# UNITED STATES



SECURITIES AND
EXCHANGE COMMISSION



Washington D.C. 20549

# FORM 10-Q

# (Mark One)



|X| QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT         OF 1934

## For the quarterly
period ended September 30, 2003

# OR

|_|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT         OF 1934,

# For the transition
period
from             to

# 1-12897



(Commission File
Number)

PROVIDIAN FINANCIAL
CORPORATION



(Exact Name of
Registrant as Specified in Its Charter)

|Delaware                        | 94-2933952         
|------------------------------- | -------------------
|(State or other Jurisdiction of | (I.R.S. Employer   
|Incorporation or Organization)  | Identification No.)

201 Mission Street,
San Francisco, California 94105(Address of principal executive offices) (Zip Code)

(415) 543-0404
(Registrants
Telephone Number, Including Area Code)

Not Applicable(Former
name, former address and former fiscal year, if changed since last report)

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes  |X|              No  |_|

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).

Yes  |X|              No  |_|

As
of October 31, 2003, there were 290,229,277 shares of the registrants Common Stock, par
value $0.01 per share, outstanding.



---

# PROVIDIAN FINANCIAL
CORPORATION FORM 10-Q

# INDEX

# September 30, 2003

|                                                                                    | Page
|----------------------------------------------------------------------------------- | ----
|PART I.   FINANCIAL INFORMATION                                                     |     
|                                                                                   
|Item 1.  Financial Statements (unaudited):                                          |     
|Consolidated Statements of Financial Condition                                      |     
|Consolidated Statements of Income                                                   |     
|Consolidated Statements of Changes in Shareholders' Equity                          |     
|Consolidated Statements of Cash Flows                                               |     
|Notes to Consolidated Financial Statements                                          |     
|                                                                                   
|Item 2.  Management's Discussion and Analysis of Financial Condition and Results of |     
|Operations                                                                          |     
|                                                                                   
|Item 3.  Quantitative and Qualitative Disclosures About Market Risk                 |     
|                                                                                   
|Item 4.  Controls and Procedures                                                    |     
|                                                                                   
|PART II.   OTHER INFORMATION                                                        |     
|                                                                                   
|Item 1.  Legal Proceedings                                                          |     
|                                                                                   
|Item 5.  Other Information                                                          |     
|                                                                                   
|Item 6.  Exhibits and Reports on Form 8-K                                           |     
|                                                                                   
|SIGNATURES                                                                          |     
|                                                                                   
|EXHIBIT INDEX                                                                       |     

2

---

# PART I. FINANCIAL INFORMATION

# Item 1. Financial Statements

# Providian Financial
Corporation and Subsidiaries Consolidated Statements of Financial Condition

|                                                                                   | September 30, | December 31,
|---------------------------------------------------------------------------------- | ------------- | ------------
|
|
|Assets                                                                             |               |             
|Cash and cash equivalents                                                          |               |             
|Federal funds sold and securities purchased under resale agreements                |               |             
|Investment securities:                                                             |               |             
|Available-for-sale (at market value, amortized cost of $1,481,241 at September 30, |               |             
|2003 and $1,839,854 at December 31, 2002)                                          |               |             
|Loans receivable, less allowance for credit losses of $643,982 at September 30,    |               |             
|2003 and $1,012,461 at December 31, 2002                                           |               |             
|Premises and equipment, net                                                        |               |             
|Interest receivable                                                                |               |             
|Due from securitizations                                                           |               |             
|Deferred taxes                                                                     |               |             
|Other assets                                                                       |               |             
|                                                                                   |               |             
|Total assets                                                                       |               |             
|                                                                                   |               |             
|                                                                                   |               |             
|Liabilities                                                                        |               |             
|Deposits:                                                                          |               |             
|Non-interest bearing                                                               |               |             
|Interest bearing                                                                   |               |             
|                                                                                   |               |             
|Total deposits                                                                     |               |             
|                                                                                  
|                                                                                   |               |             
|Short-term borrowings                                                              |               |             
|Long-term borrowings                                                               |               |             
|Deferred fee revenue                                                               |               |             
|Accrued expenses and other liabilities                                             |               |             
|                                                                                   |               |             
|Total liabilities                                                                  |               |             
|                                                                                   |               |             
|Company obligated mandatorily redeemable capital securities                        |               |             
|                                                                                   |               |             
|Shareholders' Equity                                                               |               |             
|Common stock, par value $0.01 per share (authorized: 800,000,000 shares; issued:   |               |             
|September 30, 2003  290,580,842 shares; December 31, 2002  290,880,218 shares)   |               |             
|Retained earnings                                                                  |               |             
|Cumulative other comprehensive income                                              |               |             
|Common stock held in treasuryat cost (September 30, 2003  396,879 shares;        |               |             
|December 31, 2002  1,498,398 shares)                                              |               |             
|                                                                                   |               |             
|Total shareholders' equity                                                         |               |             
|                                                                                   |               |             
|Total liabilities and shareholders' equity                                         |               |             
|                                                                                   |               |             
|                                                                                   |               |             

See Notes to Consolidated
Financial Statements.

3

---

# Providian Financial
Corporation and Subsidiaries Consolidated Statements of Income (unaudited)

|                                                                           | Three months ended September 30, | Nine months ended September 30,
|-------------------------------------------------------------------------- | -------------------------------- | -------------------------------
|
|Interest Income                                                            |                                  |                                
|Loans                                                                      |                                  |                                
|Federal funds sold and securities purchased under                          |                                  |                                
|resale agreements                                                          |                                  |                                
|Other                                                                      |                                  |                                
|                                                                           |                                  |                                
|Total interest income                                                      |                                  |                                
|                                                                          
|                                                                           |                                  |                                
|Interest Expense                                                           |                                  |                                
|Deposits                                                                   |                                  |                                
|Borrowings                                                                 |                                  |                                
|                                                                           |                                  |                                
|Total interest expense                                                     |                                  |                                
|                                                                           |                                  |                                
|                                                                          
|                                                                           |                                  |                                
|Net interest income                                                        |                                  |                                
|                                                                          
|                                                                           |                                  |                                
|Provision for credit losses                                                |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|Net interest (loss) income after provision for credit losses               |                                  |                                
|                                                                          
|                                                                           |                                  |                                
|Non-Interest Income                                                        |                                  |                                
|Servicing and securitization                                               |                                  |                                
|Credit product fee income                                                  |                                  |                                
|Other                                                                      |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|Non-Interest Expense                                                       |                                  |                                
|Salaries and employee benefits                                             |                                  |                                
|Solicitation and advertising                                               |                                  |                                
|Occupancy, furniture, and equipment                                        |                                  |                                
|Data processing and communication                                          |                                  |                                
|Other                                                                      |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|Income from continuing operations before income taxes                      |                                  |                                
|Income tax expense (benefit)                                               |                                  |                                
|                                                                           |                                  |                                
|Income from continuing operations                                          |                                  |                                
|Income from discontinued operations, net-of-taxes                          |                                  |                                
|                                                                           |                                  |                                
|Net Income                                                                 |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|Earnings per common share  basic                                          |                                  |                                
|Income from continuing operations                                          |                                  |                                
|Income from discontinued operations, net-of-taxes                          |                                  |                                
|                                                                           |                                  |                                
|Earnings per common share  basic                                          |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|Earnings per common share  assuming dilution                              |                                  |                                
|Income from continuing operations                                          |                                  |                                
|Income from discontinued operations, net-of-taxes                          |                                  |                                
|                                                                           |                                  |                                
|Earnings per common share  assuming dilution                              |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|Weighted average common shares outstanding  basic (000)                   |                                  |                                
|                                                                           |                                  |                                
|                                                                           |                                  |                                
|Weighted average common shares outstanding  assuming       dilution (000) |                                  |                                
|                                                                           |                                  |                                

See Notes to Consolidated
Financial Statements.

4

---

# Providian Financial
Corporation and Subsidiaries



Consolidated Statements
of Changes in Shareholders Equity (unaudited)

|                                    |  |  |   | Cumulative | Common |  
|----------------------------------- |  |  | - | ---------- | ------ | -
|
|
|
|Balance at December 31, 2001        |  |  | $ | 2,862      |        | $
|Comprehensive income:               |  | 
|Net Income                          |  |  |   |            |        |  
|Unrealized loss on securities, net  |  | 
|of income tax benefit of $288       |  |  |   |            |        |  
|Foreign currency translation        |  | 
|adjustments, net of income tax      |  | 
|expense of $700                     |  |  |   |            |        |  
|                                    |  |  |   |            |        |  
|Total comprehensive income          |  |  |   |            |        |  
|                                   
|                                    |  |  |   |            |        |  
|Purchase of 666,714 common shares   |  | 
|for treasury                        |  |  |   |            |        |  
|Exercise of stock options and other |  | 
|awards                              |  |  |   |            |        |  
|Issuance of restricted and          |  | 
|unrestricted stock less forfeited   |  | 
|shares                              |  |  |   | 49         |        |  
|Deferred compensation related to    |  | 
|grant of restricted and             |  | 
|unrestricted stock less             |  | 
|amortization of $15,643             |  |  |   |            |        |  
|Net tax effect from employee stock  |  | 
|plans                               |  |  |   |            |        |  
|                                    |  |  |   |            |        |  
|Balance at September 30, 2002       |  |  | $ | 2,911      |        | $
|                                    |  |  |   |            |        |  
|                                   
|                                    |  |  |   |            |        |  
|Balance at December 31, 2002        |  |  | $ | 2,909      |        | $
|Comprehensive income:               |  | 
|Net Income                          |  |  |   |            |        |  
|Unrealized loss on securities, net  |  | 
|of income tax benefit of $13,426    |  |  |   |            |        |  
|                                    |  |  |   |            |        |  
|Total comprehensive income          |  |  |   |            |        |  
|                                   
|                                    |  |  |   |            |        |  
|Purchase of 459,693 common shares   |  | 
|for treasury                        |  |  |   |            |        |  
|Exercise of stock options and other |  | 
|awards                              |  |  |   |            |        |  
|Issuance of restricted and          |  | 
|unrestricted stock less forfeited   |  | 
|shares                              |  |  |   | (3         | )      |  
|Deferred compensation related to    |  | 
|grant of restricted and             |  | 
|unrestricted stock less             |  | 
|amortization of $6,455              |  |  |   |            |        |  
|Net tax effect from employee stock  |  | 
|plans                               |  |  |   |            |        |  
|                                    |  |  |   |            |        |  
|Balance at September 30, 2003       |  |  | $ | 2,906      |        | $
|                                    |  |  |   |            |        |  

See Notes to Consolidated
Financial Statements.

5

---

# Providian Financial
Corporation and Subsidiaries Consolidated Statements of Cash Flows (unaudited)

|                                                                                   | Nine months ended September 30,
|---------------------------------------------------------------------------------- | -------------------------------
|
|Operating Activities                                                               |                                
|Net Income                                                                         |                                
|Income from discontinued operations                                                |                                
|                                                                                   |                                
|Income from continuing operations                                                  |                                
|Adjustments to reconcile income from continuing operations to net cash             |                                
|provided by operating activities:                                                  |                                
|Provision for credit losses                                                        |                                
|Depreciation and amortization of premises and equipment                            |                                
|Amortization of net loan acquisition costs                                         |                                
|Amortization of deferred compensation related to restricted and unrestricted stock |                                
|Decrease in deferred fee revenue                                                   |                                
|Decrease in deferred income tax benefit                                            |                                
|Decrease in interest receivable                                                    |                                
|Gain from sale of interests in Providian Master Trust                              |                                
|Net (increase) decrease in other assets                                            |                                
|Net decrease in accrued expenses and other liabilities                             |                                
|                                                                                   |                                
|Net cash provided by operating activities                                          |                                
|                                                                                   |                                
|                                                                                   |                                
|Investing Activities                                                               |                                
|Net cash from loan originations and principal collections on loans receivable      |                                
|Net decrease in securitized loans                                                  |                                
|Net proceeds from sale of interests in Providian Master Trust                      |                                
|Decrease in due from securitizations                                               |                                
|Purchases of available-for-sale investment securities                              |                                
|Proceeds from maturities and sales of available-for-sale investment securities     |                                
|Increase in federal funds sold and securities purchased                            |                                
|under resale agreements or similar arrangements                                    |                                
|Net purchases of premises and equipment                                            |                                
|                                                                                   |                                
|Net cash provided by investing activities                                          |                                
|                                                                                   |                                
|                                                                                   |                                
|Financing Activities                                                               |                                
|Net decrease in deposits                                                           |                                
|Proceeds from issuance of term federal funds                                       |                                
|Repayment of term federal funds                                                    |                                
|Repayment of short-term borrowings                                                 |                                
|Proceeds from long-term borrowings                                                 |                                
|Repayment of long-term borrowings                                                  |                                
|Purchase of treasury stock                                                         |                                
|Proceeds from exercise of stock options                                            |                                
|                                                                                   |                                
|Net cash used by financing activities                                              |                                
|                                                                                   |                                
|Net cash provided by discontinued operations                                       |                                
|                                                                                   |                                
|Net Increase (Decrease) in Cash and Cash Equivalents                               |                                
|Cash and cash equivalents at beginning of period                                   |                                
|                                                                                   |                                
|Cash and cash equivalents at end of period                                         |                                
|                                                                                   |                                

See Notes to Consolidated
Financial Statements.

6

---

# Providian Financial
Corporation and Subsidiaries Notes to Consolidated Financial StatementsSeptember 30, 2003
(unaudited)

# Note 1.
Organization and Basis of Presentation

Providian
Financial Corporation (the Company) is a corporation incorporated under the
laws of Delaware. The Companys wholly owned banking subsidiaries are Providian
National Bank (PNB) and Providian Bank (PB). The Company offers
credit card and deposit products throughout the United States. The Company markets
consumer loans and deposits using distribution channels such as mail, telephone, and the
Internet.

In
November 2001, the Company announced that it would discontinue its operations in Argentina
and the United Kingdom, and the Company sold those operations in 2002.
Accordingly, the operations of the Companys subsidiaries and branches in those
locations are reflected as discontinued operations on the Companys 2002 statements
of income.

The
accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, we do not include all of the
information and footnotes required by GAAP for complete consolidated financial statements.
In the opinion of management, all adjustments considered necessary for a fair presentation
of the results for the interim periods presented have been included. All such adjustments
are of a normal, recurring nature. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect reported
amounts in the financial statements and accompanying notes. These estimates are based on
information available as of the date of the consolidated financial statements. Therefore,
actual results could differ from those estimates. Operating results for the three and nine
months ended September 30, 2003 are not necessarily indicative of the results for the year
ending December 31, 2003. The notes to the consolidated financial statements
contained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 should be read in conjunction with these consolidated financial
statements. All significant intercompany balances and transactions have been eliminated in
consolidation. For purposes of comparability, certain prior period amounts have been
reclassified.

# Note 2. Stock-Based
Employee Compensation

The
Company has elected to account for its stock-based compensation plans in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations, as permitted by Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. Accordingly, because the exercise price of the
Companys employee stock options is the fair market value of the underlying stock on
the date of grant, the Company recognizes no compensation expense at the time of the
grant. In addition, the Company does not recognize compensation expense for its employee
stock purchase plan, since it qualifies as a non-compensatory plan under APB Opinion
No. 25.

In
December 2002, the Financial Accounting Standards Board (FASB) issued SFAS No.
148, Accounting for Stock-Based CompensationTransition and Disclosurean
Amendment of FASB Statement No. 123. SFAS No. 148 amended the disclosure
requirements of SFAS No. 123 to require disclosures in the notes to both annual and
interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The stock-based
compensation plan disclosures required by SFAS No. 123 and SFAS No. 148 are provided
in this Note and in the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 in Note 21 to Consolidated Financial Statements.

The
following table reflects, for the three and nine months ended September 30, 2003 and 2002,
the stock-based employee compensation costs arising out of the restricted and unrestricted
stock programs that are included in reported net income. It also reflects on a pro forma
basis the Companys net income and earnings per common share with and without
dilution, as if compensation costs for stock options had been recorded based on the fair
value at the date of grant under the Companys stock-based compensation plans,
consistent with the provisions of SFAS No. 123. The pro forma compensation expense
reflects compensation expense over the vesting period of the grant, which is generally
three years.

7

---

# Stock-Based Employee
Compensation Cost and Pro Forma Net Income and Earnings Per Common Share

|                                                    | Three months ended September 30, | Nine months ended September 30,
|--------------------------------------------------- | -------------------------------- | -------------------------------
|
|Restricted and unrestricted stock amortization,    
|net-of-taxes, included in net income, as reported   |                                  |                                
|Net income, as reported                             |                                  |                                
|Deduct: Pro forma stock-based employee compensation |                                  |                                
|expense determined under fair value method,         |                                  |                                
|net-of-taxes(1)                                     |                                  |                                
|                                                    |                                  |                                
|Pro forma net income                                |                                  |                                
|                                                    |                                  |                                
|Net income per common share:                        |                                  |                                
|As reported  basic                                 |                                  |                                
|                                                    |                                  |                                
|As reported  assuming dilution                     |                                  |                                
|                                                    |                                  |                                
|Net income per common share:                        |                                  |                                
|Pro forma  basic                                   |                                  |                                
|                                                    |                                  |                                
|Pro forma  assuming dilution                       |                                  |                                
|                                                    |                                  |                                

---

|(1) |  | The pro forma stock-based compensation expenses for the three and nine months ended September 30, 2003 and 2002 include
the effects of an expense reduction for non-vested stock options that have been forfeited in the relevant period.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
fair value of the stock options granted by the Company was estimated at the grant date
through the Black-Scholes option pricing model using assumptions for risk-free weighted
average interest rate, expected dividend yield, weighted average expected volatility, which is based upon
unadjusted historical volatility, and the expected stock option life.

# Note 3. Consolidation of
Variable Interest Entities

In
January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51. FIN 46 provides guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, non-controlling interests,
and results of operations of a VIE must be included in a companys consolidated
financial statements. A company that holds variable interests in an entity is required to
consolidate the entity if the companys interest in the VIE is such that the company
will absorb a majority of the VIE's expected losses and/or receive a majority of the
entitys expected residual returns, if any. FIN 46 became effective upon its issuance
for interests in a VIE acquired after January 31, 2003. For VIEs acquired before
February 1, 2003, the original FIN 46 effective date of July 1, 2003 for such
interests has been delayed to December 31, 2003. The FASB delayed the implementation due
to additional time needed for companies and their auditors to complete the evaluation of
existing variable interest entities and to determine which of those entities are affected
by this change in accounting.

Since
January 31, 2003, the Company has not acquired an interest in any VIEs. Because the
Companys securitizations are structured using qualifying special purpose entities,
as defined in SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities and FIN 46, the Companys
securitization trusts are not required to be consolidated. Based upon evolving
interpretation of the criteria for consolidation of FIN 46, the Company is continuing to
perform analysis of its VIEs acquired before February 1, 2003, primarily with respect
to the Companys limited partnership interests and loans that qualify under the
Community Reinvestment Act. The Company does not expect the implementation of any changes
in the accounting for these investments to have a material impact on its financial
statements. The Company has applied the provisions of FIN 46 to its wholly-owned trust that issued capital securities. (See Note 9 to
the Consolidated Financial Statements)

# Note 4. Interest and Fee
Income Recognition

Beginning
on January 1, 2002, the Company adopted a new methodology (the suppression
methodology) for recognizing interest and fee income. Under the
suppression methodology, interest and fees that would otherwise accrue on reported loans
and other assets, but that the Company estimates will not be collected (the
suppressed amounts), are not recognized as interest income, credit product fee
income, or servicing and securitization income on the Companys income statement and
are not included in loans receivable, interest receivable, or due from securitizations on
the Companys balance sheet. In connection with its securitizations, the Company
recognizes a portion of the interest and fee income relating to the securitized loans
receivable in servicing and securitization income. Under the suppression methodology, the
Company analyzes projected credit loss rates, delinquency status, and historical loss
experience to estimate the suppressed amounts.

8

---

During
the second quarter of 2002, due to continuing high levels of customer bankruptcies and the
impact of such bankruptcies on the collectibility of interest and fees, the Company began
to include in its estimate of uncollectible interest and fees an amount expected to charge
off due to customer bankruptcies, regardless of delinquency status. The additional
estimated amounts associated with customer bankruptcies were included in the suppressed
amounts. Prior to the second quarter of 2002, the estimates focused on delinquency roll
rates (the percentage of customers whose delinquency status worsens from month to month)
and the Company did not include separate amounts for loans expected to charge off due to
bankruptcy.

When
loan principal amounts are charged off, related accrued interest and fees included in
loans receivable, interest receivable, and due from securitizations are reversed against
income. During the third quarter and first nine months of 2003 and 2002, the
Companys reported interest and fee income and servicing and securitization income
were reduced as a result of the suppression of estimated uncollectible interest and fees
and interest and fee income reversals as follows:

# Reductions to Interest
and Fee Income

|                             | Three months ended September 30, | Nine months ended September 30,
|---------------------------- | -------------------------------- | -------------------------------
|
|Interest                     |                                  |                                
|Fee                          |                                  |                                
|Servicing and securitization |                                  |                                
|                             |                                  |                                
|Total                        |                                  |                                
|                             |                                  |                                

# Note 5. Investment Securities

# Summary of Investment Securities

|                            | September 30, 2003 | December 31, 2002
|--------------------------- | ------------------ | -----------------
|
|
|
|Investment Securities       |                    |                  
|Available-for-Sale          |                    |                  
|United States Treasury and  |                    |                  
|federal agency bonds        |                    |                  
|Mortgage-backed securities  |                    |                  
|Equity securities           |                    |                  
|Other                       |                    |                  
|                            |                    |                  
|Total investment securities |                    |                  
|available-for-sale          |                    |                  
|                            |                    |                  

For
the three months ended September 30, 2003, the Company sold investment securities with an
amortized cost of $358.0 million at a gross realized loss of $1.5 million. For the nine
months ended September 30, 2003, the Company sold investment securities with an amortized
cost of $1.30 billion at a net realized gain of $8.5 million, which includes gross gains
of $11.2 million and gross losses of $2.7 million. During the three and nine months ended
September 30, 2002, the Company sold investment securities with an amortized cost of $97.9
million at a gross realized gain of $10.2 million. The Company calculates realized gains
and losses using the specific identification method.

# Note 6. Loans Receivable
and Loans Held for Securitization or Sale

The
Company has credit risk on loans to the extent that borrowers fail to repay amounts owed
and such amounts are not recovered through collection procedures. At September 30, 2003,
the Company had no significant regional domestic or foreign concentrations of credit risk.

In
connection with the sale of PB loans completed in August 2003, the Company reclassified
substantially all of the PB loans and related interest receivable to loans held for
securitization or sale as of June 30, 2003. The fair value was estimated based upon
anticipated terms of the sale. The net book value of the loans and interest receivable
held for securitization or sale was reduced to fair value by adding $11.9 million to the
allowance for credit losses related to these loans. The loan balances and related
allowance of $171.6 million were then transferred to loans held for securitization or sale
resulting in a new basis for the loans of $667.1 million.

9

---

At
September 30, 2002, the Company transferred $500.0 million of loans receivable, at the
lower of cost or fair value, to loans held for securitization or sale. On October 30,
2002, these loans receivable were transferred to Providian Gateway Master Trust in
connection with a securitization transaction, and removed from loans held for securitization
or sale on the Companys balance sheet.

At
March 31, 2002, the Company reclassified certain higher risk loans to loans held for
securitization or sale. Prior to the transfer, the net book value of the loans was
decreased to fair value by adding $388.2 million to the allowance for credit losses
related to these loans. The loan balances and related allowance of $985.9 million
were then transferred to loans held for securitization or sale, resulting in a new basis
for the loans of $1.61 billion.

# Note 7. Securitization
or Sale of Receivables

The
Company periodically securitizes pools of its loans receivable and issues asset-backed
securities in underwritten offerings and private placements. During the three months ended
September 30, 2003, the Company securitized $406.5 million of loans receivable in its
funding series and recognized net losses of $4.2 million from the recognition of retained
interests from the new securitizations. The Company did not enter into any new
securitizations during the three months ended September 30, 2002. For the nine months
ended September 30, 2003 and 2002, the Company securitized $1.50 billion and $257.7
million of loans receivable in the existing variable funding series. The Company
recognized net losses of $20.4 million and $6.5 million in the nine months ended September
30, 2003 and 2002 from the recognition of retained interests from the new securitization
transactions. These amounts exclude the benefit realized from the reduction to the
allowance for credit losses recognized at the time of the initial sale. In addition to the
amount recognized upon the initial sale and the subsequent impact of changes in the fair
value of retained interests, the Companys earnings in the nine months ended
September 30, 2003 were affected by an increase to the allowance for credit losses due to
an increase in loans receivable that resulted from the amortization of certain
securitizations. This increase in loans receivable was partially offset by new
securitization activity during the first nine months of 2003 that had the effect of
reducing our reported loans receivable and the associated allowance. After the initial
sale, the Companys securitizations impact its earnings through changes in the fair
values of its retained interests, including the accretion of the discounts on retained
interests, the ongoing recognition of interest-only strips receivable, and the difference
in the actual excess servicing received as compared to the amount estimated in the related
interest-only strips receivable.

The
total amount of securitized loans as of September 30, 2003 and December 31, 2002 was
$10.62 billion and $12.33 billion. Due from securitizations was $3.18 billion as of
September 30, 2003, and $3.72 billion as of December 31, 2002. At September 30, 2003
and December 31, 2002, the primary components of due from securitizations, which are
reported at their carrying amount, net of any discounts to arrive at fair value, were
retained subordinated certificateholders interests, which were $1.92 billion and
$2.06 billion; interest-only strips receivable, which were $185.6 million and $257.4
million; spread accounts, which were $479.6 million and $467.0 million; and accrued
interest receivable, which were $409.7 million and $488.1 million.

The
retained subordinated certificateholders interests represent debt securities and are
accounted for as trading securities. They are reported at fair value under SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities
and are included on the Companys balance sheet in due from securitizations. The
retained subordinated certificateholders interests consist primarily of non-interest
bearing beneficial interests that are repaid upon the maturity of the securitization
transaction. Upon origination of a securitization, the Company recognizes these assets at
their allocated carrying value in accordance with SFAS No. 140 Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The
allocated carrying value is less than the face value of the certificate, and the
difference is recorded as a reduction to servicing and securitization income. At the same
time, the Company recognizes the fair value of these assets. The Company determines fair
value through estimated cash flows discounted at rates that reflect the level of
subordination, the projected repayment term, and the credit risk of the securitized loans.

Subsequent
to the initial fair value recognition, the Company evaluates its retained subordinated
certificateholders interests and recognizes changes in their fair market value in
servicing and securitization income. The fair market value changes reflect the
Companys revisions in expected future cash flows and changes in discount rates that
incorporate the relative risk of the cash flows and include factors such as the
life of the underlying receivables and the term of the certificateholders interests.
As certificateholders interests approach maturity, their fair values generally
approach their face value and the discounts are accreted, with the amount of such
accretion realized in servicing and securitization income. The following table summarizes
the retained subordinated certificateholders interests in the Providian Gateway
Master Trust as of September 30, 2003 and December 31, 2002. For more information, see
Overview of Critical Accounting PoliciesSecuritization Accounting in the
Managements Discussion and Analysis of Financial Condition and Results of Operations
in this report.

10

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# Providian Gateway
Master Trust Summary of Retained Subordinated Certificateholders Interests

|                                                    | September 30, | December 31,
|--------------------------------------------------- | ------------- | ------------
|
|Retained subordinated certificateholders' interests |               |             
|Face value                                          |               |             
|Discount                                            |               |             
|Fair market value                                   |               |             
|Weighted average remaining term (months)            |               |             

For
the three and nine months ended September 30, 2003, the changes in net unrealized gains on
retained subordinated certificateholders interests included in earnings were $83.6
million and $173.6 million. These unrealized gains are recognized in servicing and
securitization income.

The
Companys valuations of retained subordinated interests, which includes subordinated
certificateholders interests, interest-only strips receivable, and spread accounts,
require it to use its judgment in selecting discount rates, estimating future cash flows,
assessing current economic conditions, and assuming the outcome of future events. Retained
subordinated certificateholders interests are discounted at rates that reflect the
relative risk of cash flows, which includes factors such as the level of subordination,
the projected repayment term, and the credit risk of the securitized loans. In valuing
interest-only strips receivable, the Company estimates the interest that will be collected
on the securitized loans, credit losses, contractual servicing fees, and repayment trends
of the securitized loans to project the amount of excess servicing to be received over the
period the securitized loans are projected to be outstanding. The spread accounts are recorded at fair
value through a discounted cash flow analysis based on projected release of funds from the
spread accounts to the Company.

At
least quarterly, the Company adjusts these valuations of the retained subordinated interests
to reflect changes in the amount of the securitized loans outstanding and any changes to
previous assumptions and estimates. The Company also continues to refine the financial
models used to update measures of the timing and amount of expected future cash flows.
These values can, and will, vary as a result of changes in the level and timing of the
cash flows and the underlying economic assumptions. Changes in the estimated fair value of
the retained interests are reported as a component of non-interest income, servicing and
securitization on the Companys income statement.

11

---

The
table below presents key economic assumptions used in the initial measurement of the
retained subordinated interests for securitizations entered into during the nine months
ended September 30, 2003 and 2002.

# Securitization Initial Measurement Assumptions

|                                                          | September 30,
|--------------------------------------------------------- | -------------
|
|Payment rate(1)                                           |              
|Expected net credit loss rate                             |              
|Weighted average loans receivable life (in years)(2)      |              
|Discount rate(3)                                          |              
|Average interest rate margin for third party investors(4) |              

---

|(1) |  | The monthly payment rate represents a forecast of principal collections for the
               month divided by a forecast of the aggregate amount of principal loans
               receivable at the beginning of the month. This rate is an average of forecasted
               monthly rates. In the fourth quarter of 2002, the Company began utilizing a
               payment rate based on principal only rather than total collections. The Company
               believes a principal payment rate more accurately measures the projected
               outstanding loan balances allocated to the certificateholders interests.
               On a comparable basis, the principal only payment rate for the nine months ended
               September 30, 2002 was 4.2%.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The weighted average loans receivable life is calculated by multiplying the principal collections expected in each future
         period by the number of periods until the balance is paid, summing those products, and dividing by the initial
         principal balance.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Discount rate assumptions vary based on the relative risk of cash flows, which includes factors such as the level of
         subordination, the projected repayment term and the credit risk of the securitized loans.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The interest rate paid to third party investors is a variable rate based on this margin plus the London Interbank Offered
Rate (LIBOR) or commercial paper rates of the conduit providers that participate in our variable funding series.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
key economic assumptions used in valuing retained subordinated interests and the
sensitivity of the current fair value of residual cash flows to immediate 10% and 20%
adverse changes in those assumptions at September 30, 2003 are presented below. These
sensitivities are hypothetical and should be used with caution.

# Securitization
Sensitivities

|                         |  | Expected |  
|------------------------ |  | -------- | -
|
|
|Current assumptions      |  |          |  
|Impact on fair value of: |  |         
|10% adverse change       |  |          | $
|20% adverse change       |  |          | $

The
adverse changes to these key economic assumptions are hypothetical and are presented in
accordance with SFAS No. 140. As the figures above indicate, changes in fair value
based on a 10% variation in assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be linear. In
addition, the effect of changing one assumption on the fair value of the retained
subordinated interests is computed without allowing any other assumption to change. In
reality, changes in one assumption may result in changes in others. Furthermore, the
sensitivities presented do not reflect actions that management might take to mitigate the
impact of the adverse change.

12

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The
table below summarizes certain cash flows from and paid in respect of securitizations for
the nine months ended September 30, 2003 and 2002:

# Securitization Cash Flows

|                                                              | For the nine months ended September 30,
|------------------------------------------------------------- | ---------------------------------------
|
|Proceeds from new securitizations(1)                          |                                        
|Proceeds reinvested in revolving period of securitizations(1) |                                        
|Servicing fees received                                       |                                        
|Net cash flows received on retained interests                 |                                        
|Principal paid in respect of maturing securitizations(1)      |                                        

---

|(1) |  | Cash flows received or paid with respect to third party certificateholders' interests.
|--- |  | --------------------------------------------------------------------------------------

# Note 8. Guarantees and Contingencies

Guarantees

In January 2003, the Company entered into a pledge agreement with an insurer with respect to certain obligations
owing to the insurer in connection with two series of the Providian Gateway Master Trust. In exchange for the insurer
agreeing to a reduction in the base rate used for the purpose of calculating the excess spread early amortization event
for those two series, the Company pledged $30.0 million held in a deposit account as security for the payment to the
insurer of amounts owing to it in connection with these transactions. The pledge will continue in effect until the
investor certificates and all amounts owing to the insurer with respect to the two series are paid. In accordance with
the pledge agreement, the pledged collateral was reduced upon the repayment of one of the series that occurred on
September 15, 2003. The remaining amount of the pledged collateral at September 30, 2003 was $13.6 million. The remaining
series related to the pledge has an expected final payment date of September 15, 2005. The Company does not currently
expect that performance under this pledge will be required.

The Company enters into various agreements that contain general indemnification provisions, primarily in
connection with sale of asset agreements and service contracts. These provisions typically require the Company to make
payments to another party to indemnify them against losses that may be incurred due to actions taken by the Company prior
to entering into the agreement, due to breach of representations, warranties and covenants made in connection with the
agreement and due to possible changes in or interpretations of tax law. The Company cannot estimate the potential future
impact of these agreements since this would require an assessment of future claims that may be made against the Company
that have not yet occurred. Based on historical experience, the Company does not currently expect the risk of loss under
these indemnification provisions to have a material adverse effect on its financial condition or results of operations,
but it cannot give any assurance that they will not have such an effect.

Litigation

The Company is subject to various pending and threatened legal actions, including actions arising in the ordinary
course of business from the conduct of its activities. While the Company believes that it has substantive defenses and
intends to defend the actions vigorously, it cannot predict the ultimate outcome or the potential future impact on the
Company of such actions. The Company does not currently expect any of the actions affecting it to have a material adverse
effect on its financial condition or results of operations, but it cannot give any assurance that they will not have such
an effect.

13

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# Note 9.  Long-Term Borrowings and Capital Securities

Long-term borrowings and capital securities consist of borrowings having an original maturity of one year or
more. For purposes of comparability, certain prior period amounts have been reclassified.

# Summary of Long-Term
Borrowings and Capital Securities

|                                                                           | September 30, | December 31,
|-------------------------------------------------------------------------- | ------------- | ------------
|
|Long-Term Borrowings                                                       |               |             
|6.65% senior bank notes maturing in 2004(1)                                |               |             
|3.25% convertible senior notes maturing in 2005                            |               |             
|Zero coupon convertible senior notes maturing in 2021(2)                   |               |             
|4.00% convertible senior notes maturing in 2008                            |               |             
|9.525% junior subordinated deferrable interest debentures maturing in 2027 |               |             
|                                                                           |               |             
|                                                                           |               |             
|Less unamortized issuance costs                                            |               |             
|                                                                           |               |             
|Total long-term borrowings                                                 |               |             
|                                                                           |               |             
|                                                                           |               |             
|Capital Securities                                                         |               |             
|Company obligated mandatorily redeemable capital securities                |               |             
|                                                                           |               |             

---

|(1) |  | Amount at September 30, 2003 is due in one year or less and has been classified as
                 short-term borrowings.
|--- |  | --------------------------------------------------------------------------------------------------------------------------

|(2) |  | Amount includes the accreted portion of a yield to maturity of 4.00% per year.
|--- |  | ------------------------------------------------------------------------------

Convertible
Senior Notes. On May 27, 2003, the Company issued $287.5 million of 4.00%
convertible senior notes due May 15, 2008 with interest payable semiannually on
May 15 and November 15 of each year, commencing on November 15, 2003. If
specified conditions are met, these notes are convertible at the option of the holders at
the conversion rate of 76.8758 shares of the Companys common stock for each $1,000
of note principal. In addition, contingent interest is required to be paid to holders if
certain specified conditions are met. The Company may not redeem the notes prior to their
maturity. Holders may require the Company to purchase their notes following a fundamental
change, as defined in the related indenture supplement.

Company
Obligated Mandatorily Redeemable Capital Securities. In 1997, through Providian
Capital I, a wholly owned subsidiary statutory business trust, the Company issued
mandatorily redeemable preferred securities, which accumulate accrued distributions that
are payable semiannually. The Company has the right to cause the redemption of the capital
securities on or after February 1, 2007, or earlier in the event of certain
regulatory changes. The redemption price depends on several factors, including the date of
the redemption, the present value of the principal and premium payable, and the
accumulated but unpaid distributions on the capital securities. The sole assets of
Providian Capital I are $109.3 million in aggregate principal amount of the Companys
9.525% junior subordinated deferrable interest debentures due February 1, 2027 and
the right to reimbursement of expenses under a related expense agreement with the Company.
The Companys obligations under the capital securities constitute a full and
unconditional guarantee.

In accordance with FIN 46 (see Note 3 to Consolidated Financial Statements), the Company has determined that
Providian Capital I is a VIE and that the Company is not the primary beneficiary. The Company would not absorb a majority
of the trust's expected losses if they were to occur. Though the effective date for FIN 46 has been delayed to December
31, 2003, the Company has adopted the provisions of FIN 46 in relation to the trust. As a result, the
Company deconsolidated the trust effective July 1, 2003 and is no longer reporting the trust's capital securities on its
balance sheet. At September 30, 2003, the Company reported $109.3 million in junior subordinated deferrable interest
debentures related to the capital securities in long-term borrowings and the Company's equity investment in the trust of
$5.0 million in other assets. In addition, the Company reported the related interest as interest expense and its equity
in the earnings of the nonconsolidated trust as non-interest incomeother for the three months ended September 30, 2003.

14

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# Note 10. Asset Sales

In
February 2002, the Company sold its interests in the Providian Master Trust, which
primarily consisted of $1.4 billion of reported loans receivable and $472 million of
retained subordinated interests held by PNB. As of the date of sale, the Providian Master
Trust contained nearly $8 billion of loans receivable arising from approximately 3.3
million active credit card accounts. This transaction resulted in cash proceeds of
approximately $2.8 billion and a first quarter 2002 gain of approximately $401.9 million,
which was included in non-interest income.

Also
in February 2002, the Company agreed with investors to terminate a securitization
transaction that funded approximately $410 million of receivables arising from a portfolio
of accounts acquired in 1998. Substantially all of these receivables were included in the
structured sale of the $2.4 billion higher risk asset portfolio completed in June 2002,
which is described below.

In
June 2002, the Company completed the structured sale of the $2.4 billion higher risk asset
portfolio transferred to loans held for securitization or sale during the first quarter of
2002. In addition to charges of $388.2 million to adjust the portfolio to fair value and
$15.1 million in related transaction expenses during the first quarter of 2002, the
Company recognized a loss in the second quarter of 2002 of $4.5 million related to the
reduction in carrying value of the receivables in the portfolio and related transaction
costs.

On
August 1, 2003, the Company completed the sale of 435,000 credit card accounts with $859
million in outstanding balances, which comprised substantially all of the credit card
loans of PB. The Company transferred servicing of the receivables in August 2003.
Effective June 30, 2003, the Company reclassified the loans and related accrued interest
receivable to loans held for securitization or sale and recognized a loss of approximately
$8 million, or a decrease of $0.03 in earnings per diluted share.

In
October 2003, the Company entered into an agreement to sell certain assets of its
subsidiary, GetSmart.com. The Company expects the transaction to be completed in December
2003. Under the terms of the agreement, the Company will sell the lender and marketing
agreements, trademarks, intellectual property and certain fixed assets, but retain the
outstanding receivables generated from fees paid by lenders and other participants offering their products
through GetSmart.com. During the fourth quarter of 2003, the Company expects to recognize an after-tax gain of $6.2
million, with respect to the sale.

# Note 11. Income
Taxes

In
September 2002, California enacted a law requiring large banks to conform to federal law
with respect to accounting for bad debts. The California law applies to tax years
beginning on or after January 1, 2002. Before the change, all banks, regardless of size,
were eligible to use the reserve method of accounting for bad debts, which enabled them to
take deductions for anticipated bad debt losses for California tax purposes before the
losses were recognized as charge-offs. As a result of the change, large banks now deduct
only actual charge-offs, net of recoveries, in determining their California taxable
income, and were required to include in 2002 taxable income 50 percent of the bad debt
reserves existing as of the end of the prior tax year. As a concession to the banks that
were subject to the new law, the State of California waived recapture of the remaining 50
percent of the reserves. The effect of this concession was to create a permanent tax
benefit for the Company in the amount of $30.0 million. The effective tax rate for
continuing operations for the three and nine months ended September 30, 2002 reflects this
benefit.

# Note 12.
Discontinued Operations

Pursuant
to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, the Company reclassified the balances relating to its United Kingdom and
Argentina operations on its consolidated financial statements to reflect the disposition
of these operations. The revenues, costs and expenses, and cash flows of these operations
have been segregated in the Companys consolidated statements of income and
consolidated statements of cash flows for all periods presented and have been separately
reported as discontinued operations.

Sales
of the Companys discontinued operations in the United Kingdom and Argentina were
finalized during the second quarter of 2002 and resulted in a total gain of $103.6
million. There were no results from discontinued operations for the three and nine months
ended September 30, 2003, and for the three months ended September 30, 2002. The Company
reported $67.2 million of income from discontinued operations for the nine months ended
September 30, 2002.

15

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# Note 13. Cumulative
Other Comprehensive Income

The
components of cumulative other comprehensive income, net of related taxes, for the nine
months ended September 30, 2003 and 2002 are as follows:

# Cumulative Other
Comprehensive Income Components

|                              |  |  | Cumulative
|----------------------------- |  |  | ----------
|
|
|
|Balance at December 31, 2001  |  |  | $         
|Other comprehensive income    |  |  |           
|Tax benefit (expense)         |  |  |           
|                              |  |  |           
|Balance at September 30, 2002 |  |  | $         
|                              |  |  |           
|                              |  |  |           
|Balance at December 31, 2002  |  |  | $         
|Other comprehensive income    |  |  |           
|Tax benefit                   |  |  |           
|                              |  |  |           
|Balance at September 30, 2003 |  |  | $         
|                              |  |  |           

16

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# Note 14. Earnings
per Common Share

The
following table sets forth the computation of both the basic and diluted earnings per
common share for the three and nine months ended September 30, 2003 and 2002:

# Computation of
Earnings per Common Share

|                                                                     | Three months ended September 30, | Nine months ended September 30,
|-------------------------------------------------------------------- | -------------------------------- | -------------------------------
|
|Basic                                                                |                                  |                                
|Income from continuing operations                                    |                                  |                                
|Discontinued operations, net-of-taxes                                |                                  |                                
|                                                                     |                                  |                                
|Net income available to common shareholders                          |                                  |                                
|                                                                     |                                  |                                
|                                                                     |                                  |                                
|Weighted average common shares outstanding                           |                                  |                                
|                                                                     |                                  |                                
|Earnings per common share:                                           |                                  |                                
|Income from continuing operations                                    |                                  |                                
|Discontinued operations, net-of-taxes                                |                                  |                                
|                                                                     |                                  |                                
|Net income per common share                                          |                                  |                                
|                                                                     |                                  |                                
|                                                                     |                                  |                                
|Diluted                                                              |                                  |                                
|Income from continuing operations                                    |                                  |                                
|Plus: Income impact of assumed conversions                           |                                  |                                
|Interest on convertible senior notes, net-of-taxes(1)                |                                  |                                
|                                                                     |                                  |                                
|Income from continuing operations with assumed conversions           |                                  |                                
|Discontinued operations, net-of-taxes                                |                                  |                                
|                                                                     |                                  |                                
|Net income available to common shareholders with assumed conversions |                                  |                                
|                                                                     |                                  |                                
|                                                                     |                                  |                                
|Weighted average common shares outstanding                           |                                  |                                
|Plus: Incremental shares from assumed conversions                    |                                  |                                
|Restricted stock issued  non vested                                 |                                  |                                
|Employee stock options                                               |                                  |                                
|Convertible senior notes(1)                                          |                                  |                                
|                                                                     |                                  |                                
|Dilutive potential common shares                                     |                                  |                                
|                                                                     |                                  |                                
|Adjusted weighted average common shares                              |                                  |                                
|                                                                     |                                  |                                
|Earnings per common share:                                           |                                  |                                
|Income from continuing operations                                    |                                  |                                
|Discontinued operations, net-of-taxes                                |                                  |                                
|                                                                     |                                  |                                
|Net income per common share                                          |                                  |                                
|                                                                     |                                  |                                

---

|(1) |  | For the three and nine months ended September 30, 2003, there were no assumed
               conversions or interest expense add-backs related to the Companys 3.25%
               convertible senior notes because the effect would be antidilutive. The
               Companys other convertible senior notes have substantive contingent
               conversion features that have not been met, and therefore are not considered for
               possible dilution.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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# Item 2.  Management's Discussion and Analysis of Financial Condition
 and Results of Operations

This
discussion is intended to further the readers understanding of the consolidated
financial condition and results of operations of our company. It should be read in
conjunction with our historical financial statements included in this quarterly report and
with the information in our Annual Report on Form 10-K for the year ended
December 31, 2002 (the 2002 Annual Report). Our historical financial
statements may not be indicative of our future performance.

Our Business

Through
our banking subsidiaries, we provide credit card and deposit products to customers
throughout the United States. Our lending and deposit taking activities are conducted
through Providian National Bank (PNB), a wholly owned banking subsidiary. We
are in the process of consolidating Providian Bank (PB), another wholly owned
banking subsidiary, into PNB, which we expect to be complete by the end of 2003. We market
consumer loans and deposits using distribution channels such as mail, telephone, and the
Internet.

We
generate income primarily through interest assessed on outstanding loan balances, fees
paid by customers related to account usage and performance (such as late, overlimit, cash
advance, processing, and annual membership fees), and from the sale of various cardholder
service products. We receive interchange fees from bankcard associations based on the
purchase activity of our credit card customers. In addition, we earn income on our
investments held for liquidity purposes, servicing fees, and excess servicing on
securitized loans.

Our
primary expenses are funding costs, including interest costs related to customer deposits
and borrowings, credit losses, operating expenses, including salaries and employee
benefits, advertising and solicitation costs, occupancy costs, data processing and
communication costs, and income taxes.

We
seek to fund our assets through a diversified mix of sources. Our ability to fund existing
and future customer loans is currently dependent on four primary sources: customer
deposits, securitizations, a portfolio of cash and liquid investment securities, and, to a
lesser extent, debt. Securitization is a process in which we segregate a pool of customer
loans by transferring them to a trust or other special purpose entity, which issues
certificates backed by the principal, interest, and fee cash flows generated by the pool
of loans. At the time the certificates are issued, we receive cash proceeds from the certificates sold to third parties.

Overview of Critical
Accounting Policies

Our
financial statements are prepared in accordance with accounting principles generally
accepted in the United States (GAAP), which in some instances require us to
use estimates and assumptions. Complex judgments are also required for the valuation of
certain of our assets. Uncertainties are inherent in these matters. The following is an
overview of our application of accounting policies that require us to exercise significant
judgment and reach conclusions about future events based upon information currently
available. These policies are fundamental to understanding our discussion and analysis of
financial condition and results of operations. Differences in judgment, and differences
between our judgments and the actual events and outcomes that unfold, could have a
material impact on our earnings.

Securitization
Accounting. We periodically transfer a portion of our loans receivable to a
non-consolidated trust through which we issue asset-backed securities, which represent undivided
interests in a pool of loans and the right to receive future collections of principal,
interest, and fees related to the loans receivable. We sell the senior classes of these
securities to third party investors, using various forms of credit enhancement so that
these classes will receive credit ratings that allow them to be sold in underwritten
offerings or private placements. We record our securitizations as sales for GAAP and for
regulatory accounting purposes. We continue to service the securitized loans and receive
contractual servicing fees during the term of the transaction.

In
addition to the third party investors interests, the structure of the securitization
creates certain retained interests in the securitized pool of loans, including a
sellers interest, subordinated certificateholders interests, an interest-only
strips receivable, and spread accounts. We include these retained interests on our balance
sheet. When we enter into a securitization, we receive the cash proceeds from the sale of
securities to third parties, remove from our balance sheet the portion of the loans
receivable associated with the senior and subordinated certificateholders' interests and
the related allowance for credit losses, and record our retained interests in the transaction. We
typically recognize a gain on sale from the securitization, due primarily to the removal
of the related allowance for credit losses and recognition of the interest-only strips
receivable, which is partially offset by discounts recognized for the retained
subordinated interests.

18

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The
sellers interest in our securitizations is composed of senior and subordinated
components. The senior sellers interest represents the sellers undivided
interest in the trust assets not allocated to the certificateholders interests. We
retain the senior sellers interest in loans receivable, which includes principal and
interest and fees receivable, on our balance sheet. We maintain a credit loss allowance
for the principal balances included in the senior sellers interest. The subordinated
component of the sellers interest is the accrued interest receivable asset, or
AIR. The AIR represents our interest in outstanding accrued interest and fees
that are initially allocated to the certificateholders interests. We first recorded
an AIR in the fourth quarter of 2002, when we adopted regulatory guidance provided by
federal banking agencies under which we treat only principal receivables as being removed
from our balance sheet when we securitize loans. Formerly, we treated both principal as
well as accrued interest and fees as being removed from our balance sheet. As a result of
this change, the amount of principal included in our sellers interest has decreased
and the amount of accrued interest and fees has increased from our previous allocations.
We record the AIR on our balance sheet in due from securitizations at a discount based on
its allocated carrying value.

Our
other retained interests in the securitized loans are also recorded on our balance sheet
in due from securitizations, generally at fair value. Retained subordinated
certificateholders interests represent certificateholders interests not sold
to third party investors. At the time of a securitization, we determine whether these
interests should be treated as held for trading or available-for-sale. This judgment is
based on our intent and plans and can vary among different securitizations and different
retained interests. Our existing retained certificateholders interests are generally
measured like investments in debt securities held for trading. Unrealized gains and losses
on assets held for trading are included in earnings. Unrealized gains and losses on
available-for-sale assets are excluded from earnings and reported as a net amount in
shareholders equity, as other comprehensive income. If there is a determination that
available-for-sale assets have been permanently impaired, unrealized losses are reported
in servicing and securitization income. When realized, available-for-sale gains and losses
are removed from other comprehensive income and included in earnings.

The
interest-only strips receivable represents the present value of the estimated future excess
servicing income expected to be generated by the securitized loans over the period the
securitized loans are projected to be outstanding. Excess servicing income represents the
net positive cash flow from interest and fee collections allocated to the
certificateholders interests after deducting the interest paid on investor
certificates, credit losses, contractual servicing fees, and other expenses. Spread
accounts are cash reserve accounts that can be called upon to fund payments due to
securitization investors and credit enhancers if their share of cash flows is insufficient
to do so. Spread accounts may be funded from proceeds of the securitization transaction or
through excess servicing cash flows, and the required funding levels are determined by
excess servicing rates and by other trigger events that may occur during the term of the
securitization. Spread account funds are released to us if certain conditions are met or
the securitization terminates with amounts remaining in the spread accounts.

We
estimate the fair value of our retained subordinated certificateholders interests,
interest-only strips, and spread accounts using a discounted cash flow valuation
methodology that incorporates the repayment of these interests over time. Retained
subordinated certificateholders interests are discounted at rates that reflect the
relative risk of the cash flows, which includes factors such as the level of
subordination, the projected repayment term, and the credit risk of the securitized loans.
For interest-only strips receivable, we estimate the interest and fees that will be
charged on the securitized loans, credit losses, contractual servicing fees, and repayment
trends of the securitized loans to project the amount of excess servicing to be collected
over the period the securitized loans will be outstanding. For spread accounts, we
estimate their fair value through a discounted cash flow analysis based on projected
repayments from the spread account balances to us, typically at the maturity of the
securitization. See Note 7 to Consolidated Financial Statements for further discussion.

A
variety of internal and external factors, including economic conditions, current account
management strategies, and market perceptions regarding our performance can affect the
expected net interest income, net credit losses, and discount rates we use in our
estimates. Changes in performance expectations can have a material impact on the projected
cash flows and thus on our fair value estimates of our retained interests. Complex
judgment is required for the selection and use of these factors. Different judgments and
results that differ from our projections can result in a material impact on our balance
sheet and income statement.

Allowance
for Credit Losses. When loans become delinquent, we recognize the credit losses by
charging off the principal balance no later than the last day of the calendar month in
which the accounts become 180 days past due under the terms of the account agreement.
Loans that are restructured under our consumer debt management program are charged off no
later than 120 days after they become contractually past due. We generally recognize
charge-offs for accounts of bankrupt and deceased customers within 30 days after
notification of bankruptcy and within 60 days after verification of death,
respectively.

19

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We
maintain an allowance for credit losses to provide for the estimated probable net
principal credit losses inherent in the loans receivable on our balance sheet. The
calculation of the amount of the allowance requires an assessment of known and inherent
risks in our portfolios.

We
establish our allowance for credit losses by analyzing historical risk behavior and credit loss trends,
including bankruptcy, delinquency and charge-off rates. We also consider factors such as
general environmental conditions, trends in loan portfolio volume and seasoning, and
recent changes to loan review and underwriting procedures. We compare prior estimates of
loss rates and amounts to actual performance, and we compare our loss rates and loan
coverage ratios (the allowance as a percentage of loans outstanding) to those of other
credit card lenders. Through the allowance review process, we establish an allowance for
credit losses that represents an estimate of the amount necessary to absorb future
principal charge-offs related to credit losses inherent in the loans currently
outstanding.

Establishing
an allowance for credit losses that is adequate and not excessive requires significant
judgment. We forecast multiple scenarios and use alternative methods to establish and test
the adequacy of the allowance. The coverage ratios under these varying scenarios and
methods create a range of reasonable outcomes from which we record our allowance.

If
different assumptions were made regarding estimated net credit losses, our financial
position and results of operations could differ materially. For example, a 10% increase in
the projected net credit losses estimated at September 30, 2003 would result in an
increase of approximately $64 million in the allowance for credit losses and the provision
for credit losses.

Interest
and Fee Income Recognition. Beginning in January 2002, we instituted a change to
recognize only the estimated collectible portion of accrued interest and fees. Prior to
January 2002, we had recognized a valuation allowance for the amount of interest and
fees estimated to be uncollectible. In connection with the change, we began estimating
uncollectibility based on expected credit losses from delinquent accounts; estimates of
amounts expected to be uncollectible due to customer bankruptcies were added in the second
quarter of 2002. We do not recognize interest and fee income that we estimate to be
uncollectible in our revenues or as an increase to loans receivable, interest receivable,
or due from securitizations on our financial statements. When loan principal amounts are
charged off, related accrued interest and fees included in loans receivable, interest
receivable, and due from securitizations are reversed against income. See Note 4 to
Consolidated Financial Statements for further discussion.

We
continue to utilize projected credit loss rates to estimate the uncollectible revenue, as
we did previously in establishing the valuation allowance for estimated uncollectible
interest and fees receivable. During the first six months of 2002, we depleted the
valuation allowance recorded for estimated uncollectible interest and fees at
December 31, 2001 as we charged off the loans for which the valuation allowances had
been established. Consistent with our method of calculating the allowance for credit losses, we use multiple scenarios
and alternative methods to establish a range of reasonable levels of estimated
uncollectible interest and fees from which we record the estimated collectible interest
and fee income.

If
different assumptions were made regarding estimated uncollectible interest and fees, our
financial position and results of operations could differ materially. For example, a 10%
increase in the projected uncollectible interest and fees estimated at September 30, 2003
would result in decreases of approximately $4 million to interest income and $24 million
to non-interest income.

Accounting
for Interest Rate Derivatives. Because we are a financial institution, our assets and
the liabilities we incur to fund those assets are primarily interest-bearing. As a result,
our earnings will be subject to the risk resulting from interest rate fluctuations. This
interest rate risk will vary depending on the mix of fixed rate versus floating (variable)
rate assets and liabilities and is affected by changes in the balances of interest-earning
assets and interest-bearing liabilities through maturity, borrowing, repricing, and
repayment activity.

To
manage and reduce interest rate risk, we measure exposure to interest rate changes by
analyzing various increasing and decreasing interest rate scenarios. We estimate how
customers and competitors will react to changes in market interest rates. Based on our
analysis, we may seek to mitigate this exposure by entering into interest rate derivative
contracts, including interest rate swap and cap agreements, with third parties. Interest
rate swap agreements have the effect of converting assets or liabilities from a fixed rate
to a floating rate or from a floating rate to a fixed rate. Interest rate cap agreements
have the effect of limiting the maximum interest rates payable on the corresponding
portions of our funding. Payments made or received under interest rate derivative
contracts are recorded as a component of net interest income.

20

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We
do not trade our derivative positions or use derivatives to speculate on interest rate
movements. As required by Statement of Financial Accounting Standards (SFAS)
No. 133 Accounting for Derivative Instruments and Hedging Activities, we
record the fair value of an interest rate derivative as an asset or liability (as
appropriate) and offset that amount with a change in the fair value of the item being
hedged.

Earnings Summary

The
following discussion provides a summary of our earnings for the three and nine months
ended September 30, 2003, compared to the three and nine months ended September 30, 2002.
In the second quarter of 2002, we completed the sale of our operations in the United
Kingdom and Argentina. The significant components of our results of operations are covered
in further detail in subsequent sections of this discussion.

For
the three months ended September 30, 2003, reported total net revenue (net interest income
plus non-interest income) was $526.3 million, compared to $664.6 million for the three
months ended September 30, 2002. For the nine months ended September 30, 2003, reported
total net revenue was $1.65 billion, compared to $2.82 billion for the nine months ended
September 30, 2002, a decrease of $1.18 billion. The significant decrease in the nine
months ended September 30, 2003 compared to September 30, 2002 is the result of a $344.1
million decrease in net interest income and an $832.0 million decrease in non-interest
income.

For
the three and nine months ended September 30, 2003 and 2002, the decrease in net interest
income was primarily driven by a reduction in loans receivable and a decrease in the yield
on outstanding loans receivable as we shifted our marketing strategy to generating a
larger proportion of higher credit quality loans receivable and to managing our existing
portfolio through selective pricing appropriate for the assessed risk. In addition, the
decrease in non-interest income for the nine months ended September 30, 2003 was primarily
driven by the inclusion in 2002 non-interest income of the $401.9 million gain on the
sale of our interests in the Providian Master Trust and by the decrease of $311.4 million
in 2003 credit product fee income as a result of lower average loans receivable and our
transition to higher quality credit card account originations.

Our provision for credit
losses was $98.7 million for the quarter ended September 30, 2003, a decrease of $93.6 million from the third quarter of 2002. For the nine months ended September 30, 2003, our provision for credit losses was
$492.6 million, compared to $1.15 billion for the nine months ended September 30, 2002. The decrease of $660.3 million
from the nine months ended September 30, 2002 to the nine months ended September 30, 2003 is primarily attributable to a
2002 increase of $388.2 million to recognize the fair value of the higher risk loans sold during the period. In addition,
the provision for the nine months ended September 30, 2003 reflects a lower reported loans receivable balance, and also
reflects a lower loan loss coverage ratio related to the improved delinquency performance of our loans receivable
resulting from certain new portfolio management and collections strategies and policies and higher quality credit card
account originations.

For
the quarter ended September 30, 2003, non-interest expense decreased $165.6 million
to $286.6 million, compared to $452.2 million for the quarter ended September 30,
2002. For the nine months ended September 30, 2003, non-interest expense decreased
$549.1 million to $939.5 million, compared to $1.49 billion for the nine months
ended September 30, 2002. This reduction is primarily due to lower personnel and related
infrastructure costs associated with our workforce reductions and reduced levels of
solicitation and advertising expenses as we transition to our new marketing strategies.

21

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Statement of Average
Balances, Income and Expense, Yields and Rates

The
following table provides an analysis of reported interest income, interest expense, net
interest spread, and average balances for the three and nine months ended September 30,
2003 and 2002. Average earning assets represent interest-earning consumer loan portfolios
and investments held for liquidity purposes.

# Statement of Average
Balances, Income and Expense, Yields and Rates

|                                   | Three months ended September 30,
|---------------------------------- | --------------------------------
|
|
|
|Assets                             |                                 
|Interest-earning assets            |                                 
|Consumer loans                     |                                 
|Interest-earning cash              |                                 
|Federal funds sold                 |                                 
|Investment securities              |                                 
|Other                              |                                 
|                                   |                                 
|Total interest-earning assets      |                                 
|                                  
|                                   |                                 
|Allowance for credit losses        |                                 
|Other assets                       |                                 
|                                   |                                 
|                                   |                                 
|Total assets                       |                                 
|                                   |                                 
|                                   |                                 
|Liabilities and Equity             |                                 
|Interest-bearing liabilities       |                                 
|Deposits                           |                                 
|Borrowings                         |                                 
|                                   |                                 
|Total interest-bearing liabilities |                                 
|                                  
|                                   |                                 
|Other liabilities                  |                                 
|                                   |                                 
|Total liabilities                  |                                 
|                                  
|                                   |                                 
|Capital securities                 |                                 
|                                  
|                                   |                                 
|Equity                             |                                 
|                                   |                                 
|                                   |                                 
|Total liabilities and equity       |                                 
|                                   |                                 
|                                   |                                 
|Net Interest Income and Spread     |                                 
|                                   |                                 

22

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# Statement of Average Balances,
Income and Expense, Yields and Rates

|                                   | Nine months ended September 30,
|---------------------------------- | -------------------------------
|
|
|
|Assets                             |                                
|Interest-earning assets            |                                
|Consumer loans                     |                                
|Interest-earning cash              |                                
|Federal funds sold                 |                                
|Investment securities              |                                
|Other                              |                                
|                                   |                                
|Total interest-earning assets      |                                
|                                  
|                                   |                                
|Allowance for credit losses        |                                
|Other assets                       |                                
|                                   |                                
|                                   |                                
|Total assets                       |                                
|                                   |                                
|                                   |                                
|Liabilities and Equity             |                                
|Interest-bearing liabilities       |                                
|Deposits                           |                                
|Borrowings                         |                                
|                                   |                                
|Total interest-bearing liabilities |                                
|                                  
|                                   |                                
|Other liabilities                  |                                
|                                   |                                
|Total liabilities                  |                                
|                                  
|                                   |                                
|Capital securities                 |                                
|                                  
|                                   |                                
|Equity                             |                                
|                                   |                                
|                                   |                                
|Total liabilities and equity       |                                
|                                   |                                
|                                   |                                
|Net Interest Income and Spread     |                                
|                                   |                                

23

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Interest Volume and Rate
Variance Analysis

Net
interest income is affected by changes in the average interest rate earned on
interest-earning assets and the average interest rate paid on interest-bearing
liabilities. Net interest income is also affected by changes in the volume of
interest-earning assets and interest-bearing liabilities. The following table sets forth
the dollar amount of the increase (decrease) in reported interest income and expense
resulting from changes in volumes and rates.

# Rate-Volume Variance
Analysis

|                       | Three months ended September 30, | Nine months ended September 30,
|---------------------- | -------------------------------- | -------------------------------
|
|
|
|Interest Income        |                                  |                                
|Consumer loans         |                                  |                                
|Federal funds sold     |                                  |                                
|Other securities       |                                  |                                
|                       |                                  |                                
|Total interest income  |                                  |                                
|                      
|                       |                                  |                                
|Interest Expense       |                                  |                                
|Deposits               |                                  |                                
|Borrowings             |                                  |                                
|                       |                                  |                                
|Total interest expense |                                  |                                
|                       |                                  |                                
|                      
|                       |                                  |                                
|Net Interest Income    |                                  |                                
|                       |                                  |                                

---

|(1) |  | The changes due to both volumes and rates have been allocated in proportion to
               the relationship of the absolute dollar amounts of the change in each. The
               changes in interest income and interest expense are calculated independently for
               each line in the table.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net Interest Income

Net
interest income is interest earned from loans receivable and our investment portfolios
less interest expense on deposits and borrowings.

Reported
net interest income for the three months ended September 30, 2003 was $80.9 million,
compared to $199.5 million for the same period in 2002, a decrease of $118.6 million.
Reported net interest income for the nine months ended September 30, 2003 was
$389.0 million, compared to $733.1 million for the same period in 2002, a
decrease of $344.1 million. The decline in reported interest income year over year
for both the three and nine months ended September 30, 2003 reflects our continuing
efforts to create a higher quality loan portfolio. The runoff of the old portfolio loans
stabilized during the quarter, but still exceeded new account additions, resulting in
lower loans receivable. In addition, the yield decreased as the mix of our portfolio
reflects a growing proportion of higher quality accounts, which generally have lower
annual percentage rates, including lower and longer introductory rates. Also contributing
to the lower net interest income are the lower yields on our liquidity position.

Interest
expense declined from $189.0 million in the third quarter of 2002 to $154.9 million in the
third quarter of 2003. For the nine months ended September 30, 2003, interest expense was
$490.6 million, compared to $592.1 million for the same period in 2002, a decrease of
$101.5 million. Consistent with the decline in our average loan balances and with our
banking subsidiaries Capital Plans, we decreased the level of our deposit funding.
The year over year decreases in interest expense reflect the lower average deposits and
lower interest rates paid.

Allowance and Provision
for Credit Losses

We
maintain our allowance for credit losses at a level estimated to be adequate to absorb
future principal charge-offs, net of recoveries, in the existing reported loan portfolio.
We maintain the allowance for credit losses for reported loans only.

24

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We
establish our allowance for credit losses by analyzing historical risk behavior and credit loss trends, and
reviewing current loss expectations that incorporate general economic conditions that may
impact future losses. We segregate loans into general risk classifications
for each product type. We combine quantitative factors (including historical delinquency
roll rates, historical credit loss rates, customer characteristics, such as risk scores,
and other data) with environmental credit risk factors to prepare comparative evaluations
of the allowance for credit losses.

The
environmental credit risk factors are consistent with applicable bank regulatory
guidelines and reflect our assessment of general macroeconomic conditions, trends in loan
portfolio volume and seasoning, geographic concentrations, and recent modifications to
loan review and underwriting procedures, among other factors. We compare allowances
established in prior periods with subsequent actual credit losses and perform a peer group
comparative analysis of lagged loss rates to coverage ratios. Coverage ratios are derived
by dividing the allowance for credit losses by the loans outstanding at period end.

# Allowance for Credit
Losses

|                                                   | Three months ended | Nine months ended
|-------------------------------------------------- | ------------------ | -----------------
|
|
|Balance at beginning of period                     |                    |                  
|Provision for credit losses                        |                    |                  
|Fair value adjustment - loans held for             |                    |                  
|securitization or sale(1)                          |                    |                  
|Credit losses                                      |                    |                  
|Recoveries                                         |                    |                  
|Credit losses on loans held for securitization or  |                    |                  
|sale(1)                                            |                    |                  
|                                                   |                    |                  
|Balance at end of period                           |                    |                  
|                                                   |                    |                  
|                                                   |                    |                  
|Allowance for credit losses to loans at period end |                    |                  
|                                                   |                    |                  
|                                                   |                    |                  
|Reported loan balance at period end(2)             |                    |                  
|                                                   |                    |                  

---

|(1) |  | The fair value adjustment of $11.9 million reflects an increase in the allowance
               for credit losses as a result of the mark to market of the Providian Bank
               (PB) loans receivable reclassified as loans held for securitization
               or sale in the nine months ended September 30, 2003. Additionally, the decrease in allowance for credit
               losses of $171.6 million represents loan loss reserves transferred with the par
               value of the PB loans, as part of the adjustment to the fair value of $667.1
               million. The fair value adjustment of $388.2 million reflects an increase in the
               allowance for credit losses as a result of the higher risk loans receivable
               reclassified as loans held for securitization or sale in the nine months ended
               September 30, 2002. Additionally, the decrease in allowance for credit losses of
               $985.9 million represents the allowance for credit losses that was transferred
               with the par value of the reclassified higher risk loans as part of the
               adjustment to the fair value of $1.61 billion.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The 2003 and 2002 balances exclude SFAS No. 133 market value adjustments of ($0.8) million and $12.1 million. In
addition, the 2002 balance excludes loans held for securitization or sale of $500.0 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
decrease in the allowance for credit losses as a percentage of reported loans and as a
dollar amount as of September 30, 2003 compared to September 30, 2002 reflects
the inherent trend in net credit losses after adjusting our loan mix for the impact of
recent higher quality account originations and changes in portfolio management strategies
and for the sale of a portfolio of higher risk loans. The decrease in the dollar amount of
the allowance also reflects the effect of adopting the AIR guidance in the fourth quarter
of 2002 (see Managements Discussion and Analysis of Financial Condition and
Results of OperationsThe Impact of Securitizations in our 2002 Annual Report).
As we continue to evaluate the allowance for credit losses in light of changes in asset
quality, regulatory requirements, general economic trends, and the effect of our new
marketing strategy, we may further adjust the amount of the allowance, which would result
in a change to the ratio of the allowance for credit losses to reported loans.

25

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Non-Interest Income

Servicing
and Securitization Income.Servicing and securitization income relates primarily to
securitized loans. It includes servicing fees, primarily relating to loans receivable
transferred in our securitizations, excess servicing income, and gains or losses related
to the securitization of financial assets (see Managements Discussion and
Analysis of Financial Condition and Results of Operations The Impact of
Securitizations in our 2002 Annual Report).

As
of September 30, 2003 and 2002, the total principal amount of securitized loans
outstanding was $10.62 billion and $11.26 billion. For the three months ended September
30, 2003, servicing and securitization income was $261.1 million, an increase of
$136.0 million from $125.1 million in the third quarter of 2002. Securitization and servicing income includes a $56.3 million benefit from an increase in the fair value recognized for
our retained subordinated certificateholders' interest and spread accounts due to favorable changes in market discount
rates. The improvement in the discount rates used to fair value these assets
is primarily due to factors not within the control of the Company, such as the improving U.S. economy, the
general performance of sub-prime loan issuers, and the regulatory climate. Additionally, securitization and servicing
income increased for the third quarter of 2003 as compared to the same period of 2002 due to higher discount accretion
related to increased average retained subordinated certificateholders' interests and spread account balances and a
decrease in 2002 due primarily to reductions in estimated cash flows used in the measurement of the fair value of the
interest-only strips receivable. These increases were partially offset by lower servicing fee income due to lower
securitized loans outstanding and the inclusion in 2002 of servicing fee income from the Providian Master Trust and
interim servicing fee income from the higher risk asset portfolio, which were both sold in 2002.

For
the nine months ended September 30, 2003, servicing and securitization income was $614.4
million, compared to $570.2 million earned during the first three quarters of 2002. This increase for the nine months ended September 30, 2003 is due to similar factors addressed above regarding the third
quarter of 2003, such as the positive valuation adjustments and increased discount accretion for our retained
subordinated interests, partially offset by lower servicing fee income. Additionally, securitization and servicing income
for the nine months ended September 30, 2003 includes a decrease due to lower levels of interest-only strips receivable
recognized due to lower average securitized receivables and lower excess servicing assumptions.

Credit
Product Fee Income.Credit product fee income includes performance fees (late,
overlimit and returned check charges), annual membership fees and cash advance fees, all
of which are recorded as fees receivable. Credit product fee income also
includes revenue from cardholder service products, which in the case of our Credit Protection
product, is recorded as fees receivable. All other cardholder service products are
billed annually and are recorded as customer purchases. Cardholder service product and annual membership fee revenue
are recognized ratably over the customer privilege period. Credit product fee income also
includes interchange fees received from bankcard associations.

For
the three months ended September 30, 2003, credit product fee income was
$173.4 million, a decrease from $273.5 million for the three months ended September
30, 2002. For the nine months ended September 30, 2003, credit product fee income was
$593.2 million, a decrease from $904.7 million for the nine months ended September 30,
2002. These year over year decreases reflect lower average loans receivable, which
resulted in lower late, overlimit, and interchange fees and lower cardholder service
product and annual membership fee revenue. In addition, the decrease in credit product fee
income reflects lower late and overlimit fee income associated with our transition to
higher quality credit card account originations.

Other.  
          For the three and nine months ended September 30, 2002, non-interest
          income-other included income relating to our prior business of collecting on
          charged-off receivables that we purchased from other companies. Substantially
          all of the related receivables were sold in December 2002. For the nine months
          ended September 30, 2002, non-interest income-other included the gains on the
          sale of our interests in the Providian Master Trust and the sale of our United
          Kingdom operations.

26

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Non-Interest Expense

Non-interest
expense includes salary and employee benefit costs, loan solicitation and advertising
costs, occupancy, furniture, and equipment costs, data processing and communication costs,
and other non-interest expense. The following table presents non-interest expense for the
three and nine months ended September 30, 2003 and 2002. Overall, the decrease in
non-interest expense reflects our efforts to align our operations with the reduction in
our loans receivable portfolio, including the impact of disposing of our business that
collected charged-off receivables purchased from other companies, and reduced levels of
new account solicitations as we transition to our new marketing strategies.

# Summary of
Non-Interest Expense

|                                    | Three months ended | Nine months ended
|----------------------------------- | ------------------ | -----------------
|
|
|Salaries and employee benefits      |                    |                  
|Solicitation and advertising        |                    |                  
|Occupancy, furniture, and equipment |                    |                  
|Data processing and communication   |                    |                  
|Other                               |                    |                  
|                                    |                    |                  
|Total non-interest expense          |                    |                  
|                                    |                    |                  

Salary
and employee benefits costs include staffing costs associated with marketing, customer
service, collections, and administration. In August and October 2003 as part of our
strategy of enhancing operational efficiency, we entered into agreements to outsource
certain information technology functions. These include agreements with Accenture, which will provide the Company with technology application development and
maintenance services, and Computer Sciences Corporation ("CSC"), which will provide desktop, help desk, server, security
administration, e-mail and network infrastructure services.  One of the Company's directors is also
a director of CSC. We anticipate these agreements further reducing
salaries and employee benefits expense with a partial offsetting increase in other non-interest expense items.

Solicitation
and advertising costs include printing, postage, telemarketing, list processing, and
credit bureau costs paid to third parties in connection with account solicitation efforts,
and also include costs incurred to promote our products. Advertising costs and the
majority of solicitation expenses are expensed as incurred. In accordance with GAAP, we
capitalize only the direct loan origination costs associated with successful account
acquisition efforts. We amortize capitalized loan origination costs over the customer
privilege period (currently one year) for credit card loans, unless the loans are
securitized, in which case we recognize the remaining costs as an expense upon
securitization. For 2002, solicitation and advertising also included costs related to the
acquisition of charged-off receivables from other companies. We disposed of this part of
our business in December 2002. For the three and nine months ended September 30, 2003, we
amortized loan origination costs of $6.3 million and $16.7 million, compared to
amortized loan origination costs of $8.7 million and $35.2 million for the three and nine
months ended September 30, 2002. For the three months ended September 30, 2003 and 2002,
and the nine months ended September 30, 2003 and 2002, the decreases in loan solicitation
and advertising costs reflect a reduction in the volume of new account solicitations as we
change our marketing strategy and begin testing new product offerings. We anticipate
increases in loan solicitation and advertising costs in the future in connection with our
new strategic marketing programs including our partnership marketing initiatives.

Other
non-interest expense includes operational expenses such as collection costs, fraud losses,
and bankcard association assessments.

During
the first quarter of 2002 we recorded a $16.7 million charge in connection with workforce
reductions and a $15.1 million charge related to the planned sale of higher risk
receivables. In connection with the closure of several of our facilities, we recognized
additional charges of $37.9 million in the second quarter of 2002 related to premises,
equipment and furniture lease expenses, fixed asset write-downs, and disposition costs. At
September 30, 2003, we had $17.2 million accrued for remaining costs expected to be paid,
primarily for premises, equipment and furniture lease costs associated with property no
longer in use.

Income Taxes

We
recognized income tax expense of $55.7 million and an income tax benefit of $22.1
million from continuing operations for the three months ended September 30, 2003 and 2002.
For the nine months ended September 30, 2003 and 2002 we recognized $84.3 million and
$41.1 million in income tax expense. Our effective tax rate for continuing operations was
39.5% for the three and nine months ended September 30, 2003. In 2002, our effective tax
rate is not comparable, due to the non-recurring tax benefit discussed below.

27

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In
September 2002, California enacted a law requiring large banks to conform to federal law
with respect to accounting for bad debts. Before the change, all banks, regardless of
size, were eligible to use the reserve method of accounting for bad debts, which enabled
them to take deductions for anticipated bad debt losses for California tax purposes before
the losses were recognized as charge-offs. As a result of the change, large banks now
deduct only actual charge-offs, net of recoveries, in determining their California taxable
income, and were required to include in 2002 taxable income 50 percent of the bad debt
reserves existing as of the end of the prior tax year. As a concession to the banks that
were subject to the new law, the State of California waived recapture of the remaining 50
percent of the reserves. The effect of this concession was to create a permanent tax
benefit for us in the amount of $30.0 million, which was reflected in our income tax
expense for the three and nine months ended September 30, 2002.

The Impact of
Securitizations

We
account for our securitization transactions under SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Our
securitizations involve the transfer of a pool of loans receivable to a trust. The trust
meets the criteria for a qualifying special purpose entity that is not consolidated in our
financial statements.

The
structures of the transactions create undivided interests in the pool of loans and
establish certificateholders interests, a sellers interest, and other retained
interests, including an interest-only strips receivable and, in some cases, spread
accounts. Certificateholders interests consist of one or more classes of senior
investor interests, which are typically sold to third party investors, and one or more
series of subordinated investor interests. We receive the proceeds from the sale to third
party investors and account for the transfer of loans receivable as a sale. We typically
recognize a gain on sale from the securitization, due primarily to the removal of the
related allowance for credit losses and the recognition of an interest-only strips
receivable, which is partially offset by discounts recognized for the retained
certificateholders interests. See Overview of Critical Accounting
Policies.

During
the three months ended September 30, 2003, we securitized $406.5 million of loans
receivable in the existing variable funding series and we recognized losses of $4.2
million from the recognition of retained interests from the new securitizations. During
the three months ended September 30, 2002, we did not enter into any new securitizations.
For the nine months ended September 30, 2003 and 2002, we securitized $1.50 billion and
$257.7 million of loans receivable in the existing variable funding series. We
recognized losses of $20.4 million and $6.5 million in the nine months ended September 30,
2003 and 2002 from the initial sale to third party investors and recognition of retained
interests from new securitization transactions. These amounts exclude the benefit realized
from the reduction to the allowances for credit losses recognized at the time of the
initial sale. In addition to the amounts recognized upon the initial sale and the
subsequent impact of changes in the fair value of retained interests, our earnings in the
nine months ended September 30, 2003 were affected by an increase to the allowance for
credit losses due to loans receivable returning to our balance sheet in connection with
the amortization of certain securitizations. This increase in loans receivable was
partially offset by new securitization activity during the first nine months of 2003 that
had the effect of reducing our reported loans receivable and the associated allowance for
credit losses. After the initial sale, our securitizations impact our earnings through
changes in the fair values of our retained interests, including the accretion of the
discounts on retained interests, the ongoing recognition of interest-only strips
receivable, and the difference in the actual excess servicing received as compared to the
amount estimated in the related interest-only strips receivable.

The
total amount of securitized loans as of September 30, 2003 and December 31, 2002 was
$10.62 billion and $12.33 billion. The following table presents the fair value
(carrying value, net of any discounts) of the assets reported in due from securitizations
at September 30, 2003 and December 31, 2002.

# Due from Securitizations

|                                                    | September 30, | December 31,
|--------------------------------------------------- | ------------- | ------------
|
|Retained subordinated certificateholders' interests |               | $1,919,215  
|Interest-only strips receivable                     |               | 185,617     
|Spread accounts                                     |               | 479,648     
|Accrued interest receivable                         |               | 409,658     
|Other(1)                                            |               | 184,085     
|                                                    |               |             
|Total due from securitizations                      |               | $3,178,223  
|                                                    |               |             

---

|(1) |  | Amount consists primarily of fund advances to the trust collection account.
|--- |  | ---------------------------------------------------------------------------

28

---

Non-GAAP Managed Financial Information

Loans that have been securitized and sold to third party investors are not considered to be our assets under GAAP
and therefore are not shown on our balance sheet. However, the interests we retain in the securitized loan pools create
financial exposure to the current and expected cash flows of the securitized loans (see "The Impact of
Securitizations"). Although such securitized loans are not on our balance sheet, their performance can affect the recorded
values of our retained interests included in due from securitizations and servicing and securitization income. In
addition, we continue to service these loans.

Because of this continued exposure and involvement, we use managed financial information to evaluate our
historical performance, assess our current condition, and plan our future operations. We believe that managed financial
information supplements our GAAP information and is helpful to the reader's understanding of our consolidated financial
condition and results of operations. "Reported" financial information refers to GAAP financial information. "Managed"
financial information is derived by adjusting the reported financial information to add back securitized loan balances
and the related interest and fee income, credit losses, and net interest costs.

Loan Performance Measures.  We present key loan performance measures on a reported and a managed basis. Reported
loans do not necessarily have the same income or credit characteristics as securitized loans and can perform differently
over time. Although managed loan performance measures include both reported and securitized loans, the securitized loans
will have a more significant impact on the managed loan performance numbers because our securitized receivables balance
is substantially larger than the reported receivables balance. In addition, when loans are securitized, there is a
potentially significant impact on reported loan performance as loans are removed or reclassified from loans receivable on
our balance sheet, while there is generally no significant impact on managed loan performance.

29

---

# Key Loan Performance
Financial Data and Statistics

|                                              | Three months ended | Nine months ended
|--------------------------------------------- | ------------------ | -----------------
|
|
|Financial Data                                |                    |                  
|Reported interest income from loans           |                    |                  
|Securitized interest income from loans        |                    |                  
|                                              |                    |                  
|Managed interest income from loans            |                    |                  
|                                              |                    |                  
|                                             
|Reported interest income from investments     |                    |                  
|Securitization adjustment(1)                  |                    |                  
|                                              |                    |                  
|Managed interest income from investments      |                    |                  
|                                              |                    |                  
|                                             
|Reported interest expense                     |                    |                  
|Securitized interest expense                  |                    |                  
|                                              |                    |                  
|Managed interest expense                      |                    |                  
|                                              |                    |                  
|                                             
|Reported net interest income                  |                    |                  
|Securitized net interest income               |                    |                  
|                                              |                    |                  
|Managed net interest income                   |                    |                  
|                                              |                    |                  
|                                             
|Reported credit product fee income            |                    |                  
|Securitized credit product fee income         |                    |                  
|                                              |                    |                  
|Managed credit product fee income             |                    |                  
|                                              |                    |                  
|                                             
|Reported average loans receivable             |                    |                  
|Securitized average loans receivable          |                    |                  
|                                              |                    |                  
|Managed average loans receivable              |                    |                  
|                                              |                    |                  
|                                             
|Reported average earning assets               |                    |                  
|Securitized average earning assets            |                    |                  
|                                              |                    |                  
|Managed average earning assets                |                    |                  
|                                             
|Reported average assets                       |                    |                  
|Securitized average assets                    |                    |                  
|                                              |                    |                  
|Managed average assets                        |                    |                  
|                                              |                    |                  
|                                             
|Loan Performance Statistics                   |                    |                  
|Reported                                      |                    |                  
|Net interest margin on average loans(2)       |                    |                  
|Net interest margin on average earning assets |                    |                  
|Adjusted margin on average loans(4)           |                    |                  
|Return on average assets                      |                    |                  
|                                              |                    |                  
|                                             
|Managed                                       |                    |                  
|Net interest margin on average loans(3)       |                    |                  
|Net interest margin on average earning assets |                    |                  
|Adjusted margin on average loans(5)           |                    |                  
|Return on average assets                      |                    |                  

---

|(1) |  | On a reported basis, the Company recognizes interest income attributable to its
               retained beneficial interests in securitized loans. On a managed basis, this
               interest income is included in non-interest incomeservicing and
               securitization.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents interest income, less interest expense, expressed as a percentage of reported average loans receivable.
Interest expense is allocated to reported average loans receivable based on the ratio of reported average loans
receivable to reported average earnings assets.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

30

---

|(3) |  | Represents interest income, less interest expense, expressed as a percentage of managed average loans receivable. Interest
expense is allocated to managed average loans receivable based on the ratio of managed average loans receivable to
managed average loans receivable.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Represents interest income, less interest expense and net credit losses, plus credit product fee income on reported
average loans receivable, expressed as a percentage of reported average loans receivable. Interest expense is allocated
to reported average loans receivable based on the ratio of reported average loans receivable to reported average earnings
assets.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Represents interest income, less interest expense and net credit losses, plus credit product fee income on managed
average loans receivable, expressed as a percentage of managed average loans receivable. Interest expense is allocated to
managed average loans receivable based on the ratio of managed average loans receivable to managed average earnings
assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net
Interest Margin. Our reported net interest margin on average loans decreased to 8.87%
for the third quarter of 2003, from 12.93% for the same period in 2002. Managed net
interest margin on average loans decreased to 14.79% for the third quarter of 2003, from
16.73% for the same period in 2002. The yield on our reported loans receivable decreased
to 13.69% for the third quarter of 2003, from 17.97% for the same period in 2002. The
yield on managed loans receivable decreased to 18.07% for the third quarter of 2003, from
20.47% for the same period in 2002. The lower yields in the three and nine months ended
September 30, 2003 are primarily a result of our strategy to generate a higher quality
loan portfolio by increasing the percentage of higher credit quality accounts, which
generally have lower interest rates.

Reported
earning assets include consumer loans, interest-earning cash, federal funds sold,
investment securities, spread accounts, and interest-only strips receivable. Managed
earning assets include reported earning assets plus the loans receivable removed or
reclassified from loans receivable on our balance sheet through our securitizations. Net
interest income expressed as a percentage of average earning assets is referred to as net
interest margin on average earning assets. The reported net interest margin on average
earning assets declined from 5.32% for the quarter ended September 30, 2002 to 2.51% for
the quarter ended September 30, 2003. The managed net interest margin on average earning
assets declined from 11.58% for the quarter ended September 30, 2002 to 9.89% for the
quarter ended September 30, 2003. In addition to the impact from the lower yield on
loans receivable, these decreases also reflect lower yields earned on our interest-earning
cash, federal funds sold and other investment securities.

Adjusted
Margin.  One of the ways we measure loan portfolio profitability is by comparing
 the revenue generated by customer accounts with the related funding costs and risk of loss. In prior periods, this measurement, risk adjusted margin, included interest income plus non-interest income, less interest
expense allocated to loans and net credit losses. We have modified this measure and now refer to it as adjusted margin.
This revised measure includes total interest income plus non-interest income, credit product fee income less interest
expense allocated to loans and net credit losses. This change excludes from the measure non-interest income, servicing and securitization
and non-interest income, other. Adjusted margin is expressed in dollars or as a percentage of average
loans outstanding.

Reported
adjusted margins for the quarter ended September 30, 2003 were $147.4 million and 10.06%,
compared to $265.4 million and 14.53% for the quarter ended September 30, 2002. Reported
adjusted margins for the first nine months of 2003 were $419.6 million and 8.38%, compared
to $792.7 million and 11.29% for the first nine months of 2002. The adjusted margin
for the three months ended September 30, 2003 decreased due primarily to a lower yield and
reduced fee income on reported loans outstanding, partially offset by lower net credit
losses. The adjusted margins for the nine months ended September 30, 2003 also declined due
to a lower yield and reduced fee income on reported loans and in addition the net credit
loss rate for the nine months was higher in 2003 compared to 2002.

Managed
adjusted margins for the quarter ended September 30, 2003 were $323.2 million
and 7.66%, compared to $423.4 million and 8.80% for the quarter ended
September 30, 2002. The decreases in managed adjusted margins are primarily due
to a decrease in average managed loans and the related yield and lower levels of fees
associated with our transition to higher quality accounts, partially offset by lower
managed net credit losses and a lower net credit loss rate.

Managed
adjusted margins for the first nine months of 2003 were $812.6 million and 6.04%, compared
to $1.33 billion and 7.93% for the first nine months of 2002. The decrease in managed
adjusted margins is primarily the result of lower interest income and fee income primarily
due to lower average managed loan balances resulting from the sales of our interests in
the Providian Master Trust and a portfolio of higher risk loans, partially offset by a
decrease in net credit losses year over year. Although the net credit losses
decreased in 2003 due to lower loan balances, the managed net credit loss rate increased
from 15.97% to 16.35% for the nine months in 2003 as our managed net credit loss rate
reached a high point in the first quarter of 2003 due to the impact of the continued
seasoning of our older loan portfolio, before trending down in the second and third
quarter of 2003.

31

---

Asset Quality

Our
delinquencies and net credit losses reflect, among other factors, the credit quality of
our customers, the average age of our loans receivable (generally referred to as
seasoning), the success of our collection and recovery efforts, and general
economic conditions. Initially, customer credit quality is primarily determined by the
characteristics of the targeted market segment and the underwriting criteria utilized in
the credit approval process. After an account is opened, account management efforts,
seasoning, and demographic and economic conditions will affect overall customer credit
quality.

We
historically focused on three market segments: the standard market segment (higher risk
and generally underserved customers who might not ordinarily qualify for credit cards,
including customers with past credit problems or limited credit history); the middle
market segment (customers whose credit is typically superior to the standard market
segment but inferior to platinum and prime market segment customers); and the platinum
market segment (customers with generally good credit history).

In
2001, we changed our marketing strategies within both the new account acquisition and
portfolio management functions with the goal of generating a higher quality loan portfolio
with more stable earnings and lower, less volatile credit loss rates. In
October 2001, we discontinued all new account marketing to the standard segment. In
mid-2002, we introduced a balanced strategy of originating new loans across the broad
middle to prime market segments and, more recently, we refined our strategy to focus on
the parts of the middle and prime segments that we expect to be most profitable. Under our
new programs, we selectively recruit higher quality customers from these more attractive
segments of the market. We expect to generate higher quality customers through our proprietary marketing
program, which emphasizes the portion of the market we refer to as "middle America," and through
our new partnership marketing program, which is consistent with our focus on "middle America"
and seeks to match individuals associated with various groups with whom we have established
partnerships with our highly targeted marketing criteria.

Consistent
with the changes in our strategy for new account acquisitions, we altered our marketing
approaches for existing customers. We also selectively re-priced loans that exhibited
increased risk levels. To strengthen and extend our relationships with our best customers,
we began to selectively provide product upgrades, improve pricing, and increase credit
lines when appropriate.

We
recognize credit losses on accounts determined to be uncollectible by charging off the
outstanding principal balances, as described in Overview of Critical
Accounting Policies. At the time a loan is charged off, any accrued and unpaid
interest and fee income is removed from our loan balances but is maintained on the
customers record in the event of a future recovery. After a loan is charged off, we
continue collection activity to the extent legally permissible. Any collections on, and
proceeds from the sale of, charged-off loans are recognized as recoveries and are offset
against current period charged-off balances to determine net credit losses.

During
the third quarter of 2002, we undertook a strategic review of our risk management and
collections operations. As a result, we initiated a series of changes to our operating
strategies and policies. The most significant outcome of our review was the adoption of a
delinquency lifecycle strategy for the management of delinquent accounts. In
October 2002, we began to implement this strategy in combination with event-driven
approaches, consumer counseling, and consumer debt management education. Under the
delinquency lifecycle approach, we prioritize collections to focus on delinquency status,
with attention to customer events within each stage of delinquency. We believe that this
facilitates management and collector accountability for, and ownership of, collection
results.

In
January 2003, the Office of the Comptroller of the Currency and the Federal Deposit
Insurance Corporation (FDIC), in coordination with the Federal Financial Institutions Examination Council
("the FFIEC"), issued new guidance to the industry on credit card account management and loss allowance practices.
We believe our practices are already in compliance with most aspects of the guidance, and
expect to achieve full compliance during the course of 2003 without material impact to our
business model. However, we can provide no assurance that our banking regulators will
agree with our assessment of our compliance with the guidance, nor can we estimate what
costs, if any, might result from any direction provided by our banking regulators.

We
also reviewed our operational policies and procedures in light of regulatory guidance and
industry practice, and made changes within those parameters where necessary or
appropriate. As a result of the review, we implemented certain changes in 2002 that
impacted our recognition of principal charge-offs, our procedures for investigating fraud
losses, and our recognition of charge-offs for accounts of deceased customers.

32

---

In
February 2003, we modified our loan re-aging practices. If a customer makes a partial
payment that qualifies under our standards and applicable regulatory requirements, we
re-age the related account from delinquency status to current status. With the change
instituted in February 2003, accounts became eligible for re-aging not more than once in
any 12-month period, and not more than twice within 60 months, which was within the
guidance provided by the FFIEC. Previously, our practice was to re-age qualifying accounts not more
than once in any 30-month period and not more than twice within 60 months.

In
the third quarter of 2003, in order to create additional process efficiencies and in
conjunction with our migration to a new servicing platform with increased functionality,
we made the following operational changes to our credit and collections practices,
consistent with the FFIEC guidance:

- In August 2003, we began recognizing charge-offs for bankrupt customers on a daily basis, generally 30 days after
         notification of the bankruptcy. Previously, we batch processed bankruptcy accounts and charged off the related
         amounts once a month. The impact of implementing this change was a decrease in the September 2003 reported
monthly net credit loss rate of approximately 96 basis points.
- In August 2003, we began recognizing charge-offs for deceased customers on a daily basis, generally 60 days after
         verification of death. Previously, we recognized charge-offs for deceased customers on two separate days each
         month, generally within a range of about 35 to no more than 60 days after verification of death. We estimate
         implementing this change had no significant impact to the September 2003 reported monthly net credit loss rate or
         the 30+ day delinquency rate.
- In August 2003, we modified the partial payment amount required to be paid by a customer in order to keep the
         customer's account from aging. Previously, we required a payment of no less than $5 below the minimum amount
         due.  With the change, in order to avoid aging the account we now require a payment of 90% or more of the minimum
         amount due. We estimate implementing this change had no significant impact to the September 2003 reported monthly
         net credit loss rate or the 30+ day delinquency rate.
- In August 2003, we modified the criteria used to determine whether a customer's account has been restructured
         under a consumer debt management program and is therefore subject to charge-off no later than 120 days after it
         becomes contractually past due. Previously, we considered an account to be in our consumer debt management
         program when a customer made three payments on the restructured account. With the change, we now consider an
         account to be in our consumer debt management program when the customer makes one payment on the restructured
         account. We estimate implementing this change had no significant impact to the September 2003 reported monthly
         net credit loss rate or the 30+ day delinquency rate.
- In September 2003, we further modified our loan re-aging practices. Previously, an account could qualify for
         re-aging if the customer paid the minimum amount due in each of three consecutive monthly payment cycles. With
         the change, an account may also qualify for re-aging when the customer pays the cumulative equivalent amount within a three payment cycle period. The impact of implementing this change
was a decrease in the September 2003 reported 30+ day delinquency rate of approximately 18 basis points.

We
expect that this series of changes will result in performance improvements over the long
term. Our continued review of risk management and collections operations could lead to
further modifications in the future.

Delinquencies.An account is contractually delinquent if the minimum payment is not
          received by the next billing date. Accountholders may cure account delinquencies
          by making a partial payment that qualifies under our re-aging practices and
          applicable regulatory requirements. The 30+ day delinquency rate on reported
          loans was 7.18% as of September 30, 2003, compared to 7.64% as of June 30, 2003
          (7.93% if loans held for securitization or sale are excluded) and 10.00% as of
          December 31, 2002.

The
30+ day delinquency rate on managed loans was 9.68% as of September 30, 2003, compared to
9.72% as of June 30, 2003 (9.90% if loans held for securitization or sale are excluded)
and 11.11% as of December 31, 2002. The decreases from the second quarter of 2003 in both
our reported and managed 30+ day delinquency rates reflect the impact of our new
collection and credit strategies, policies and practices implemented in the latter part of
2002, portfolio management actions to improve the credit quality of the loan portfolio,
and higher quality credit card account originations.

33

---

# Delinquent Loans

|                         | September 30, 2003 | December 31, 2002
|------------------------ | ------------------ | -----------------
|
|
|Reported                 |                    |                  
|Loans outstanding(1) (2) |                    |                  
|Loans delinquent         |                    |                  
|30  59 days             |                    |                  
|60  89 days             |                    |                  
|90 or more days          |                    |                  
|                         |                    |                  
|Total loans delinquent   |                    |                  
|                         |                    |                  
|                         |                    |                  
|Securitized              |                    |                  
|Loans outstanding(3)     |                    |                  
|Loans delinquent         |                    |                  
|30  59 days             |                    |                  
|60  89 days             |                    |                  
|90 or more days          |                    |                  
|                         |                    |                  
|Total loans delinquent   |                    |                  
|                         |                    |                  
|                         |                    |                  
|Managed                  |                    |                  
|Loans outstanding(1)     |                    |                  
|Loans delinquent         |                    |                  
|30  59 days             |                    |                  
|60  89 days             |                    |                  
|90 or more days          |                    |                  
|                         |                    |                  
|Total loans delinquent   |                    |                  
|                         |                    |                  

---

|(1) |  | The September 30, 2003 and December 31, 2002 balances exclude market value adjustments related to the fair value of
         designated financial instruments of $(0.8) million and $7.9 million.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The Company adopted the federal banking agencies' accrued interest receivable, or AIR, guidance in the fourth quarter of
2002, resulting in a reclassification of a portion of accrued interest receivable from reported loans receivable to due
from securitizations during the first three quarters of 2003 and the fourth quarter of 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Excludes the senior seller's interest in the loans receivable transferred in securitizations, which is
included in reported loans receivable.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

Net
Credit Losses.Net credit losses for consumer loans represent the principal amount of
charged-off loan balances (including charged-off bankrupt and deceased customer accounts)
less current period recoveries. Net credit losses include purchases, including certain
financed cardholder service product sales and cash advances, and exclude accrued interest
and fees and fraud losses. Recoveries include collections on previously charged-off
accounts and the proceeds from the sale of charged-off receivables. The amount of charged-off receivables sold will vary from period to period and is influenced by charge off
trends, market conditions, and credit loss performance targets for the period in question.
The proceeds recognized from these sales of charged-off receivables were $23.9 million and
$73.2 million for the three and nine months ended September 30, 2003, as compared to $4.1
million and $20.2 million for the three and nine months ended September 30, 2002. The
proceeds recognized from sales on a managed basis were $72.3 million and $195.7 million
for the three and nine months ended September 30, 2003, as compared to $9.3 million and
$55.0 million for the three and nine months ended September 30, 2002. Fraud losses (losses
due to the unauthorized use of credit cards, including credit cards obtained through
fraudulent applications) are not included in credit losses and are charged to non-interest
expense after an investigation period of up to 90 days (up to 60 days prior to
November 2002).

Credit
loss rates are derived by dividing net credit losses by average loans receivable balances
for a specified period. While net credit losses exclude all accrued interest and fees
associated with charged-off loans, loans receivable balances include accrued interest and
fee balances estimated to be collectible. The reported net credit loss rate was 10.65% for
the quarter ended September 30, 2003, compared to 13.38% for the quarter ended September
30, 2002.

34

---

Managed
net credit losses include reported net credit losses plus charged-off amounts less
recoveries (including proceeds from the sale of charged-off receivables) related to
securitized loans. The managed net credit loss rate was 14.37% for the quarter ended
September 30, 2003, compared to 16.71% for the quarter ended September 30, 2002.

The
improvement in the managed net credit loss rate primarily reflects the implementation of
the new collections initiatives and increased charged-off asset sales in 2003, coupled
with underwriting enhancements and improved credit performance over time for newer
accounts.

# Net Credit Losses

|                                                   | Three months ended | Nine months ended
|-------------------------------------------------- | ------------------ | -----------------
|
|
|Reported                                           |                    |                  
|Average loans outstanding(1)(2)(3)                 |                    |                  
|Net credit losses(4)                               |                    |                  
|Net credit losses as a percentage of average loans |                    |                  
|outstanding                                        |                    |                  
|                                                   |                    |                  
|                                                  
|Securitized                                        |                    |                  
|Average loans outstanding(5)                       |                    |                  
|Net credit losses                                  |                    |                  
|                                                   |                    |                  
|                                                  
|Managed                                            |                    |                  
|Average loans outstanding(1)(2)                    |                    |                  
|Net credit losses(4)                               |                    |                  
|Net credit losses as a percentage of average loans |                    |                  
|outstanding                                        |                    |                  

---

|(1) |  | The 2003 average loans outstanding include loans held for securitization or sale
               at par.
|--- |  | -------------------------------------------------------------------------------------------------------

|(2) |  | The average loans outstanding and net credit losses for the nine months ended
               September 30, 2002 included the higher risk loans receivable at par and related net
               credit losses prior to the transfer to loans held for securitization or sale on
               March 31, 2002. Subsequently, these loans receivable and related net credit
               losses were excluded from the calculation of net credit losses for the nine
               months ended September 30, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The Company adopted the federal banking agencies accrued interest
               receivable, or AIR, guidance in the fourth quarter of 2002, resulting in a
               reclassification of a portion of accrued interest receivable from reported loans
               receivable to due from securitizations during the first three quarters of
               2003 and the fourth quarter of 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The year to date 2003 and the year to date 2002 net credit losses exclude estimated net
               credit losses on loans held for securitization or sale of $171.6 million and
               $985.9 million.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Excludes the senior sellers interest in the loans receivable transferred in
               securitizations, which is included in reported loans receivable.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest Rate Sensitivity

Interest
rate sensitivity refers to the change in earnings or value resulting from fluctuations in
interest rates. Our earnings are subject to risk to the extent that there is a difference
between the amount of interest-earning assets and the amount of interest-bearing
liabilities that mature or reprice in a specific period. Even if earnings could be
perfectly hedged, a change in the level of interest rates will change the present value of
the hedged earnings stream.

Our
assets and liabilities consist primarily of investments in interest-earning assets (loans
receivable and investment securities) that are primarily funded by interest-bearing
liabilities (deposits and borrowings). Our receivables accrue interest at rates that are
either fixed or float at a spread above the prime rate. While our fixed rate credit card
receivables have no stated maturity or repricing period, we generally have the right to
adjust the rate charged after providing notice to the customer. Interest rates on our
liabilities are generally indexed to LIBOR or bear a fixed rate until maturity. This
asset/liability structure exposes us to two types of interest rate risk:
(a) repricing risk, which results from a mismatch between assets and liabilities that
mature or reprice in specific periods; and (b) basis risk, which arises from changing
spread relationships between indexes such as the prime rate and LIBOR.

35

---

The
principal objective of our interest rate risk management activities is to monitor and
control our exposure to adverse effects resulting from movements of interest rates over
time. We measure and manage interest rate risk individually for each banking subsidiary
and on a consolidated basis. We generally seek to strike a balance between hedging
earnings and hedging the present value of earnings. To measure exposure to interest rate
changes, we use multiple complementary measures of risk to current earnings and the
present value of earnings under a number of scenarios and rate changes. We typically model
the impact of rate changes on current earnings over a three-year period and the impact on
the present value of earnings over a longer horizon. When estimated risk exposure exceeds
our guidelines, we seek to mitigate the risk through the use of matching and hedging
techniques as described below.

The
table below illustrates the estimated effects on managed net interest income of positive
and negative parallel shifts in interest rates as calculated at September 30, 2003, using
our interest rate risk model, taking into consideration our current hedging activity as of
September 30, 2003.

# Estimated Effects of
Interest Rate Changes

|                   | Percentage Change in
|------------------ | --------------------
|
|+ 200 basis points |                     
|- 200 basis points |                     

---

|(1) |  | The information shown is presented on a consolidated managed asset/liability
               basis, giving effect to derivatives, securitizations and related funding. It
               compares managed net interest income over twelve months in a stable interest
               rate environment to scenarios in which interest rates rise and fall by 200 basis
               points. We do not in the normal course of business derive comparable interest
               rate sensitivity of net interest income on a reported basis. Developing such a
               projection would be unreasonably burdensome, and, in the opinion of management,
               such comparable projections on a reported basis would not provide a significant
               benefit in understanding our expected future performance.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
interest rate risk model incorporates certain assumptions regarding our ability to reprice
our fixed rate credit card loans without otherwise impacting customer behavior. The actual
repricing sensitivity of these loans depends on how our customers and competitors respond
to changes in market interest rates. As of September 30, 2003, we modeled the repricing
maturity of our fixed rate credit card loans based on an average maturity of 15 months.
The repricing of certain other categories of assets and liabilities is subject to
competitive and other pressures beyond our control. As a result, certain assets and
liabilities assumed to mature or otherwise reprice within a certain period may in fact
mature or reprice at different times and at different volumes. The table above should be
viewed as our best estimate, subject to these uncertainties, of the general effect of the
indicated interest rate movements on our managed net interest income.

We
generally seek to mitigate the risk arising from changes to earnings and value associated
with interest rate movement by matching the modeled repricing characteristics of assets
and liabilities. When matching the repricing characteristics of assets and liabilities is
not possible or efficient, we generally seek to hedge the risk by using derivative
financial instruments, including interest rate swap and cap agreements. We do not trade
derivatives or use derivatives to speculate on interest rate movements, and we believe our
use of such instruments is prudent and consistent with industry standards.

36

---

# Notional Amounts of
Interest Rate Swap and Cap Agreements

|                              | Three months ended September 30, | Nine months ended September 30,
|----------------------------- | -------------------------------- | -------------------------------
|
|Interest Rate Swap Agreements |                                  |                                
|Beginning balance             |                                  |                                
|Maturities                    |                                  |                                
|                              |                                  |                                
|Ending balance                |                                  |                                
|                              |                                  |                                
|                              |                                  |                                
|Interest Rate Cap Agreements  |                                  |                                
|Beginning balance             |                                  |                                
|Maturities                    |                                  |                                
|                              |                                  |                                
|Ending balance                |                                  |                                
|                              |                                  |                                

Notional
amounts of interest rate swaps and caps outstanding on September 30, 2003 decreased from
September 30, 2002, primarily as the need for hedging declined in conjunction with a
decrease in our fixed rate loans. As market conditions or our asset/liability mix change,
we may increase or decrease the notional amounts of interest rate swaps and caps
outstanding in order to manage our interest rate risk within prudent levels.

We
manage credit risk arising from derivative transactions through an ongoing credit review,
approval, and monitoring process. Credit risk for these derivative transactions is defined
as the risk that a loss will occur as the result of a derivative counterparty defaulting
on a contract when the contract is in a favorable economic position to us. We may enter
into master netting, market settlement, or collateralization agreements with derivative
counterparties to reduce this risk.

In
2002 we completed the sale of our operations in the United Kingdom and Argentina. At
September 30, 2003, our foreign currency exposure had been reduced to small cash balances
in British pound sterling.

Funding and Liquidity

We
seek to fund our assets through a diversified mix of funding products designed to appeal
to a broad range of investors, with the goal of generating funding at the lowest cost
available to us while maintaining liquidity at appropriate levels and managing interest
rate risk. The primary goal of our liquidity management is to provide funding to support
our operations in varying business environments. We employ multiple strategies, including
diversification of funding sources, dispersion of maturities, and maintenance of liquid
investments and cash balances.

Our
debt ratings and those of PNB were downgraded in 2001 and 2002. Accordingly, our access to
funding has been and may continue to be more limited, at a higher cost and on terms less
favorable than available to us prior to the downgrades. On September 26, 2003,
FitchRatings upgraded the ratings for senior unsecured debt of Providian Financial
Corporation from B to B+ and for senior unsecured debt of Providian National Bank from B+
to BB-. In addition, FitchRatings revised our ratings outlook from stable to positive.
However, we do not expect any material change in our access to funding or in our funding
costs as a result of these upgraded ratings.

# Current Long-Term
Senior Debt Ratings

|                                | Standard & | Moody's |    
|------------------------------- | ---------- | ------- | ---
|
|Providian Financial Corporation | B          | B2      | B+ 
|Providian National Bank         | BB-        | Ba3     | BB-

---

|(1) |  | Stable outlook.
|--- |  | ---------------

|(2) |  | Positive outlook.
|--- |  | -----------------

During
the third quarter of 2003, our liquidity position (federal funds sold and securities
purchased under resale agreements, available-for-sale investment securities, and cash and
cash equivalents) decreased by approximately $809.4 million from $6.64 billion at June 30,
2003 to $5.83 billion at September 30, 2003. We expect our liquidity position to decrease
over the remainder of 2003 as our aggregate level of deposits decrease. In accordance with
the Capital Plans that our banking subsidiaries have entered into with their regulators,
we expect to continue to maintain significant levels of liquidity.

37

---

In
addition, under the capital assurances and liquidity maintenance agreements we entered
into with our banking subsidiaries, we have agreed to provide capital and liquidity
support to them. Our agreements with our banking subsidiaries to provide capital and
liquidity support exempt certain of our near-term cash obligations, including current
interest obligations on our 3.25% convertible senior notes due August 15, 2005 and current
payments on the 9.525% junior subordinated deferrable interest debentures due
February 1, 2027. In addition, certain accrued deferred compensation, miscellaneous working capital needs not to exceed $25
million, and severance payments are generally exempt from the parent companys
obligations under the agreements. See Regulatory Matters in our 2002 Annual
Report for a description of our capital assurances and liquidity maintenance agreements.

Our
investment in subsidiaries as a percentage of our total equity, which is referred to as
our double leverage, at September 30, 2003 was 131%. A double leverage ratio
in excess of 100% indicates the degree to which an investment in subsidiaries has been
funded with long-term borrowings and other liabilities of the parent company. The
principal source of funds for us to make payments on our parent company debt securities
and to meet our other obligations is our cash investments and dividends from our banking
subsidiaries. However, our banking subsidiaries have agreed not to pay any dividends to us
during the term of their regulatory agreements without first obtaining regulatory consent.
They do not currently have any plans to seek such consent. In addition, if we are required
to provide additional capital and liquidity support to our banking subsidiaries, our
ability to service our debt obligations would be further limited.

Funding
Sources and Maturities.  We seek to fund our assets by diversifying our distribution
channels and offering a variety of funding products. However, our ability to fund existing
and future customer loans is currently dependent on four primary sources: customer
deposits, securitizations, a portfolio of cash and liquid investment securities, and, to a
lesser extent, debt.

We
offer maturity terms for our funding products that range up to 30 years. Actual maturity
distributions depend on several factors, including expected asset duration, investor
demand, relative costs, shape of the yield curve, and anticipated issuances in the
securitization and capital markets. We seek to maintain a balanced distribution of
maturities and avoid undue concentration in any one period. We monitor existing funding
maturities and loan growth projections to prudently manage liquidity levels.

For
the remainder of the year (October 1, 2003 through December 31, 2003), we have
funding requirements for maturing deposits of $933.4 million, and no maturing term
securitizations or maturing debt. We also expect to renew the variable
funding series, which has $2.0 billion in investor interests provided by third parties, in the fourth quarter of 2003 for a period of approximately twelve months.
If not renewed, this series would amortize or would otherwise become payable during the
fourth quarter of 2003. We anticipate that we will meet these funding requirements, along
with any incremental asset growth, with securitization issuances, our liquidity position,
and new deposits. However, given our credit ratings and the
deterioration in our financial performance and asset quality, our ability to attract
deposits, borrow funds from other sources, and issue additional asset-backed securities
has been adversely impacted. We may generate additional funding by issuing common stock
through a dividend reinvestment and direct stock purchase plan or by issuing new debt
securities.

Deposits.Deposits decreased to $11.18 billion as of September 30, 2003 from $12.66
          billion as of December 31, 2002. While we anticipate that deposits will continue
          to be a substantial source of our overall funding, we expect that the level of
          our deposit balances will continue to decrease during the remainder of 2003 as
          we manage down our liquidity position. Consistent with our banking
          subsidiaries Capital Plans, we expect to continue to work with their
          regulators to improve the quality of the assets that we hold on our balance
          sheet that are funded by deposits, with the goal of having deposits covered by
          cash, liquid investments, and risk-adjusted on-balance sheet loans. The sale of
          PB loans receivable in the third quarter, combined with account origination,
          portfolio management, funding strategies and other initiatives currently in
          process or otherwise available, should enable our banking subsidiaries to
          achieve their goals consistent with such Capital Plans.

38

---

The
following table summarizes the contractual maturities of our deposits, substantially all
of which are retail deposits.

# Maturities of Deposits

|                                      | September 30, 2003 | December 31, 2002
|------------------------------------- | ------------------ | -----------------
|
|
|Three months or less                  |                    |                  
|Over three months through one year(1) |                    |                  
|Over one year through five years(2)   |                    |                  
|Over five years                       |                    |                  
|Deposits without contractual maturity |                    |                  
|                                      |                    |                  
|Total deposits                        |                    |                  
|                                      |                    |                  

---

|(1) |  | Maturities of deposits over three months through one year by quarter are as
               follows: first quarter 2004: $1.08 billion; second quarter 2004: $810.6 million;
 third quarter 2004: $881.0 million.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Maturities of deposits over one year through two years, $2.38 billion.
|--- |  | ----------------------------------------------------------------------

A bank that is below the "well capitalized" levels as reported on its Call Reports is subject to ceilings on
rates paid for deposits (limited to not more than 75 basis points higher than the prevailing rate in its market) and is
restricted from accepting brokered deposits without a waiver from the FDIC. As of September 30, 2003, capital ratios for
both PNB and PB were above the "well capitalized" levels on a Call Report basis. PB has exceeded the "well-capitalized"
level since December 31, 2001; PNB, since March 31, 2002. Accordingly, the restrictions on deposit taking activities
described above do not currently apply to PNB or PB and will not apply to them so long as they remain "well capitalized"
on a Call Report basis.

Securitizations.    We securitize loans in order to diversify funding sources and to obtain efficient all-in cost
of funds, including the cost of capital. We seek a range of maturity terms in our securitizations.

Securitizations may utilize variable funding series that renew annually if the relevant conditions for such
renewal are satisfied. Securitized funding under the variable funding series representing investor interests held by
third parties totaled $2.00 billion as of September 30, 2003 and $2.81 billion as of December 31, 2002. We expect to
extend the revolving period of the variable funding series in the fourth quarter of 2003 for a period of approximately
twelve months, and thus extend the beginning of the scheduled amortization period to November 2004. If it is not renewed
or extended, based on current projections and amounts outstanding as of September 30, 2003, we would expect it to
amortize or otherwise become payable during the fourth quarter of 2003.

Term securitizations are issued with expected maturities of one year or more. Our term securitizations are
expected to amortize over the periods indicated below based on current projections and amounts outstanding as of
September 30, 2003.

# Amortization of Term
Securitizations

|     | Amount Amortizing
|---- | -----------------
|
|2003 |                  
|2004 |                  
|2005 |                  
|2006 |                  
|2007 |                  
|2008 |                  

The
amount funded in our spread accounts will change from time to time, depending on
securitization amounts and maturities and spread account funding triggers. These triggers
are based, in part, on our credit rating and the performance of the securitized loans. At
the end of the third quarter of 2003, the funds on deposit in spread accounts totaled
$578.4 million, of which $355.5 million was funded due to downgrades in our credit rating
in 2001 and 2002 and $222.9 million due to the performance of the securitized loans. The
spread account funding requirements due to our credit rating downgrades have been fully met. Currently, there are no additional spread account funding requirements relating to our
credit ratings. As the Trust performance improves or deteriorates, spread account funding
levels related to performance will decrease or increase.

39

---

Unsecured
Funding Facilities.

# Summary of Unsecured
Funding Facilities

|                                                       | September 30, 2003
|------------------------------------------------------ | ------------------
|
|
|Senior and subordinated bank note program(2)           |                   
|Providian Financial shelf registration(3)              |                   
|Junior subordinated deferrable interest debentures (4) |                   

---

|(1) |  | Funding availability and/or funding costs are subject to market conditions and
               contractual provisions.
|--- |  | ---------------------------------------------------------------------------------------------------------------------

|(2) |  | This program is not available as a result of a condition that new note issuances are not permitted unless debt of bank
               issuer is rated investment grade. Bank notes currently outstanding under this
               program are all senior bank notes. Amounts presented do not include related
               discount and/or issuance costs.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Outstanding securities issued under the shelf registration consist of three
               convertible debt offerings with earliest possible required principal payment
               dates beginning in August 2005, February 2006, and May 2008.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | In accordance with FIN 46, amounts previously classified as capital securities are classified as junior subordinated
deferrable interest debentures in long-term borrowings as of September 30, 2003. See Note 9 to our Consolidated Financial
Statements for further discussion.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
May 2003, we issued $287.5 million of 4.00% convertible senior notes due May 15, 2008 that
are convertible, at the option of the holder if certain conditions are met, into common
stock at a conversion rate of 76.8758 shares of common stock per $1,000 principal amount
of the notes. This issuance was done under Providian Financial Corporations shelf
registration filed with the Securities and Exchange Commission. We intend to use the
proceeds from this issuance for general corporate purposes, including the repurchase of
outstanding debt obligations, capital contributions or extensions of credit to our banking
subsidiaries, and other purposes consistent with our banking subsidiaries Capital
Plans.

The
principal source of funds for payment of dividends on our common stock is dividends
received from our banking subsidiaries. However, our banking subsidiaries have agreed not
to pay any dividends to us during the term of their regulatory agreements without first
obtaining prior regulatory consent. See Regulatory Matters in our 2002 Annual
Report. Our banking subsidiaries do not currently have any plans to seek such consent. In
addition, our Board of Directors has suspended for an indefinite period the payment of
quarterly cash dividends on our common stock.

Investments.We maintain short-term liquidity through federal funds sold and securities
          purchased under resale agreements, available-for-sale investment securities and
          cash and cash equivalents. We also maintain a portfolio of high-quality
          investment securities, such as U.S. government and agency obligations,
          mortgage-backed securities, and commercial paper. Investment securities
          decreased to $1.46 billion as of September 30, 2003 from $1.86 billion as of
          December 31, 2002. Federal funds sold and securities purchased under resale
          agreements increased to $3.85 billion as of September 30, 2003 from $3.60
          billion as of December 31, 2002.

Capital Adequacy

Each
of our banking subsidiaries is subject to capital adequacy guidelines as defined by its
primary federal regulator. Core capital (Tier 1) consists principally of
shareholders equity less goodwill. Total risk-based capital (Tier 1 + Tier
2) includes a portion of the allowance for credit losses and other capital
components. Based on these classifications of capital, the capital adequacy regulations
establish three capital adequacy ratios that are used to measure whether a financial
institution is well capitalized or adequately capitalized. See
Regulatory MattersOur 
Capital Plans and Regulatory MattersSupervision and Regulation GenerallyCapital
 Requirements" in our 2002 Annual Report.

# Capital Adequacy
Guidelines

|                 |                                           | Well | Adequately
|---------------- | ----------------------------------------- | ---- | ----------
|
|
|Total risk-based | (Tier 1 + Tier 2)/Total risk-based assets | >10% | >8% <10%  
|Tier 1           | Tier 1/Total risk-based assets            | >6%  | >4% <6%   
|Leverage         | Tier 1/Adjusted average assets            | >5%  | >4% <5%   

40

---

# Capital Ratios (Call
Report Basis)

|                 | Providian |   
|---------------- | --------- | --
|
|
|Total risk-based |           | 17
|Tier 1           |           | 14
|Leverage         |           | 19

Pursuant
to the Capital Plans, our banking subsidiaries capital is also evaluated under the
Expanded Guidance for Subprime Lending Programs (Subprime Guidance).
Application of the Subprime Guidance results in a higher overall risk weighting on the
loan portfolio as a whole than would otherwise be required by the regulations. Under the
methodology utilized under the Capital Plans for determining risk weightings, our banking
subsidiaries have segmented their standard and middle market loan portfolios into several
categories according to their internal credit scores and historical and projected
charge-off rates. As applied by the banks as of September 30, 2003, this methodology
resulted in weighted average risk weightings against reported standard and middle segment
loans of 157% at PNB and 162% at PB. On a combined basis, the banks weighted average
risk weighting on a Subprime Guidance basis was approximately 157% against reported
standard and middle segment loans of approximately $3.69 billion as of September 30,
2003. Such risk weightings are subject to change depending upon conditions in our loan
portfolio and/or changes in regulatory guidance. Managed loans outstanding to customers in
the standard and middle segments, on a combined basis, totaled approximately
$14.29 billion as of September 30, 2003. See Regulatory MattersOur
Capital Plans and Regulatory MattersSupervision and Regulation
GenerallyCapital Requirements in our 2002 Annual Report.

As
of September 30, 2003, PNB and PB each met their Capital Plan commitment
 to maintain capital ratios associated with well
capitalized status after applying the Subprime Guidance risk weightings. In the case
of PNB, this commitment is based upon a total risk-based capital ratio, excluding from the
calculation the effect of adopting the AIR guidance.  PNBs
total risk-based capital ratio based on such calculation was 15.40% as of September 30,
2003. PNB has the additional commitment of achieving by June 30, 2004 and thereafter
maintaining capital ratios associated with well capitalized status after
applying the Subprime Guidance risk weightings and including the effect
of adopting the AIR guidance.

# Capital Ratios(Applying
Subprime Guidance)

|                 | Providian |   
|---------------- | --------- | --
|
|
|
|Total risk-based |           | 13
|Tier 1           |           | 11
|Leverage         |           | 19

The total risk-based and Tier 1 capital ratios for PB in the two tables above reflect a change from the ratios
reported in the Financial & Statistical Summary accompanying the Company's earnings release of October 29, 2003.
Subsequent to issuing the release on October 29, 2003, and after consultation with the FDIC, PB amended its Call Report
for the quarter ended September 30, 2003, to adjust the risk-weighting applicable to $309.4 million in 0% risk-weighted
investment securities that had been sold on September 30, 2003, for settlement in early October. Under the FDIC's
application of risk-based capital rules, during the period between the trade date and settlement, the amount due to PB
from its counterparty constitutes an other asset and bears a risk-weight of 100%, rather than the 0% reflected on PB's
originally filed Call Report. The increased risk-weight had the effect of reducing PB's risk-based capital ratios to the
levels reported in the two tables above. With the closing of the security sales in early October and the receipt by PB of
cash, the need for the higher risk weighting going forward has been eliminated. There was no comparable impact on PNB.

In
August 2003, Providian Financial Corporation purchased from PNB retained subordinated
certificateholders interests in certain series of the Providian Gateway Master Trust
at a carrying value of $126 million. The sale of these interests by PNB to its parent
company improved PNBs total risk-based capital ratios by approximately 137 basis
points on a Call Report basis and 108 basis points after applying the Subprime Guidance. In addition
to PNB's capital ratio improvement, PB's capital ratios improved as a result of the August 2003 sale of $859
million in loans receivable, which comprised substantially all of the credit card loans of
PB.

Future
capital ratios will depend on, among other things, the level of internally generated
capital as well as the level of loan growth, changes in loan mix, and the level of
retained subordinated interests related to our securitization activity. Growth in reported
receivables, combined with the growth in spread accounts and other retained subordinated
interests relating to our securitizations, may result in the fluctuation of the
banks risk-based capital ratios, as reported in their Call Reports and after
applying the Subprime Guidance. However, with the substantial completion of our strategic
asset dispositions and other strategic initiatives, as well as the generation of internal
capital through the recognition of net income, and subject to ongoing review and
continuing update of our Capital Plans and the potential impact of evolving regulatory
standards, we expect that our banking subsidiaries will be able to achieve the capital
goals in their Capital Plans as required.

41

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The
capital requirements and classifications of our banking subsidiaries are subject to
qualitative judgments by their regulators with respect to components, risk weightings, and
other factors. The banking regulators have the authority to require us to adhere to higher
capital requirements. This would necessitate increasing capital ratios by various means,
including asset sales or equity issuances. In addition, the strategic initiatives that we
have taken, and any that we may take in the future, could have an impact on the capital
requirements of our banking subsidiaries.

In
accordance with the banking regulators risk-based capital standards, risk-based
capital must be maintained for assets transferred with recourse, in an amount no greater
than the maximum amount of recourse for which a regulated entity is contractually liable.
This rule, known as the low-level recourse rule, applies to transactions accounted for as
sales under GAAP in which a bank contractually limits its risk of loss or recourse
exposure to less than the full effective minimum risk-based capital requirement for the
assets transferred. Low-level recourse transactions arise when a bank securitizes assets
and uses contractual cash flows, retained subordinated interests, or other assets as
credit enhancements. Accordingly, our banking subsidiaries are required to hold risk-based
capital equivalent to the maximum recourse exposure on the assets transferred, not to
exceed the amount of risk-based capital that would be required if the low-level recourse
rule did not apply.

In
November 2001, the federal banking agencies published a final rule to revise the
agencies regulatory capital standards to address the treatment of recourse
obligations, residual interests and direct credit substitutes that expose banks to credit
risk (the residual interest rule). The final rule was effective
January 1, 2002 for any transaction covered under the rule that settled on or after
the effective date. Our banking subsidiaries elected early adoption of the residual
interest rule, effective January 1, 2002, as to transactions entered into before that
date.

The
residual interest rule adds new standards for the treatment of retained interests related
to securitizations, including a concentration limit for credit-enhancing interest-only
strips. This rule is intended to result in more consistent regulatory capital treatment
for certain transactions involving similar risk, and capital requirements that more
closely reflect a banking organizations relative exposure to credit risk.
Specifically, the final rule amended capital standards by: providing a more consistent
risk-based capital treatment for recourse obligations and direct credit substitutes;
applying a ratings-based approach that sets capital requirements for positions in
securitized transactions; deducting from Tier 1 capital the amount of credit-enhancing
interest-only strips receivable that exceeds 25% of Tier 1 capital (concentration limit);
and requiring dollar-for-dollar risk-based capital for certain residual
interests not deducted from Tier 1 capital. As of September 30, 2003, PNBs interest-only strips receivable represented 6.71% of its
Tier 1 capital, which is below the 25% concentration limit, and PB had no interest-only
strips receivable.

On
May 17, 2002, the federal banking agencies issued clarifying guidance on the
regulatory capital treatment of AIR related to credit card securitizations. The guidance
defined the AIR asset as a subordinated retained interest that requires
dollar-for-dollar risk-based capital. On December 4, 2002, the agencies
also provided guidance on the accounting for the AIR asset. We adopted the guidance for
the capital treatment and accounting of the AIR in the fourth quarter of 2002.

Cautionary Statement
Regarding Forward-Looking Information

This
report contains certain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which are subject to the safe harbor created by those
sections. Forward-looking statements include, without limitation: expressions of the
belief, anticipation, or expectations of management;
statements as to industry trends or future results of operations of our company and our
subsidiaries; and other statements that are not historical fact. Forward-looking
statements are based on certain assumptions by management and are subject to risks and
uncertainties that could cause actual results to differ materially from those in the
forward-looking statements. These risks and uncertainties include, but are not limited to,
competitive pressures; factors that affect liquidity, delinquency rates, credit loss rates
and charge-off rates; general economic conditions; consumer loan portfolio growth; changes
in the cost and/or availability of funding due to changes in the deposit, credit or
securitization markets; changes in the way we are perceived in such markets and/or
conditions relating to existing or future financing commitments; the effect of government
policy and regulation, whether of general applicability or specific to us, including
restrictions and/or limitations relating to our minimum capital requirements, deposit
taking abilities, reserving methodologies, dividend policies and payments, growth, and/or
underwriting criteria; changes in accounting rules, policies, practices and/or procedures;
the success of product development efforts; legal and regulatory proceedings, including
the impact of ongoing litigation; interest rates; one-time charges; extraordinary items;
the ability to recruit or replace key personnel; and the impact of existing, modified, or
new strategic initiatives. These and other risks and uncertainties are described in our
2002 Annual Report under the heading Risk Factors, and are also described in
other parts of our 2002 Annual Report, including Legal Proceedings and
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Readers are cautioned not to place undue reliance on any forward-looking
statement, which speaks only as of the date thereof. We undertake no obligation to update
any forward-looking statements.

42

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# Item 3. Quantitative and
Qualitative Disclosures About Market Risk

Information
concerning quantitative and qualitative disclosures about market risk is provided under
the caption Interest Rate Sensitivity under Managements Discussion
and Analysis of Financial Condition and Results of Operations.

# Item 4. Controls and
Procedures

The
Companys management, with the participation of the Companys Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the
end of the period covered by this report and, based on this evaluation, concluded that the
Companys disclosure controls and procedures, which have been designed to ensure that
information required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms of the Securities and Exchange Commission, are
effective.

No
change in the Companys internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)) has occurred during the Companys most recent fiscal
quarter that has materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

43

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# PART
II.  OTHER INFORMATION

# Item 1.  Legal
Proceedings

Following
our third quarter earnings announcement in October 2001, a number of lawsuits were
filed against us and certain of our executive officers and/or directors. These included
Rule 10b-5 securities class actions, two shareholder derivative actions, and class actions
relating to our 401(k) plan (the 401(k) plan).

The
Rule 10b-5 securities class actions were filed in the District Court for the Northern
District of California. These consolidated actions (In re Providian Financial Securities
Litigation) allege that we and certain of our officers made false and misleading
statements concerning our operations and prospects for the second and third quarters of
2001, in violation of federal securities laws. The actions define the putative class as
those persons or entities who acquired our stock between June 6 and October 18,
2001, and they seek damages, interest, costs, and attorneys fees. Our motion to
dismiss was denied in December 2002, and the case has moved into the discovery phase.

The
shareholder derivative actions were filed in December 2001 and January 2002 in
California state court in San Francisco. These actions generally seek redress against
members of our Board of Directors and certain executive officers and allege breach of
fiduciary duty, gross negligence, breach of contract and violation of state insider
trading law. The complaints seek damages (in the name of the Company and to be awarded to
the Company), attorneys fees and other relief.

The
class actions relating to the 401(k) plan were filed beginning in December 2001 in
the District Court for the Northern District of California, on behalf of a class
comprising all persons who were participants or beneficiaries of the plan since
July 17, 2001. These consolidated actions, which alleged breaches of fiduciary duties
under the Employee Retirement Income Security Act, have been settled on a classwide basis
for $8.6 million, which was funded by our insurance carriers. The settlement received
final approval from the court in June 2003.

Beginning
in 1999, the Company was named as a defendant in a number of legal proceedings relating to
allegedly unfair and deceptive business practices by our banking subsidiaries in the
marketing of cardholder service products and other practices. In June 2000, the
Company reached settlements with the Comptroller, the San Francisco District Attorney, the
California Attorney General, and the Connecticut Attorney General with respect to these
consumer claims. In December 2000, the Company announced that it had agreed to settle
the consumer class action and other lawsuits pending in state and federal court relating
to such practices. This settlement received final state court approval in
November 2001 and the federal court actions were dismissed in March 2002. In
connection with these settlements the Company agreed to make certain business practice
changes and to pay restitution to affected customers. Approximately 6,400 class members
opted out of participation in the class action settlement and approximately 825 of those
class members have filed individual actions against the Company that are currently
pending. The parties have reached agreement in principle to settle the opt out cases on a
global basis.

In
February 2001, the Company was named as a defendant in a putative consumer class
action suit entitled Ross v. Visa, U.S.A., Inc., et al., which was filed in the
United States District Court for the Eastern District of Pennsylvania against Visa,
MasterCard and a number of credit card issuing banks. The suit alleges that uniform
foreign currency surcharges allegedly imposed by the defendants are the result of a
conspiracy in restraint of trade and violate the federal antitrust laws, and that the
defendant banks failed to separately identify these surcharges to their customers on their
monthly statements in violation of the federal Truth-in-Lending Act. A number of similar
lawsuits were subsequently filed in California and New York. In August 2001, the
Federal Judicial Panel on Multidistrict Litigation transferred all of these cases to the
Southern District of New York. In January 2002, plaintiffs filed an amended
consolidated complaint, which the defendants moved to dismiss in March 2002. In July
2003 the court granted the motion to dismiss the plaintiffs claim for actual damages
under the Truth-in-Lending Act, and denied the motion to dismiss the plaintiffs
antitrust claims. The case has moved into the discovery phase.

In
July 2002, the Company was named as a defendant in a putative class action suit entitled
Shoars v. Providian Bancorp Services, Providian Financial Corporation, et al., which was
filed against the Company in California state court, alleging that our Paid Time Off
(PTO) plan violates California Labor Code section 227.3 because the
Company caps the payout of PTO benefits for terminated employees at 40 hours.
Following removal of the case to federal court and the subsequent remand to state court,
the parties have agreed to settle the case on a classwide basis for $5.7 million, subject
to final approval by the court.

44

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Following
the filing of a claim in arbitration, we continue to have settlement discussions with our
former Chief Executive Officer, Shailesh Mehta, concerning severance and other benefits
alleged to be due under Mr. Mehtas employment agreement in connection with the
termination of his employment in November 2001.

In
addition, we are commonly subject to various other pending and threatened legal actions
arising in the ordinary course of business from the conduct of our activities. An informed
assessment of the ultimate outcome or potential liability associated with our pending
lawsuits and other potential claims that could arise is not feasible at this time.

Due
to the uncertainties of litigation, we can give no assurance that we will prevail on all
claims made against us in the lawsuits that we currently face or that additional
proceedings will not be brought. While we believe that we have substantive defenses in the
actions and claims described above and intend to defend those actions and claims
vigorously, we cannot predict their ultimate outcome or their potential future impact on
us. We do not presently expect any of these matters to have a material adverse effect on
our business, financial condition or results of operations, but can give no assurance that
they will not have such an effect.

# Item 5. Other
Information

Based on a determination by the Company that it is in the best interests of the
Company to create additional incentives for the continued service of Joseph Saunders, Chairman, President and Chief
Executive Officer of the Company, during a critical period in the Company's continuing recovery, on November 7, 2003 (a)
the Company and Mr. Saunders agreed to delay, until November 25, 2004, the vesting of 166,667 shares of restricted stock
previously granted to him that had been scheduled to vest on November 25, 2003 and (b) the Company made a new grant to
Mr. Saunders of 20,000 shares of restricted stock scheduled to vest on November 25, 2004.  Pursuant to the agreement
entered into between the Company and Mr. Saunders, prior to November 1, 2004 Mr. Saunders has the right to elect to
delay, until June 30, 2005, the vesting of all shares of restricted stock held by him that are scheduled to vest on
November 25, 2004, including both the shares for which vesting was delayed and the new grant described in the preceding
sentence, as well as 166,666 additional shares of previously granted restricted stock that are scheduled to vest on
November 25, 2004.  In the event he elects to delay such vesting until June 30, 2005, he will receive another new grant
of 20,000 shares of restricted stock, scheduled to vest on June 30, 2005.

# Item 6. Exhibits and
Reports on Form 8-K

(a)    
          Exhibits Required by Item 601 of Regulation S-K.

|Exhibit 12.1 |  | Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed Charges and Preferred
                Stock Dividend Requirements.
|------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|Exhibit 31.1 |  | Section 302 Certification of Chief Executive Officer.
|------------ |  | -----------------------------------------------------

|Exhibit 31.2 |  | Section 302 Certification of Chief Financial Officer.
|------------ |  | -----------------------------------------------------

|Exhibit 32.1 |  | Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
|------------ |  | ---------------------------------------------------------------------------------

(b)    
          Reports on Form 8-K.

The
Company filed or furnished the following reports on Form 8-K during the third quarter of 2003:

| | The Company filed a report on Form 8-K on July 16, 2003 with respect to its and the Providian
Gateway Master Trusts net credit loss and 30+ day delinquency rates, and the
Providian Gateway Master Trusts average excess spread rates, for the month ended
June 30, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company furnished a report on Form 8-K on July 28, 2003 attaching its press release announcing its financial
         results for the second quarter of 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company furnished a report on Form 8-K/A on July 29, 2003 amending certain information contained in the report on
Form 8-K furnished on July 28, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company filed a report on Form 8-K on August 15, 2003 with respect to its and the Providian Gateway
         Master Trust's net credit loss and 30+ day delinquency rates, and the Providian Gateway Master Trust's average
         excess spread rates, for the month ended July 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company filed a report on Form 8-K on September 15, 2003 with respect to its and the Providian
Gateway Master Trusts net credit loss and 30+ day delinquency rates, and the
Providian Gateway Master Trusts average excess spread rates, for the month ended August 31, 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

45

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|(c) | Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
          Charges and Preferred Stock Dividend Requirements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|                               | Nine months ended | Year ended December 31,
|------------------------------ | ----------------- | -----------------------
|
|Earnings to Fixed Charges      |                   |                        
|Excluding interest on deposits |                   | 5                      
|Including interest on deposits |                   | 1                      
|                               |                   |                        
|                              
|Earnings to Combined Fixed     |                  
|Charges and Preferred Stock    |                  
|Dividend Requirements(1)       |                  
|Excluding interest on deposits |                   | 5                      
|Including interest on deposits |                   | 1                      

---

|(1) |  | Preferred stock dividend requirements are adjusted to represent a pretax
          earnings equivalent.
|--- |  | -------------------------------------------------------------------------------------------------------

46

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# SIGNATURES

Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

|                         | Providian Financial Corporation (Registrant)                                                                                                             
|------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|                         |                                                                                                                                                          
|                         |                                                                                                                                                          
|Date:  November 14, 2003 | /s/ Anthony F. Vuoto
        Anthony F. VuotoVice Chairman andChief Financial Officer
        (Principal Financial Officer and Duly Authorized Signatory)
|                         |                                                                                                                                                          
|                         |                                                                                                                                                          
|Date:  November 14, 2003 | /s/ Daniel Sanford
        Daniel SanfordExecutive Vice President andController
        (Chief Accounting Officer and Duly Authorized Signatory)         
|                         |                                                                                                                                                          

47

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# EXHIBIT INDEX

|Exhibit |  | Description                                                                                                                                  | 
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- | 
|12.1    |  | Computation of Ratio of Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividend Requirements. | 
|       
|31.1    |  | Section 302 Certification of Chief Executive Officer.                                                                                        | 
|       
|31.2    |  | Section 302 Certification of Chief Financial Officer.                                                                                        | 
|       
|32.1    |  | Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.                                                           | 

48

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