Annual Report (Form 10-K), fiscal year 1994

Item 1. BUSINESS
ORGANIZATION AND SEGMENTS
Providian Corporation (the "Company"), an insurance and diversified financial services company based in Louisville, Kentucky, was incorporated in Delaware in 1969 by Commonwealth Life Insurance Company ("Commonwealth Life"). The objective was to achieve earnings growth through acquisitions of other insurance companies and, thus, effect economies of scale and the sharing of commonly needed resources, while preserving the strengths of acquired companies' marketing operations. The name of the Company was changed from Capital Holding Corporation to Providian Corporation effective May 12, 1994. Through affiliates of its Providian Agency Group, Providian Direct Insurance and Providian Capital Management business units, the Company offers accumulation, life and annuity, accident and health and property and casualty insurance products. The Company's Providian Bancorp affiliates provide consumer loans, deposits and other banking and related services. Providian Agency Group By 1976, the Company had acquired Peoples Life Insurance Company ("Peoples Life") in Washington, D.C.; National Standard Life Insurance Company ("National Standard") in Orlando, Florida; Georgia International Life Insurance Company ("Georgia International") in Atlanta, Georgia; Home Security Life Insurance Company ("Home Security") in Durham, North Carolina; and several other companies that were subsequently merged into these affiliates. On October 1, 1985, Peoples Life and Home Security Life were merged to form Peoples Security Life Insurance Company ("Peoples Security") with headquarters in Durham. On March 31, 1987, the Company sold Georgia International to Southmark Corporation. On April 1, 1988, National Standard was merged into Commonwealth Life. On September 8, 1989, the Company acquired Southlife Holding Company and its primary operating companies, Public Savings Life Insurance Company ("Public Savings Insurance") and Security Trust Life Insurance Company ("Security Trust"). In December, 1991, the Company created Capital Security Life Insurance Company ("Capital Security"), as the successor to Public Savings Insurance. On November 14, 1991, the Company acquired Durham Corporation and its primary operating company, Durham Life Insurance Company ("Durham Life"), with headquarters in Raleigh, North Carolina. On September 30, 1994, Durham Life was merged into Peoples Security. Agency Group's business is conducted primarily through three affiliates: Commonwealth Life, Peoples Security and Capital Security. Providian Direct Insurance
In 1979, Commonwealth Life's property and casualty operation was recapitalized, made a direct subsidiary of the Company and later renamed Capital Enterprise Insurance Company ("Capital Enterprise"). On December 31, 1986, the Company acquired Worldwide Underwriters Insurance Company ("Worldwide Insurance"), located in St. Louis, Missouri, and the personal lines property and casualty insurance business of the Wausau Insurance Companies. Concurrently, it made Capital Enterprise a direct subsidiary of Worldwide Insurance. These two affiliates, together with Capital Landmark Insurance Company, a subsidiary of Capital Enterprise, form the property and casualty line of business of the Providian Direct Insurance business unit. In January 1994, Worldwide Insurance acquired a block of property and casualty business from Skandia U.S. Insurance Company. National Liberty Corporation ("National Liberty") in Valley Forge, Pennsylvania, was acquired on January 14, 1981, and added a nationwide direct marketing operation to what previously had been a regional, agent based marketing system.
- 2 - Item 1. (continued)
In addition, National Home Life Assurance Company ("National Home"), domiciled in Missouri, was also acquired as National Liberty's primary operating company, together with its principal subsidiaries, Veterans Life Insurance Company ("Veterans Life") and National Home Life Insurance Company of New York ("National Home NY").
Effective January 15, 1993, Worldwide Insurance acquired Academy Insurance Group ("Academy") and its affiliates. Academy principally markets life insurance to active duty military service personnel.
Providian Capital Management
In 1987, the institutional accumulation product business, previously managed in Providian Agency Group, and the retail accumulation product business, previously managed by National Liberty, were moved to the business unit formerly known as Accumulation and Investment Group (now Providian Capital Management). Affiliates of Providian Agency Group and Providian Direct Insurance offer these institutional and retail accumulation products. In addition to the marketing and management of accumulation (investment-type) products, Providian Capital Management manages the Company's insurance-related investment portfolios.
Providian Bancorp
In April, 1984, the Company acquired a controlling interest in First Deposit Corporation (which, in September 1994, changed its name to Providian Bancorp, Inc. "Providian Bancorp")), which owns a consumer bank (First Deposit National Bank) and in 1987 established a credit card bank (First Deposit National Credit Card Bank) which, in January 1995, changed its name to Providian National Bank. The Company's ownership of Providian Bancorp was increased each year until 1989 when the remaining shares were purchased. At December 31, 1994, the Company owned 100% of the common stock and 100% of the outstanding preferred stock of Providian Bancorp. These affiliates form the Providian Bancorp business unit.
Financial information about business segments is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. PRODUCTS
Insurance
Commonwealth Life, Peoples Security, Capital Security, National Home, Veterans Life, National Home NY and Academy write a variety of individual, nonparticipating life insurance products. These include universal life contracts, traditional and interest sensitive whole life insurance, term life insurance, endowments, accidental death and dismemberment coverage and premium waiver disability insurance.
- 3 - Item 1. (continued)
The following table reconciles total life insurance in force for the year ended December 31, 1994:
Total Life Insurance (dollars in thousands) In force at December 31, 1993 $65,986,504 Sales and additions 13,855,647 79,842,151 Terminations: Surrender and Conversion 2,056,274 Lapse 9,752,858 Reinsurance - Other 1,958,814 Subtotal 13,767,946
In force at December 31, 1994 $66,074,205( 1)
Number of policies in force before reinsurance ceded at December 31, 1994 1,859,284( 1)
(1)Reinsurance assumed has been included. Reinsurance ceded has not been deducted.
Commonwealth Life, Peoples Security, Capital Security, National Home, Veterans Life, National Home NY and Academy also issue an assortment of individual accident and health insurance products. These include coverages for regular income during periods of hospitalization, scheduled reimbursement for specific hospital/surgical expenses and cancer treatments, hospice care, deductible and co-payment amounts not covered by other health insurance and lump sum payments for accidental death or dismemberment and provide benefits for death and injury resulting from an accident. Additionally, National Home and Academy offer a Medicare supplement product.
Worldwide Insurance, Capital Enterprise and their subsidiaries underwrite personal lines automobile, homeowners and umbrella liability coverages mainly for standard and preferred risks.
Accumulation
The institutional line of accumulation products, offered through Commonwealth Life, Peoples Security and National Home, consists of floating and fixed rate guaranteed investment contracts ("GICs"), Trust GICs and separate account products offered to institutional customers, including pension funds, banks, mutual funds and other organizations. The Trust GICs permit the plan sponsor to own and retain assets related to these contracts and Commonwealth Life and Peoples Security provide benefit responsiveness in the event that benefit requests and other contractual commitments exceed current cash flows. Through National Home, Commonwealth Life and Peoples Security, the Company offers retail accumulation products including immediate life annuities (primarily structured settlements), variable annuities, single premium and flexible premium deferred annuities and individual retirement annuities. Single premium and
- 4 - Item 1. (continued)
flexible premium deferred annuities are offered at a fixed interest rate on either a fixed or indexed basis. In addition, flexible premium deferred annuities are offered on a variable contract basis.
Banking
Providian Bancorp affiliates offer both secured and unsecured loan accounts, as well as a broad range of deposit products. The receivables portfolio consists primarily of unsecured consumer loans which use a VISA or MasterCard credit card as the credit extension vehicle, a revolving cash loan product without a credit card, a savings deposit secured line of credit using a VISA or MasterCard credit card, a home equity secured loan product called Select Equity and insurance premium finance installment loans. Providian Bancorp affiliates also offer fee-based strategic protection products and services such as Credit Protection, Home Protection, First Health Advantagesm and DriveProsm. Deposit products include retail and institutional certificates of deposit and money market deposit accounts.
MARKETING
Providian Agency Group markets individual insurance products primarily through agents, who call on customers in their homes to sell policies and provide related services. Substantially all of the agents are employees of Agency Group affiliates and do not represent other insurers. Such representatives receive compensation from sales commissions, and from renewal and service commissions. The compensation arrangement is designed to reward representatives who not only sell new policies, but who also effectively maintain and service in-force business to meet Company sales and persistency objectives. In addition to its agent sales organization, marketing partnerships have also been formed whereby products are distributed through the insurance and marketing organizations of third parties.
Providian Direct Insurance primarily uses television and print media solicitation, direct mail, telephone and third-party programs to market its insurance products. Additional mail correspondence and telephone communications are used to follow up and close sales. Sponsored marketing programs are conducted through major banks, oil companies, department stores, associations and other businesses with large customer bases. Products are marketed to active duty military personnel on military bases through Agents/Counselors. Property and casualty products are also marketed through a portion of the home service agents of Agency Group. Institutional accumulation products of Providian Capital Management are marketed through a small sales staff, bank trustees, municipal GIC brokers, GIC fund managers, brokers and direct marketing. Retail products are marketed through financial planners, stock brokerage firms, pension consultants, savings and loan associations, banks and other financial institutions. Providian Bancorp's consumer loan and deposit products are primarily marketed using direct mail and telemarketing channels and other direct response methods. Installment loans are primarily marketed through independent third parties. Consumer credit products are also endorsed by, or offered in connection with the products or services of, unaffiliated third parties through joint marketing arrangements with such third parties. The Company's Providian Agency Group affiliates concentrate their marketing efforts in the Southeast and Mid-Atlantic states, while the Providian Direct Insurance, Providian Capital Management and Providian Bancorp business units market their products nationwide.
- 5 - Item 1. (continued)
RISK
Risk is integral to insurance but, as is customary in the insurance business, risk exposure is kept within acceptable limits. The Company's subsidiaries retain no more than $1,000,000 of life insurance and $250,000 of accidental death benefits for any single life. Excess coverages are reinsured externally. At December 31, 1994, approximately $3.7 billion, or approximately 5.6 percent of total life insurance in force, was reinsured with nonaffiliated insurance companies. The Company would become liable for the reinsured risks if the reinsurers could not meet their obligations.
The Company's life insurance affiliates in many cases require evidence of insurability before issuing individual life policies including, in some cases, a medical examination or a statement by an attending physician. Home office underwriters review that evidence and approve the issuance of the policy in accordance with the application if the risk is acceptable. Some applicants who are substandard risks are rejected, but many are offered policies with higher premiums or restricted coverages. As of December 31, 1994, approximately 1.9 percent of life insurance in force was represented by risks which were substandard at the time the policy was issued. The majority of individual health insurance is Providian Direct Insurance business and written without evidence of insurability, relying on safeguards such as product design, limits on the amount of coverage, and premiums which recognize the resultant higher level of claims.
Providian Bancorp's unsecured consumer loans are principally generated through direct mail solicitations sent to a prescreened list of prospective account holders, followed by credit verification. Four principles guide development of specific underwriting criteria for each mailing: (i) sufficient credit history; (ii) no unacceptable derogatory credit remarks; (iii) necessary income qualification; and (iv) no rapid increase in outstanding debt or credit availability.
Detailed discussions about the Company's investments and financial instruments are included in Notes C and D, respectively, to the Consolidated Financial Statements on pages 45-47 of the Company's 1994 Annual Report and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. As a diversified financial services company, many of the Company's assets and liabilities are monetary in nature and thus are sensitive to changes in the interest rate environment. Additional information about interest rate risk is included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. REGULATION
Insurance
The business of the Company's insurance subsidiaries is subject to regulation and supervision by the insurance regulatory authority of each state in which the subsidiaries are licensed to do business. Such regulators grant licenses to transact business; regulate trade practices; approve policy forms; license agents; approve certain premium rates; establish minimum reserve and loss ratio requirements; review form and content of required financial statements; prescribe type and amount of investments permitted; and assure that capital, surplus and solvency requirements are met. Insurance companies can also be required under the solvency or guaranty laws of most states in which they do business to pay assessments up to prescribed limits to fund policyholder losses or liabilities of insolvent insurance companies. They are also required to file detailed annual reports with supervisory agencies, and records of their business are subject to
- 6 - Item 1. (continued)
examination at any time. Under the rules of the National Association of Insurance Commissioners (the "NAIC"), a self regulatory organization of state insurance commissioners, insurance companies are examined periodically by one or more of the supervisory agencies.
The NAIC adopted, in December of 1992, a "Risk Based Capital for Life and/or Health Insurers Model Act" (the "Model Act") which was designed to identify inadequately capitalized life and health insurers. The Model Act defines two key measures: (i) Adjusted Capital, which equals an insurer's statutory capital and surplus plus its Asset Valuation Reserve, plus half its liability for policyholder dividends, and (ii) Risk Based Capital. Risk Based Capital is determined by a complex formula which is intended to take into account the various risks assumed by an insurer. Should an insurer's Adjusted Capital fall below certain prescribed levels (defined in terms of its Risk Based Capital), the Model Act provides for four different levels of regulatory attention:
"Plan Level": Triggered if an insurer's Adjusted Capital is less than 100% but greater than or equal to 75% of its Risk Based Capital; requires the insurer to submit a plan to the appropriate regulatory authority that discusses proposed corrective action.
"Action Level": Triggered if an insurer's Adjusted Capital is less than 75% but greater than or equal to 50% of its Risk Based Capital; authorizes the regulatory authority to perform a special examination of the insurer and to issue an order specifying corrective actions.
"Authorized Control Level": Triggered if an insurer's Adjusted Capital is less than 50% but greater than or equal to 35% of its Risk Based Capital; authorizes the regulatory authority to take whatever action it deems necessary.
"Mandatory Control Level": Triggered if an insurer's Adjusted Capital falls below 35% of its Risk Based Capital; requires the regulatory authority to place the insurer under its control.
Since the Adjusted Capital levels of the Company's insurance subsidiaries currently exceed all of the regulatory action levels as defined by the NAIC's Model Act, the Model Act currently has no impact on the Company's operations or financial condition.
Although the federal government does not directly regulate insurance business, except with respect to Medicare supplement plans, legislation and administration policies concerning premiums, age and gender discrimination, financial services and taxation, among other areas, can significantly affect the insurance business.
Banking
Providian Bancorp's consumer banking subsidiaries are subject to federal and state regulation with respect to lending and investment practices, capital requirements, and financial reporting. The primary regulator for these consumer banking subsidiaries is the Office of the Comptroller of the Currency.
Holding Company
States have enacted legislation requiring registration and periodic reporting by insurance companies domiciled within their respective jurisdictions that control or are controlled by other corporations so as to constitute a holding company system. The Company and its subsidiaries have registered as a holding company system pursuant to such legislation in Kentucky, Missouri, North Carolina, New York, Illinois, Pennsylvania and New Jersey.
- 7 - Item 1. (continued)
Insurance holding company system statutes and rules impose various limitations on investments in subsidiaries and may require prior regulatory approval for the payment of dividends and other distributions in excess of statutory net gain from operations on an annual noncumulative basis by the registered insurance company to the holding company or its affiliates.
Separate Accounts
Separate accounts of the Company's subsidiaries which offer retail variable annuities are registered with the Securities and Exchange Commission under the Investment Company Act of 1940 and are governed by the provisions of the Internal Revenue Code of 1986, as amended, pertaining to the tax treatment of annuities.
COMPETITION
The insurance industry is highly competitive with over 2,000 life insurance companies competing in the United States, some of which have substantially greater financial resources, broader product lines and larger staffs than the Company's insurance subsidiaries. Additionally, life insurance companies face increasing competition from banks, mutual funds and other financial entities for attracting investment funds. The Company's insurance subsidiaries differentiate themselves through progressive marketing techniques, product features, price, customer service, stability and reputation, as well as competitive credit ratings. The insurance subsidiaries maintain their competitive position by their focus on low risk/high return markets and efficient cost structure. Other competitive strengths include integrated asset/liability management, risk management and innovative product engineering. The credit card and consumer revolving loan industry business in which Providian Bancorp's subsidiaries are engaged is highly competitive. Over the past several years, the industry has experienced consolidation, lower growth and rising charge-offs. Competitors are increasing their use of advertising, target marketing, pricing competition and incentive programs, have implemented aggressive balance transfer programs to attract customers from other issuers and have announced changes in the terms of certain credit cards, including lowering the rate of interest charged on balances. In addition, other credit card issuers have announced "tiered" or "risk-adjusted" rates under which the annual percentage rate for the issuer's most creditworthy customers is lowered. In response to the competitive environment, Providian Bancorp's subsidiaries have implemented a variety of new programs to attract and retain customers, including reducing interest rates on selected accounts. Providian Bancorp's subsidiaries have generally retained the right to alter various charges, fees and other terms with respect to consumer credit accounts. In addition, Providian Bancorp has experienced steady growth in its secured loan products and is increasing its efforts to offer its products to underserved markets.
EMPLOYEES
The total number of persons employed by the Company and its subsidiaries was approximately 8,985 as of December 31, 1994, including an agency sales force of 3,193. The Company has approximately 334 employees.
- 8 - Item 1. (continued)
FOREIGN OPERATIONS
Substantially all of the Company's operations are conducted in the United States.
ITEM 2.



ITEM 2. PROPERTIES
Principal properties of the Company and its subsidiaries includes offices located in Louisville, Kentucky (Commonwealth Life), Valley Forge, Pennsylvania (National Liberty and Worldwide Insurance) and Pleasonton, California (Providian Bancorp), which are owned; and Louisville, Kentucky (Providian Corporation), Durham, North Carolina (Peoples Security and Capital Security) and San Francisco and San Ramon, California (Providian Bancorp), which are leased.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS The last subsection titled "Legal Proceedings," of Note K Commitments and Contingencies on Page 55 of the 1994 Annual Report is incorporated by reference. ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
PART II
Item 5.

Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Common Stock Dividend and Market Data, and Quarterly Price Ranges of Common Stock and Dividends Per Common Share on page 34 of the Annual Report for the year ended December 31, 1994 are incorporated by reference. Item 6.

Item 6. SELECTED FINANCIAL DATA Selected Financial Data on pages 16 and 17 of the Annual Report for the year ended December 31, 1994, is incorporated by reference. Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Results and Analysis on pages 16 through 18, Results by Business Segment on pages 18, 19, and 23 through 32, Business Segment Data on pages 20 and 21, Supplemental Earnings Data on page 35 and Liquidity and Capital Resources and Inflation on pages 32 and 33 of the Annual Report for the year ended December 31, 1994, are incorporated by reference. Item 8.


Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Providian Corporation and Subsidiaries included on pages 37 through 55 and Quarterly Financial Data on page 34 of the Annual Report for the year ended December 31, 1994, are incorporated by reference. Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
- 9 - PART III
Item 10.



Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Election of Directors on pages 3 through 5 of the Proxy Statement for the Annual Meeting of Stockholders to be held May 5, 1995, is incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name and Age Principal Occupation and Business Experience Irving W. Bailey II Chairman of the Board of Directors, Age: 53 Providian Corporation, since November 1988, and Chief Executive Officer, Providian Corporation, since April 1988. President, Providian Corporation, from September 1987 to December 1994, and Chief Operating Officer, Providian Corporation, September 1987 to April 1988. Executive Vice President and Chief Investment Officer, Providian Corporation, from February 1981 to September 1987. Shailesh J. Mehta President and Chief Operating Officer, Age: 45 Providian Corporation, since December 1994. Executive Vice President, Providian Corporation, from August 1993 to December 1994. Chairman and CEO, Providian Direct Insurance from August 1993 to December 1994. Also, President and CEO - Banking Group, Providian Corporation, and Chairman of the Board, President and Chief Executive Officer of Providian Bancorp, Inc. and subsidiaries from April 1988 to January 1995. He served as Executive Vice President and Chief Operating Officer of Providian Bancorp from March 1986 until his election as CEO.
Robert L. Walker Senior Vice President - Finance and Chief Age: 44 Financial Officer, Providian Corporation, since August 1993. He served as Vice President and General Counsel, Providian Corporation, from December 1991 to August 1993, and Vice President, Corporate Tax, Providian Corporation, from March 1988 to December 1991.
Steven T. Downey Vice President and Controller, Providian Age: 37 Corporation, since November 1993. He served as Director, Finance and Accounting Providian Capital Management, Providian Corporation, from January 1993 to November 1993, and Second Vice President and Assistant Controller from August 1991 to January 1993. Prior to joining Providian Corporation, he was with Ernst & Young, Certified Public Accountants, from 1978 to 1991.
James V. Elliott Senior Vice President and General Counsel, Age: 50 Providian Corporation, since January 1995. General Counsel, Providian Bancorp, Inc., since 1989 and a Senior Vice President, Providian Bancorp, Inc., from March 1993 through December, 1994. During 1993, he was also responsible for Providian Bancorp's emerging business operation.
- 10 - EXECUTIVE OFFICERS OF THE REGISTRANT (continued)
Name and Age Principal Occupation and Business Experience
Joseph M. Tumbler President and CEO - Providian Capital Age: 46 Management, Providian Corporation, since November 1989. He served as Senior Vice President - Strategic Planning and Corporate Development, Providian Corporation, from January 1988 to November 1989. He previously was with National Liberty Corporation as Executive Vice President Financial Marketing from September 1986 to January 1988. Lawrence Pitterman Senior Vice President of Administration, Age: 47 Providian Corporation, since January 1991. Previously with Providian Bancorp, Inc. as Vice President, Human Resources, from July 1990 to December 1990; Vice President, Corporate Communications, from 1989 to 1990; and Vice President, First Deposit Savings Bank, from 1987 to 1989.
Lee Adrean President - Agency Group, Providian Age: 43 Corporation, since August 1993. Chief Executive Officer - Agency Group from August 1993 to January 1995. He served as Senior Vice President, Planning and Finance and Chief Financial Officer, Providian Corporation, from December 1991 to August 1993, and Senior Vice President, Strategic Planning and Corporate Development, Providian Corporation, from September 1990 to August 1993. Prior to joining Providian Corporation, he was with Bain & Company, Inc. from 1979 to 1990, serving as Vice President, 1985 to 1990; Manager, 1982 to 1985; and Consultant, 1979 to 1982.
Elaine J. Robinson Vice President and Treasurer, Providian Age: 46 Corporation, since December 1991, Second Vice President and Assistant Treasurer, Providian Corporation, from November 1987 to December 1991, and Second Vice President, Corporate Finance, Providian Corporation, from August 1987 to November 1987.
Bruce E. Ogle Vice President and Corporate Auditor, Age: 39 Providian Corporation, since 1989. He served as Director, Marketing Support Agency Group, Providian Corporation, from 1987 to 1988, and as Manager, Computer Audit Function-Agency Group, Providian Corporation, from 1984 to 1987.
Frederick C. Vice President and Chief Investment Officer, Kessell Providian Capital Management, Providian Age: 46 Corporation since May 1993. Managing Director, Chief Investment Officer Providian Capital Management, Providian Corporation, from May 1989 to May 1993, and Vice President, Fixed Income Securities Providian Capital Management, Providian Corporation, from May 1985 to May 1989.
- 11 - Item 11.

Item 11. EXECUTIVE COMPENSATION
Compensation of Directors and Executive Officers on pages 6 through 15 of the Proxy Statement for the Annual Meeting of Stockholders to be held May 5, 1995, is incorporated by reference. Item l2. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners and Management on pages 1 and 2 of the Proxy Statement for the Annual Meeting of Stockholders to be held May 5, 1995, are incorporated by reference. Item 13.


Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2)--The response to these portions of Item 14 is submitted as a separate section of this report.
(a)(3)--The response to this portion of Item 14 is submitted as a separate section of this report.
(b)On December 16, 1994 the Company filed a current report dated December 16, 1994 on Form 8-K, Item 5 (other events). This report was in regards to the Board of Directors electing Shailesh Mehta, President and Chief Operating Officer of the Company. He was also elected a Director of Providian. He had been Executive Vice President of Providian since August 1993 and serving as Chief Executive Officer of Providian Bancorp and Providian Direct Insurance. In his new position he will continue to oversee Providian Bancorp and Providian Direct Insurance as well as Providian Agency Group. Lee Adrean will remain President of Providian Agency Group.
(c) Exhibits are submitted as a separate section of this report.
(d)Financial statement schedules are submitted as a
separate section of this report.
- 12 -
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Louisville, and the Commonwealth of Kentucky, on the 15th day of February 1995: PROVIDIAN CORPORATION Irving W. Bailey II Irving W. Bailey II Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed bel ow by the following persons on behalf of the registrant in the capacities indicated on the 15th day of February 1995:
SIGNATURE TITLE Irving W. Bailey II Chairman, Chief Executive Irving W. Bailey II Officer and Director
Shailesh Mehta President, Chief Operating Shailesh Mehta Officer and Director
Robert L. Walker Senior Vice President and Robert L. Walker Chief Financial Officer
Steven T. Downey Vice President and Controller Steven T. Downey (Principal Accounting Officer)
Director John L. Clendenin
John M. Cranor III Director John M. Cranor III
Joseph F. Decosimo Director Joseph F. Decosimo
Lyle Everingham Director Lyle Everingham
- 13 - SIGNATURE TITLE Raymond V. Gilmartin Director Raymond V. Gilmartin
J. David Grissom Director J. David Grissom
Watts Hill, Jr. Director Watts Hill, Jr.
F. Warren McFarlan Director F. Warren McFarlan
Martha R. Seger Director Martha R. Seger
Florence R. Skelly Director Florence R. Skelly
Director Larry D. Thompson
Director John L. Weinberg
- 14 -
ANNUAL REPORT ON FORM 10-K
ITEM l4(a)(1), (2) and (3), (c) and (d)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES
FINANCIAL STATEMENT
SCHEDULES
LIST AND INDEX OF EXHIBITS
YEAR ENDED DECEMBER 31,
PROVIDIAN CORPORATION LOUISVILLE, KENTUCKY
- 15 - FORM 10-K--ITEM 14(a)(1) and (2)
PROVIDIAN CORPORATION AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following Consolidated Financial Statements of Providian Corporation and Subsidiaries, included on pages 37 through 55 of the Annual Report for the year ended December 31, 1994, are incorporated by reference in Item 8: Page Consolidated Statements of Income - Years Ended December 31, 1994, 1993 and 1992 37 Consolidated Statements of Financial Condition - December 31, 1994 and 1993 38 -
Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992 40
Consolidated Statements of Shareholders' Equity Years Ended December 31, 1994, 1993 and 1992 41
Notes to Consolidated Financial Statements 42 -
The following financial statement schedules and the related Report of Independent Auditors are included in Item 14(d):
Schedule I - Summary of Investments - Other Than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant Schedule III - Supplementary Insurance Information Schedule IV - Reinsurance
Information required in Schedule V, "Valuation and Qualifying Accounts," is included in Note C to the consolidated financial
statements of Providian Corporation and subsidiaries, incorporated
herein by reference. All other schedules for which provision is
made in the applicable accounting regulation of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and, therefore, have been omitted.
- 16 -
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Providian Corporation
We have audited the consolidated financial statements of Providian Corporation and subsidiaries listed in the accompanying Index to financial statements (Item 14(a)). Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Providian Corporation and subsidiaries at December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. As discussed in Note A to the consolidated financial statements, in 1994 the Company changed its method of accounting for certain investments in debt and equity securities.
ERNST & YOUNG LLP
Louisville, Kentucky February 8, 1995
- 17 -
December 31, 1994 Amount Shown in Statement
Amortized Market of Financial Cost Value Condition Type of Investment (000's Omitted)
[S] [C] [C] [C] Securities available for sale: Debt securities: Bonds: US government & government agencies $2,278,415 $2,152,582 $2,152,582 State and municipal 637,551 634,899 634,899 Foreign governments 192,843 176,896 176,896 Public utilities 942,221 863,918 863,918 Industrial and miscellaneous 6,233,105 5,901,241 5,901,241 Total bonds 10,284,135 9,729,536 9,729,536 Redeemable preferred stocks 15,382 14,913 14,913 Total debt securities 10,299,517 9,744,449 9,744,449
Equity securities: Common stocks: Industrial and miscellaneous 5,009 4,687 4,687 Nonredeemable preferred stocks 606,279 552,546 552,546 Total equity securities 611,288 557,233 557,233
Trading account securities XXXXXXXXX 115,470 115,470
Commercial mortgage loans 2,649,664 XXXXXXXX 2,649,664 Residential mortgage loans 2,550,194 XXXXXXXX 2,550,194 Policy loans 390,639 XXXXXXXX 390,639 Consumer loans 2,269,531 XXXXXXXX 2,269,531 Real estate 70,847 XXXXXXXX 70,847 Other long-term investments 237,235 XXXXXXXX 237,235 Short-term investments 110,239 XXXXXXXX 110,239 Total Investments $19,189,154 $18,695,501 [FN] Includes real estate taken in foreclosure of $60,726 in our mortgage loan portfolio.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT [CAPTION] PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31
1994 1993
000's Omitted [C] [C] [S] Assets Cash and cash equivalents $88,642 $0 Investments: Common stock 16 16 Investments in and advances to subsidiaries 2,673,071 2,921,792 Short-term investments 14,404 0 Notes receivable from subsidiaries 364,202 364,061 Accrued interest and accounts receivable from subsidiaries 12,084 9,081 Other assets 47,717 49,973
Total assets 3,200,136 3,344,923
Liabilities and Shareholders' Equity:
Liabilities Cash overdraft $0 $783 Notes, accounts payable and other liabilities to subsidiaries 199,109 75,539 Short-term borrowings 49,711 49,870 Other liabilities 72,464 67,350 Long-term debt 694,250 587,750 Total liabilities 1,015,534 781,292 Redeemable cumulative preferred stock held by subsidiary 62,740 70,740
Shareholders' equity Preferred stock 0 100,000 Common stock 115,325 115,325 Additional paid-in capital 57,096 57,053 Retained earnings 262,178 130,589 Equity in undistributed earnings of subsidiaries 2,250,757 2,165,385 Equity in net unrealized investment gain (loss) of subsidiaries (344,526) 17,204 Common stock held in treasury - at cost (214,031) (89,289) Unearned restricted stock (4,937) (3,376) Total shareholders' equity 2,121,862 2,492,891
Total liabilities and shareholders' equity $3,200,136 $3,344,923 [FN] Eliminated in consolidation.
See notes to condensed financial statements.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONTINUED
[CAPTION] PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME Year Ended December 31
1994 1993 1992 000's Omitted [C] [C] [C] [S] Revenues Dividends from subsidiaries $236,089 $199,687 $117,187 Interest on notes receivable from subsidiaries 46,621 47,944 50,433 Management and service fees 27,501 25,599 23,683 Investment and other income, net 1,017 1,897 798
Total revenues 311,228 275,127 192,101
Expenses Operating expenses 40,182 37,996 37,438 Interest expense 59,881 54,175 55,794 Interest expense on notes payable to subsidiaries 12,606 5,790 6,908
Total expenses 112,669 97,961 100,140
Income before federal income tax benefit and equity in undistributed net income from subsidiaries 198,559 177,166 91,961
Federal income tax benefit 16,970 12,775 6,434
Income before equity in undistributed net income of subsidiaries 215,529 189,941 98,395
Equity in undistributed net income of subsidiaries 85,372 132,724 224,101
Net income $300,901 $322,665 $322,496
[FN] Eliminated in consolidation.
See notes to condensed financial statements.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONTINUED [CAPTION] PROVIDIAN CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31
1994 1993 1992
000's Omitted [C] [C] [C] [S] Net Cash Flows provided by Operating Activities $223,269 $198,996 $102,613
Cash Flows from Investment Activities: Investments sold or matured 0 0 4,532 Change in short term investments (14,404) 0 Changes in investments in and advances to subsidiaries (26,741) (102,015) (1,287) Changes in operating property 801 (2,155) (5,197) All other investment activities, net 0 (28) (79)
Net Cash Flows used in Investment Activities (40,344) (104,198) (2,031)
Cash Flows from Financing Activities: Change in short-term borrowings (159) 118 128 Issuance of long-term debt 106,500 0 65,000 Repayment of long-term debt 0 0 (86,822) Redemption of preferred stock (100,000) 0 0 Redemption of redeemable cumulative preferred stock (8,000) (6,120) (2,320) Purchase of common stock for treasury (138,790) 0 0 Dividends (81,988) (80,600) (73,511) Proceeds from exercise of stock options 3,789 7,900 7,764 Change in notes payable to subsidiaries 125,148 (13,992) (12,541)
Net Cash Flows used in Financing Activities (93,500) (92,694) (102,302)
Net Increase (Decrease) in Cash and Cash Equivalents or Cash Overdraft during Year 89,425 2,104 (1,720) Cash Overdraft at Beginning of Year (783) (2,887) (1,167) Cash and Cash Equivalents (Cash Overdraft) at End of Year $88,642 ($783) ($2,887)
[FN] Eliminated in consolidation. See notes to condensed financial statements.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF
REGISTRANT CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note A Basis of Presentation
In the parent company only condensed financial statements, the Company's investment in subsidiaries is stated at cost plus equity in undistributed income of subsidiaries since date of acquisition. Certain 1993 and 1992 amounts have been reclassified to conform with the 1994 presentation. These reclassifications had no significant effect on the Company's financial position or results of operations. The condensed financial statements of the parent company should be read in conjunction with the Consolidated Financial Statements and Notes of Providian Corporation and Subsidiaries. Note B Federal Income Tax The Company files a consolidated federal income tax return with certain of its subsidiaries. The federal income tax benefit in the accompanying condensed financial statements reflects the Company's allocable share of the consolidated provision. See Note G to the Consolidated Financial Statements of Providian Corporation and Subsidiaries for a description of the components of the consolidated federal income tax provision. Note C Note Payable to Providian LLC In May 1994, Providian LLC was formed and capitalized through the purchase of common shares by the Company. On May 12, 1994 Providian LLC completed the issuance of 4,000,000 shares of Cumulative Monthly Income Preferred Stock (MIPS) at $25 per share. The total proceeds of $126,600,000 from the issuance of the MIPS and the common stock were subsequently lent to the Company to provide permanent funding for the redemption of the Company's Adjustable Rate Cumulative Preferred Stock, Series F. The MIPS are redeemable at the option of Providian LLC (with the Company's consent) in whole or in part on or after May 31, 1999 at a redemption price of $25 per share plus accumulated and unpaid dividends. Upon liquidation of Providian LLC, the holders of the MIPS are entitled to $25 per share plus accumulated and unpaid dividends. The MIPS pays monthly dividends at an annual rate of 8.875 percent. The Company has unconditionally guaranteed all legally declared and unpaid dividends of Providian LLC. The note payable to Providian LLC is included in Notes, accounts payable and other liabilities to subsidiaries in the accompanying Condensed Statement of Financial Condition. Note D Long-Term Debt Long-term debt of the Company at December 31, 1994 and 1993 consisted of Debentures and Notes in the amount of $694,250,000 and $587,750,000, respectively. See Note H to the Consolidated Financial Statements of Providian Corporation and Subsidiaries for a description of the terms and aggregate maturities of the Company's long-term debt. Note E Common Stock In 1994, the Company announced plans to repurchase five million shares of the Company's common stock on the open market. Through December 31, 1994 the Company repurchased 4,334,400 shares at an aggregate cost of $138,791,000. Between January 1, 1995 and February 8, 1995, the Company repurchased an additional 422,200 shares at an aggregate cost of $13,882,000. - 22 - SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF
REGISTRANT CONTINUED
PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note F Preferred Stock
The Company has 6,000,000 shares of preferred stock, par value $5, authorized for issuance in series.
Redeemable Cumulative Preferred Stock Held By Subsidiary The Company has designated 747,400 shares of preferred stock as redeemable cumulative preferred stock to be issued in different series with varying annual dividend rates. The shares outstanding at December 31, 1994 and 1993 were 627,400 and 707,400 respectively. The subsidiary has the right, on an annual basis, to waive receipt of dividends and has waived any dividends payable through 1994. The characteristics of the redeemable preferred stock are as follows:
Shares outstanding Dividend Shares Year at December 31 Period of Series rate authorized issued 1994 1993 redemption B 12.25% 49,200 1980 49,200 57,400 1991-2000 C 14.00% 105,000 1981 105,000 120,000 1992- D 15.00% 80,000 1982 80,000 90,000 1993- E 14.25% 120,000 1982 120,000 135,000 1993- G 12.00% 224,000 1983 104,000 117,000 1993- H 11.50% 90,000 1984 90,000 100,000 1994- I 12.00% 79,200 1984 79,200 88,000 1994- 747,400 627,400 707,400 Mandatory pro-rata sinking fund payments are required to redeem 10% of each series of redeemable preferred stock annually, beginning approximately ten years after issuance at $100 per share. As the shares are redeemed, they are retired thereby reducing the total authorized shares of each series. The Company redeemed the following shares of cumulative preferred stock in 1994: 8,200 of the Series B; 15,000 of the Series C; 10,000 of the Series D; 15,000 of the Series E; 13,000 of the Series G; 10,000 of Series H; and 8,800 of Series I. The aggregate amount of mandatory pro-rata sinking fund payments required for redemption of the redeemable preferred stock in each of the following years are: 1995- $8,000,000; 1996-$8,000,000; 1997$8,000,000, 1998-$8,000,000 and 1999-$8,000,000. The Company shall have the annual non-cumulative option to double any sinking fund payment subject to an aggregate limitation of 25% of the total issue. The redeemable preferred stock is non-callable for approximately ten years and callable thereafter at $105 per share plus accrued dividends. However, in the event the Company is required to obtain approval of a specified percentage of the holders of the issue to effect a merger, consolidation, or sale of assets and such approval is denied, then the Company may redeem the preferred stock in its entirety at $100 per share plus accrued dividends. Noncumulative Convertible Junior Preferred Stock Effective June 16, 1993, each outstanding share of Series J preferred stock was exchanged for 5.55 shares of the Company's common stock and all rights of the holders of Series J preferred stock, including the rights to receive dividends, were terminated.
Adjustable Rate Cumulative Preferred Stock On March 2, 1994, the Company redeemed, at face value, all 1,000,000 shares of its Series F, Adjustable Rate Cumulative Preferred Stock, at $100 per share plus accrued and unpaid dividends through the date of redemption.
- 23 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONTINUED PROVIDIAN CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Note G Management and Service Fees
The Company provides its subsidiaries with general management
support, including services in the data processing, human
resources, legal and financial areas. The related charges are
billed to the subsidiaries being serviced as management fees,
and are computed using various allocation methods which are, in
the opinion of management, reasonable in relation to services
rendered.
- 24 -