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 period ended JUNE 30, 1997
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)
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 July 31, 1997.
Class Shares Outstanding
- -------------------------------- ----------------------------------
Common Stock, $1.00 par value 95,253,922
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PROVIDIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
June 30, December 31,
1997 1996
------------- -----------
(Amounts in millions)
Assets
Investments:
Bonds and stocks, available for sale
(Amortized cost of $11,565 and $11,104
in 1997 and 1996, respectively) $ 11,863 $ 11,400
Trading account securities 96 96
Commercial mortgage loans 2,773 2,864
Residential mortgage loans 2,386 2,718
Policy loans 489 487
Other investments 507 586
------- --------
Total Investments 18,114 18,151
Cash and cash equivalents 606 653
Deferred policy and loan acquisition costs 1,482 1,476
Value of insurance in force purchased 227 237
Goodwill 197 202
Separate account assets 4,070 3,240
Net assets of discontinued operations -- 483
Other assets 829 773
-------- --------
Total Assets $ 25,525 $ 25,215
======== ========
Liabilities and Shareholder's Equity
Liabilities:
Benefit reserves and other policy liabilities $ 4,211 $ 4,189
Individual annuity reserves 5,425 5,479
Group annuity deposits 7,159 7,170
Separate account liabilities 4,070 3,240
Long term debt 573 718
Deferred federal income tax 490 471
Other liabilities 669 758
-------- --------
Total Liabilities 22,597 22,025
Commitments and Contingencies
Company-Obligated Mandatorily Redeemable
Preferred Securities of Providian LLC 100 100
Shareholder's Equity:
Common stock, $1 par 95 115
Additional paid-in capital 50 44
Net unrealized investment gain 181 182
Retained earnings 2,502 3,109
Common stock held in treasury - at cost:
1996 - 21.6 shares -- (356)
Unearned restricted stock -- (4)
-------- --------
Total Shareholder's Equity 2,828 3,090
-------- --------
======== ========
Total Liabilities and Shareholder's Equity $ 25,525 $ 25,215
======== ========
See notes to condensed consolidated financial statements
<PAGE>
<TABLE>
Item 1. (Continued)
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Three Months
------------------ ----------------
Period Ended June 30 1997 1996 1997 1996
------------------ ----------------
(Amounts in millions,
except per common share)
<S> <C> <C> <C> <C>
Revenues:
Premiums and other considerations $ 595 $ 606 $ 291 $ 306
Investment income, net of expenses 680 654 340 324
Realized investment gain (loss) 3 (1) (1) (5)
Other income, net 39 42 20 23
----- ----- ----- -----
Total Revenues 1,317 1,301 650 648
Benefits and Expenses:
Benefits and claims 387 407 191 202
Increase in benefit and contract reserves 420 390 204 199
Commissions, net 38 45 18 23
General, administrative and other expenses, net 108 125 50 62
Amortization of deferred policy acquisition costs,
value of insurance in force purchased and goodwill 116 124 58 61
Interest expense 29 30 14 15
Merger expenses 48 -- 47 --
------ ------- ------ -----
Total Benefits and Expenses 1,146 1,121 582 562
Income from continuing operations before Federal Income Tax 171 180 68 86
Federal Income Tax 50 49 23 23
------ ------- ----- -----
Net Income from Continuing Operations before Dividends on
Company-Obligated Mandatorily Redeemable Preferred
Securities of Providian LLC 121 131 45 63
Dividends on Company-Obligated Mandatorily Redeemable
Preferred Securities of Providian LLC 3 3 1 1
------ ------- ----- -----
Income from Continuing Operations 118 128 44 62
Discontinued Operations :
Income from operations of Providian Financial Corporation
(less applicable income taxes of $41 from January 1, 1997 to
June 10, 1997,$39 for the six months in 1996, $20 from
April 1, 1997 to June 10, 1997 and $20 for the three
months in 1996.) 79 74 36 38
------ ------- ----- -----
Net Income $ 197 $ 202 $ 80 100
====== ======= ===== =====
Earnings per share:
Continuing operations $ 1.24 $ 1.37 $ .46 $ .66
Discontinued operations:
Income from operations of Providian Financial Corporation .84 .79 .38 .41
====== ======= ===== =====
Earnings per share $ 2.08 $ 2.16 $ .84 $1.07
====== ======= ===== =====
Cash Dividends per Common Share $ .55 $ .50 $.275 $ .25
====== ======= ===== =====
Weighted Average Number of Common Shares
Outstanding During the Period 94.5 93.7 95.0 93.5
====== ======= ===== =====
See notes to condensed consolidated financial statements.
<PAGE>
</TABLE>
Item 1. (Continued)
<TABLE>
<CAPTION>
PROVIDIAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30 1997 1996
--------- ----------
(Amounts in millions)
<S> <C> <C>
Net Cash Flows provided by Operations $ 681 $ 625
Cash Flows from Investment Activities:
Investments sold or matured 4,489 3,900
Cost of securities and mortgage loans acquired (4,531) (3,522)
Additions to operating property (18) (29)
Net increase in consumer loans (564) (1,561)
Securitization of loans 1,350 1,420
Purchase of securitized consumer loans (325) --
Distribution of Providian Financial Corporation (434)
All other investment activities (145) (66)
------- -------
Net Cash Flows provided by (used in) Investment Activities (179) 142
Cash Flows from Financing Activities:
Net increase (decrease) in short-term borrowings 206 (383)
Policyholder contract deposits 920 784
Withdrawals of policyholder contract deposits (1,417) (1,516)
Net increase (decrease) in banking deposits (531) 145
Issuance of long-term debt by:
Corporate -- 63
Providian Financial Corporation -- 50
Repayment of long-term debt by: -- (38)
Corporate (145) --
Providian Financial Corporation (50) --
Net borrowings (repayments) on Providian Financial Corporation
revolving line of credit 35 345
Issuance of Providian Financial Corporation Obligated Preferred Securities 160
Purchase of common stock for treasury -- (55)
Dividends (26) (47)
Proceeds from exercise of stock options 47 7
------- -------
Net Cash Flows used in Financing Activities (801) (645)
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Net Increase (Decrease) in Cash and Cash Equivalents (299) 122
Cash and Cash Equivalents at Beginning of Period 904 708
------- -------
Cash and Cash Equivalents at End of Period $ 606 $ 830
======= =======
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
Item 1. (Continued)
PROVIDIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
A. On June 10, 1997, Providian completed the Plan and Agreement of Merger and
Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON") and LT
Merger Corp., a wholly owned subsidiary of AEGON ("Merger Sub"), pursuant
to which Merger Sub was merged with and into Providian. Immediately prior
to the closing of the merger, Providian spun-off its banking operation,
Providian Financial Corporation (formerly Providian Bancorp) as a separate
company, to Providian shareholders (the "Distribution"). For each share of
Providian stock owned, shareholders received as a dividend one share of
Providian Financial Corporation in the Distribution. Pursuant to the merger
agreement, among other things, (a) Providian was the surviving corporation
in the merger and is now a wholly owned subsidiary of AEGON, and (b) each
shareholder of Providian received .434417 of one common share of AEGON in
exchange for each share of Providian common stock.
B. 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 on an
historic basis. All such adjustments are of a normal recurring nature. Due
to the existence of outstanding public debt of Providian, such adjustments
do not reflect the push down of accounting adjustments arising from AEGON's
acquisition of Providian. The results of operations for the six-month
period ended June 30, 1997 are not necessarily indicative of the results to
be expected for the full year ending December 31, 1997. These unaudited
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and footnotes included in
Providian Corporation's annual report on Form 10-K for the year ended
December 31, 1996.
C. As discussed in Note A, on June 10, 1997, Providian completed the spin-off
of its banking operations as a separate company, Providian Financial
Corporation, to Providian shareholders. Accordingly, the revenues and
expenses and assets and liabilities of the banking operations have been
excluded from the respective captions in the Condensed Consolidated
Statements of Income and the Condensed Consolidated Statements of Financial
Condition and have been reported as "Income from the operations of
Providian Financial Corporation," net of applicable income taxes and "Net
assets of discontinued operations."
On the Condensed Statements of Cash Flows, Cash and cash equivalents at
the beginning of the period include cash and cash equivalents of the
discontinued operations of $251.4 million and $161.0 million at June 30,
1997 and 1996, respectively, and Cash and cash equivalents at end of period
include cash and cash equivalents of the discontinued operations of $182.1
at June 30, 1996.
The results of discontinued operations for the periods ending June 10, 1997
and June 30, 1996 were as follows:
Six months Three months
-------------- ------------
1997 1996 1997 1996
------- ------ ----- ------
(Dollars in millions)
Total revenue $497 $463 $211 $ 234
------- ------ ----- ------
Net income before dividends on redeemable
capital securities of subsidiary trust holding
solely junior subordinated deferrable interest
debentures of Providian Financial Corporation $ 83 $ 74 $ 38 $38
Dividends on redeemable capital securities of
subsidiary trust holding solely junior
subordinated deferrable interest debentures
of Providian Financial Corporation 4 - 2 -
======= ===== ===== =======
Net Income $ 79 $ 74 $ 36 $ 38
====== ====== ===== =======
<PAGE>
Item 1. (Continued)
The net carrying value as of December 31, 1996 of assets distributed to
shareholders consisted of:
December 31,
1996
--------------------
(Dollars in millions)
Total assets $4,327
Deposits 3,390
Borrowings 259
Other Liabilities 195
Equity 483
D. Merger expenses include one time and nonrecurring costs associated with the
merger of Providian with AEGON. These costs include investment banker and
professional fees, employee benefit costs and other expenses associated
with the merger.
In connection with the merger, 20.1 million shares of Common stock held in
treasury with a cost of $300.5 million were retired. As a result, Common
stock, Additional paid-in capital, and Retained earnings decreased $20.1
million, $6.9 million and $273.5 million, respectively.
E. Per common share amounts have been calculated using net income divided by
the weighted average number of common shares outstanding during the
three-month and six-month periods. Fully diluted net income per common
share is not presented as it approximates net income per common share.
F. An analysis of the allowance for loan losses on mortgage loans for the
six-month period ended June 30, 1997 and 1996 is as follows:
Mortgage
-----------------------
Six Months Ended June 30 1997 1996
---------- --------
(Dollars in millions)
Balance at beginning of period $43 $50
Current period provision 1 3
Current period chargeoffs,
net of recoveries (1) (1)
========== ========
Balance at end of period $43 $52
========== ========
G. During the six months ended June 30, 1997, $50.0 million of medium term
notes matured and $95.0 million in sinking fund debt was retired at a cost
of $99.2 million.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This item presents specific comments on material changes to Providian
Corporation and it's subsidiaries (the "Company") 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, 1996.
This Management's Discussion and Analysis contains certain forward-looking
statements that involve risks and uncertainties. The terms "expects," "plans,"
"believes," "intends," "will continue," "may continue" or similar expressions
are intended to identify such forward-looking statements. Such statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions which may cause the Company's actual results or actions to
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause or contribute to such material differences
include those listed under Merger and Reorganization and are beyond the
Company's ability to control or predict. Readers are cautioned not to put undue
reliance on forward-looking statements.
MERGER AND REORGANIZATION
As discussed in management's discussion and analysis included in the Company's
annual report on Form 10-K for the year ended December 31, 1996, on December 28,
1996, Providian Corporation executed a Plan and Agreement of Merger and
Reorganization (the "Merger Agreement") with AEGON N.V. ("AEGON"), and LT Merger
Corp., a wholly owned subsidiary of AEGON ("Merger Sub"). On June 10, 1997,
Providian completed the transaction, pursuant to which Merger Sub was merged
with and into Providian. Immediately prior to the closing of the merger,
Providian spun-off its banking operation, Providian Financial Corporation
(formerly known as Providian Bancorp), as a separate company, to Providian
shareholders (the "Distribution"). For each share of Providian stock owned,
shareholders received as a dividend one share of Providian Financial Corporation
in the Distribution. Pursuant to the merger agreement, among other things, (a)
Providian was the surviving corporation in the merger and is now a wholly owned
subsidiary of AEGON, and (b) each shareholder of Providian received .434417 of
one common share of AEGON in exchange for each share of Providian common stock.
As a result of the above activities, the company has restated its financial
statements to exclude the revenues and expenses and assets and liabilities of
the banking operations from the respective captions in the Condensed
Consolidated Statements of Income and the Condensed Consolidated Statements of
Financial Condition. The revenues and expenses have been reported as "Income
from the operations of Providian Financial Corporation," net of applicable
income taxes and the assets and liabilities have been reported as "Net assets of
discontinued operations."
RESULTS OF OPERATIONS
The following discussion compares the results of operations for the six months
ended June 30, 1997 to the six months ended June 30, 1996 as restated to reflect
the distribution of Providian Financial Corporation. The nature and reason for
any significant variation between the quarters ended June 30, 1997 and June 30,
1996 are the same as those discussed below for the respective six month periods,
excepted where otherwise noted herein.
CONSOLIDATED RESULTS
Providian's net income for the quarter ended June 30, 1997, was $.84 per common
share, down 21.5 percent from the $1.07 per common share reported for the same
period in 1996. Net income for the six months ended June 30, 1997 was $2.08 per
share down 3.7 percent from the same period in 1996. Providian's net income from
continuing operations for the quarter ended June 30, 1997, was $.46 per common
share, down 30.3 percent from the $.66 per common share for the same period in
1996. Net income from continuing operations for the six months ended June 30,
1997 was $1.24 per share down 9.5 percent from the same period in 1996. Net
income from continuing opeartions is down due to merger related expenses of
$47.8 million. The decrease in net income, including discontinued operations,
also reflects reduced income from Providian Financial Corporation in 1997 as the
result of its spin-off on June 10, 1997. Item 2. (Continued)
Net income of $80.2 million and net income from continuing operations of $44.4
million for the quarter included pretax realized losses of $0.4 million,
comprised of realized losses on investments and securities of $0.8 million and
$0.4 million in mortgage loan gains. Net income of $196.9 million and net income
from continuing operations of $117.5 million for six months included pretax
realized gains of $2.6 million, comprised of realized gains on investment and
securities of $3.8 million and $1.2 million in provisions for mortgage loan
losses. Pretax realized losses were $5.1 million and $0.6 million for the three
and six months ended June 30, 1996, respectively.
Earnings from continuing operations, as discussed herein, exclude realized
investment gains and losses and related deferred acquisition cost amortization,
net of taxes. Earnings for the quarter ended June 30, 1997, were $44.6 million
or $.47 per common share, down 33.8 percent from the $.71 per common share for
the same period in 1996. Year-to-date earnings were $1.24 per common share down
12.1 percent from $1.41 per share for the same period in 1996. The discussion
under "Business Segment Results" and "Discontinued Operations of Providian
Financial Corporation" highlights the key items which contributed to the overall
reduction in earnings.
Revenues from continuing operations, as discussed herein, exclude realized
investment gains and losses. Revenues from continuing operations for the three
months ended June 30, 1997, were $651.0 million, down 0.3 percent from $653.2
million for the same period in 1996. Revenues for the six months of 1997 were
$1.31 billion, up 1.1 percent from $1.30 billion in 1996. The decrease for the
quarter was primarily the result of higher investment income at Providian
Capital Management due to favorable investment results, more than offset by
lower overall premium and other income. The increase for the six months was
principally due to higher investment income at Providian Capital Management due
to favorable investment results, partially offset by lower overall premium
income.
Total benefits and expenses from continuing operations increased $18.9 million,
or 3.4 percent for the quarter and $25.7 million or 2.3 percent for the six
months. The increases in total benefits and expenses were primarily the result
of merger expenses incurred in the second quarter, offset by favorable claims
experience in the Property and Casualty direct auto line for the current
accident year and Agency Group's Life and Health business. The favorable claims
experience resulted in a decrease in benefits and reserves for the quarter of
$6.1 million or 1.5 percent. The $10.2 million increase in benefits and reserves
for the six months was primarily the result of Providian Capital Management's
higher credited rates on higher deposit balances, offset by the favorable claims
experience of the direct auto line and Agency Group's Life and Health business.
Amortization decreased $3.5 million for the quarter, or 5.7 percent and $8.0
million or 6.5 percent for the six months reflecting Providian Capital
Management's recognition of continued better than expected annuity lapse
experience in 1997.
Merger expenses of $47.8 million for the six months ended June 30, 1997 include
one-time, nonrecurring costs associated with the merger of the company with
AEGON. These costs include investment banker and professional fees, employee
benefit costs and other expenses associated with the merger.
BUSINESS SEGMENT RESULTS
PROVIDIAN DIRECT INSURANCE
Providian Direct Insurance pretax earnings were $27.2 million for the quarter
and $50.0 million for the six months, up 21.4 and 13.2 percent, respectively,
from the same periods in 1996. Results improved primarily due to favorable
claims experience in the military life line and in the Property and Casualty
direct auto line, and increased fee-based revenue from the Providian
Prescription Plan in 1997. These results were partially offset by lower Life and
Health premiums in 1997 primarily due to the discontinuance of a joint venture
arrangement, reduced Property and Casualty premium volume and the run-off of the
Medicare supplement closed block of business.
Premiums and fee-based revenues were $160.8 million for the quarter, down 4.3
percent, and $322.5 million for the six months, down 5.1 percent. Total sales
for six months declined 18.8 percent. The premium and sales declines were a
result of the discontinuance of a joint venture arrangement and a decline in
Property and Casualty sales. However, fee-based Health sales increased $5.2
million for six months, reflecting strong demand for a plan featuring discounts
on prescription drugs, eyewear and other health-related items.
<PAGE>
Item 2. (Continued)
PROVIDIAN AGENCY GROUP
Providian Agency Group pretax earnings were $49.2 million for the quarter and
$96.7 million for the six months, up 4.7 percent and 3.8 percent, respectively.
The increases reflected lower Life and Health claims on both home service and
marketing partnership business and higher net investment spreads.
Total annualized premium gain rate, including fee-based products for the six
months of 1997 was 1.7 percent compared to 2.4 percent in 1996, as improved
persistency was partially offset by lower marketing partnership sales, a result
of two discontinued partnerships. The combined Life and Health policy
termination rate of 12.4 percent for the six months was down from 13.8 percent
for the same period in 1996.
The termination rate, including fee-based products, was 12.8 percent at June 30,
1997, down from 14.3 percent.
PROVIDIAN CAPITAL MANAGEMENT
Providian Capital Management pretax earnings were $46.4 million, up 16.7 percent
for the quarter ended June 30, 1997, and $90.9 million, up 15.9 percent for the
six months. Earnings increased primarily due to improved spread margins as a
result of positive investment results, growth in fee-based deposits and
recognition of less amortization expense in 1997. Profit margins on spread-based
deposits for the quarter and six months ended June 30, 1997 were 133 basis
points and 127 basis points, respectively, which improved from the 115 basis
points and 112 basis points in the same periods in 1996, respectively.
Providian Capital Management's Individual fee-based deposits continued growing
steadily with balances of $3.0 billion at June 30, 1997, an increase of 60.2
percent from June 30, 1996. Group fee-based Trust GIC customer balances were
$13.9 billion as of June 30, 1997, up 11.7 percent from 1996. Group spread-based
deposits increased 6.8 percent from June 30, 1996 due to increased sales of
floating rate contracts. Individual spread-based deposits decreased 2.9 percent
from June 30, 1996 balances as sales remained challenging due to the large
amount of funds flowing into the equity market and a very competitive pricing
environment.
DISCONTINUED OPERATIONS OF PROVIDIAN FINANCIAL CORPORATION
Providian Financial Corporation, previously known as Providian Bancorp, was
distributed to shareholders on June 10, 1997. Accordingly, the company has
restated its financial statements to exclude the revenues and expenses and
assets and liabilities of the banking operations from the respective captions in
the Condensed Consolidated Statements of Income and the Condensed Consolidated
Statements of Financial Condition. The revenues and expenses have been reported
as "Income from the operations of Providian Financial Corporation", net of
applicable income taxes." Income from the operations of Providian Financial
Corporation through June 10, 1997 was $79.4 million, net of income taxes, up 6.8
percent when compared to the six months ended June 30, 1996. The growth in
earnings was primarily attributable to the growth in managed unsecured
receivables and increases in noninterest fee income.
ANALYSIS OF FINANCIAL CONDITION
Significant variations between June 30, 1997 and December 31, 1996 balance sheet
items are discussed below.
ASSETS
Cash and invested assets were $18.7 billion at June 30, 1997, down $84.5 million
from December 31, 1996. The decrease was primarily due to lower cash and cash
equivalents of the insurance operations in 1997. Separate account assets and
liabilities increased $829.4 million or 25.6 percent from year end primarily due
to variable annuity sales through one partnership arrangement totaling $386.6
million and related fund growth of $285.5 million. (For additional information
on the Company's invested assets see the section titled "Asset/Liability
Review").
LIABILITIES
Long term debt decreased $145.0 million or 20.2 percent from year end due to the
maturity of $50.0 million of medium term notes during the six months and the
retirement of $95.0 million in sinking fund debt with a cost of $99.2 million.
<PAGE>
Item 2. (Continued)
SHAREHOLDER'S EQUITY
In connection with the merger 20.1 million shares of Common stock held in
treasury with a cost of $300.5 million were retired. As a result, common stock,
Additional paid-in capital, and Retained earnings decreased $20.1 million, $6.9
million and $273.5 million, respectively.
Additional paid-in capital increased $5.5 million or 12.4 percent from year end
primarily due to the exercise of stock options, offset partially by the
retirement of treasury stock. Retained Earnings decreased $607.4 million or 19.5
percent from December 31, 1996 primarily due to the distribution of Providian
Financial Corporation to the Company's shareholders and the retirement of
treasury stock, partially offset by additional net income. Unearned restricted
stock was fully amortized due to the release of all remaining restricted shares
which vested as a result of the merger.
The net unrealized investment gain component of shareholder's equity decreased
$636 thousand from December 31, 1996. The adjustments to record the effect of
the unrealized investment gain on Shareholder's equity and the related balance
sheet accounts were as follows:
June 30 December 31,
1997 1996 Change
----------- ---------- ---------
Unrealized investment gain
on available for sale securities $ 297.9 $ 296.3 $ 1.6
Adjusted by:
Increase (decrease) in deferred
policy acquisition costs (19.4) (16.9) (2.5)
Increase in deferred
federal income taxes (97.4) (97.7) .3
---------- ---------- ---------
Net unrealized investment gain
on available for sale securities $ 181.1 $ 181.7 $ (.6)
=========== ========== =========
ASSET/LIABILITY REVIEW
Invested assets related to insurance operations were $18.1 billion, compared to
$18.2 billion at December 31, 1996. The distribution of invested assets at June
30, 1997, has not changed significantly from December 31, 1996.
Exposure to below investment grade bonds at June 30, 1997, was 5.1 percent, up
from 4.8 percent at December 31, 1996. Default and loss experience in the
securities portfolio was excellent with no significant losses as a result of
impairments this year. As of June 30, 1997, there was a minimal amount of
securities in the bond and 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 June 30, 1997, amounted to 3.8 percent of total commercial
loans, up from 2.9 percent at December 31, 1996. The industry average for
problem commercial mortgage loans was 12.9 percent at March 31, 1997 (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 4.1 percent at June 30, 1997 compared to 4.0 percent at
December 31, 1996. The MBA average for problem residential mortgage loans was
5.0 percent at March 31, 1997 (the most recently published statistic). Loans on
which the Company has discontinued the accrual of interest and restructured
loans accruing interest as of June 30, 1997 and December 31, 1996 were as
follows:
<PAGE>
Item 2. (Continued)
Commercial Loans Residential Loans
----------------------- ----------------------
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
----------------------- ----------------------
(Dollars in millions)
Non-accrual loans $ 42.2 $ 27.1 $ 29.2 $ 32.2
Restructured loans,
accruing interest 30.7 19.1 -- --
------- ------- ------- -------
$ 72.9 $ 46.2 $ 29.2 $ 32.2
======= ======= ======= =======
As of June 30, 1997, there were approximately $23.1 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 the Company will continue to be sufficient to satisfy its
foreseeable financial obligations.
Net consolidated cash flows from operations were $680.9 million during the six
months ended June 30, 1997, and $624.6 million for the same period of 1996.
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) 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 $51.9 million
during the six months at a weighted average interest rate of 5.51 percent.
Commercial paper outstanding at June 30, 1997 was $61.6 million.
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 June 30, 1997. In
addition, the Company's bond and stock portfolio of $12.0 billion at June 30,
1997, provides a significant source of short-term liquidity.
<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
The Company's annual meeting of shareholders was held on June 6, 1997. Following
are the results of proposals voted upon at that meeting. As of the record date,
April 10, 1997, there were 94,599,880 issued and outstanding shares eligible to
vote.
PROPOSAL 1:
Lyle Everingham, Watts Hill, Jr., Ned C. Lautenbach, and Larry D. Thompson were
elected to the Board of Directors. Below is the number of votes cast for or
withheld for each director elected.
Name For Withheld
- ------------------------ ---------------------- ----------------------
Lyle Everingham 81,753,062 1,020,361
Watts Hill, Jr. 81,749,603 1,023,820
Ned C. Lautenbach 81,767,456 1,005,967
Larry D. Thompson 81,766,859 1,006,564
Directors continuing to serve on the Board are John M. Cranor III, J. David
Grissom, F. Warren McFarlan Ph.D., Martha R., Seger, Ph.D., Irving W. Bailey,
II, John L. Clendenin, Raymond V. Gilmartin, Shailesh J. Mehta.
PROPOSAL 2:
The shareholders approved the appointment of Ernst and Young LLP as the
Company's independent auditors. The results of the vote were 82,062,305 for,
382,485 against and 328,633 abstained.
PROPOSAL 3:
The shareholders approved the merger proposal. The results of the vote were
75,296,488 for, 2,166,384 against, and 742,111 abstained.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Exhibits: Exhibit 27 - Financial Data Schedule
Reports:
<PAGE>
On June 2, 1997 the Registrant filed a Form 8-K announcing that it had set a new
record date of June 10, 1997 for the spin-off of its wholly owned subsidiary,
Providian Bancorp, Inc. to the shareholders of the Registrant (the
"Distribution") in connection with the merger of the Registrant's insurance
operations with AEGON U.S.A., a wholly owned subsidiary of AEGON N.V. In
addition, the Registrant announced that its annual shareholders meeting was
adjourned on May 29, 1997 and reconvened on June 6, 1997.
On June 10, 1997, the Registrant filed a Form 8-K announcing the completion of
the merger with LT Merger Corp., a wholly owned subsidiary of AEGON N.V.
pursuant to which the Registrant was the surviving corporation and became a
wholly owned subsidiary of AEGON N.V., effective as of 5:30 p.m., eastern
daylight time, on June 10, 1997. The registrant's shareholders became entitled
to receive .434417 Common Shares of AEGON N.V. for each share of the
Registrant's Common Stock held by them at the effective time. Immediately prior
to the effective time of the merger between the Registrant and AEGON N.V., the
Registrant's banking operations were spun-off as a separate company, Providian
Financial Corporation, including its subsidiaries. Stockholders of the
registrant became entitled to receive as a dividend one share of Providian
Financial Corporation for each share of the Registrant's Common Stock held by
them at the close of business on June 10, 1997. In addition, the Registrant also
filed Pro forma Financial Statements giving effect to the distribution of
Providian Financial Corporation.
<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: August 14, 1997 Robert L. Walker
-------------------------------
Senior Vice President -- Finance
and Chief Financial Officer
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 11,863<F1>
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 5,159<F2>
<REAL-ESTATE> 53<F3>
<TOTAL-INVEST> 18,114
<CASH> 606
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,482
<TOTAL-ASSETS> 25,525
<POLICY-LOSSES> 9,636<F4>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 7,159
<NOTES-PAYABLE> 573
0
100
<COMMON> 95
<OTHER-SE> 2,733<F5>
<TOTAL-LIABILITY-AND-EQUITY> 25,525
595
<INVESTMENT-INCOME> 680
<INVESTMENT-GAINS> 3
<OTHER-INCOME> 39
<BENEFITS> 807<F6>
<UNDERWRITING-AMORTIZATION> 116<F7>
<UNDERWRITING-OTHER> 194<F8>
<INCOME-PRETAX> 171
<INCOME-TAX> 50
<INCOME-CONTINUING> 118
<DISCONTINUED> 79
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197
<EPS-PRIMARY> 2.08
<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 $588.
<F2>Includes Commercial and Residential mortgage loans.
<F3>Included in Other investments in the Consolidated Statements of Financial
Condition.
<F4>Includes Benefit reserves and other policy liabilities and individual
annuity reserves.
<F5>Includes Additional paid-in capital, Net unrealized investment gain,
Retained earnings.
<F6>Includes Benefits and claims and Increase in benefit and contract reserves.
<F7>Includes Amortization of deferred policy acquistion costs, value of
insurance in force purchased and goodwill.
<F8>Includes Commissions, net and General, administrative, merger expenses
and other expenses, net.
</FN>
</TABLE>
