would provide additional liquidity should adverse conditions
materialize, and serve as back-up to the commercial paper program. There were no
borrowings under these lines of credit during 1996 and no amounts outstanding
under them as of September 30, 1996. In addition, the Company's bond and stock
portfolio of $10.8 billion at September 30, 1996, provides a significant source
of short-term liquidity.
Providian Bancorp analyzes its current and future liquidity needs to support its
deposit portfolio and asset growth and has a revolving line of credit agreement
which provides liquidity for the existing deposit base, as well as satisfying
short-term funding requirements. During May 1996, the amount available under the
credit agreement was increased from $800.0 million to $1.2 billion. Outstanding
borrowings under the agreement were $647.0 million at September 30, 1996.
Excluding Providian Bancorp, the Company issued $63.0 million of its Series D
medium-term notes during the nine months ended September 30, 1996, and $45.8
million of the Company's long-term debt matured during that period. In addition,
Providian Bancorp issued $50.0 million of three-year notes during the nine
months ended September 30, 1996.
During September 1996, the Company registered $389.0 million of additional
medium-term notes, bringing the total amount of such securities which are
available for issuance to $500.0 million.
During the first nine months of 1996, the Company repurchased 1,255,980 shares
of its common stock at an average price of $43.56 per share to complete the 2.5
million share repurchase program announced during the third quarter of 1995. On
October 1, 1996, the Company announced plans to repurchase approximately 2.0
million additional shares. The specific amount and timing of share repurchases
will depend on market conditions and other factors.
In May 1996, Standard & Poor's Ratings Group ("Standard & Poor's") upgraded
Providian Life and Health Insurance Company's claims-paying ability rating to
AA+ from AA. Standard & Poor's also changed the claims-paying ability ratings
for Commonwealth Insurance and Peoples Security Insurance to AA+ from AAA and
the Company's senior debt rating to AA- from AA. Standard & Poor's also affirmed
its AA- rating of the Company Obligated Mandatorily Redeemable Preferred
Securities of Providian LLC and the commercial paper ratings of A-1+ of the
Company and these three subsidiaries.
In June 1996, two Providian Bancorp subsidiaries, First Deposit National Bank
and Providian National Bank, received first time ratings on unsecured debt
obligations from Duff & Phelps and Standard & Poor's. The banks were assigned
senior long-term obligation ratings of A+ by Duff & Phelps and A by Standard &
Poor's. Short-term obligations were assigned ratings of D-1 by Duff & Phelps and
A-1 by Standard & Poor's. In July 1996, Moody's assigned a first time A2 rating
for long-term deposits, as well as ratings of P-1 for short-term deposits and
other senior obligations. These ratings reflect Providian Bancorp's strong
operating results and strategic position in the marketplace, as well as
Providian's ownership.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, the Company and its subsidiaries are parties
to a number of lawsuits. Management believes that these suits will be resolved
with no material financial impact to the Company.
Item 2. Change in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
Exhibits: Exhibit 27 - Financial Data Schedule
Reports: None
<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 Corporation
-------------------------------------------
(Registrant)
Date: November 13, 1996
------------------------------------------
Robert L. Walker
Senior Vice President -- Finance and Chief
Financial Officer
Date: November 13, 1996
-------------------------------------------
Steven T. Downey
Vice President and Controller
<PAGE>
PROVIDIAN CORPORATION AND SUBSIDIARIES
LIST AND INDEX OF EXHIBITS
Reference Number Per Exhibit Number
Exhibit Table Description of Exhibit Page
- --------------------- ------------------------- ------------------
(27) Financial Data Schedule 27
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF PROVIDIAN CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 10,733 <F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 5,578 <F2>
<REAL-ESTATE> 60 <F3>
<TOTAL-INVEST> 20,851
<CASH> 791
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,527
<TOTAL-ASSETS> 27,330 <F4>
<POLICY-LOSSES> 9,664 <F5>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,637
<NOTES-PAYABLE> 788
0
100 <F6>
<COMMON> 115
<OTHER-SE> 2,780 <F7>
<TOTAL-LIABILITY-AND-EQUITY> 27,330 <F8>
899
<INVESTMENT-INCOME> 1,420
<INVESTMENT-GAINS> (9)
<OTHER-INCOME> 345 <F9>
<BENEFITS> 1,284 <F10>
<UNDERWRITING-AMORTIZATION> 220 <F11>
<UNDERWRITING-OTHER> 619 <F12>
<INCOME-PRETAX> 443
<INCOME-TAX> 130
<INCOME-CONTINUING> 309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309
<EPS-PRIMARY> 3.29
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes Equity securities of $463.
<F2>Includes Commercial and Residential mortgage loans.
<F3>Included in Other investments in the Consolidated Statements of Financial
Condition.
<F4>Includes Consumer Loans of $3,365.
<F5>Includes Benefit reserves and other policy liabilities.
<F6>Consists of Cumulative Monthly Income Preferred Stock issued by subsidiary.
<F7>Includes Additional paid-in capital, Net unrealized investment gain, Retained
earnings, Common stock held in treasury and Unearned restricted stock.
<F8>Includes Savings Deposits of $2,620.
<F9>Includes Consumer loan servicing fees of $195.
<F10>Includes Benefits and claims and Increase in benefit and contract reserves.
<F11>Includes Amortization of deferred policy and loan acquistion costs, value of
insurance in force purchased and goodwill.
<F12>Includes Commissions, net and General, administrative and other expenses, net.
</FN>
</TABLE>
