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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549

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FORM 10-Q

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(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended June 30, 2001
|--- | -----------------------------------------------------------------------------------------------------------------------------------

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to
|--- | --------------------------------------------------------------------------------------------------------------------------

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1-12897(Commission File Number)

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PROVIDIAN FINANCIAL CORPORATION(Exact Name of Registrant as Specified in Its Charter)

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|Delaware                                                       |  | 94-2933952                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
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.

YesXNo

As
of July 31, 2001, there were 284,300,835 shares of the registrant's Common Stock, par value $0.01 per share, outstanding.

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PROVIDIAN FINANCIAL CORPORATION  FORM 10-Q    INDEX    June 30, 2001

|           |  |                       |  |                                                                                       |  | Page
|---------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART I.    |  | FINANCIAL INFORMATION |  |                                                                                      
|           |  | Item 1.               |  | Financial Statements (unaudited):                                                     |  |     
|           |  |                       |  | Condensed Consolidated Statements of Financial Condition                              |  | 3   
|           |  |                       |  | Condensed Consolidated Statements of Income                                           |  | 4   
|           |  |                       |  | Condensed Consolidated Statements of Changes in Shareholders' Equity                  |  | 5   
|           |  |                       |  | Condensed Consolidated Statements of Cash Flows                                       |  | 6   
|           |  |                       |  | Notes to Condensed Consolidated Financial Statements                                  |  | 7   
|           |  | Item 2.               |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|PART II.   |  | OTHER INFORMATION     |  |                                                                                      
|           |  | Item 1.               |  | Legal Proceedings                                                                     |  | 31  
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                   |  | 33  
|           |  | Item 6.               |  | Exhibits and Reports on Form 8-K                                                      |  | 33  
|Signatures |  | 34                   

2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Condensed Consolidated Statements of Financial Condition
Providian Financial Corporation and Subsidiaries

|(dollars in thousands)                                                                                                                                                                |                                                                                                                       | June 30,
2001                              |            | December 31,
2000 |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---------- | ----------------- | ----------
|
|Assets                                                                                                                                                                                |                                                                                                                       |                                            |            |                   |           
|                                                                                                                                                                                      | Cash and cash equivalents                                                                                             |                                            | $          | 1,213,647         |           
|                                                                                                                                                                                      | Federal funds sold and securities purchased under resale agreements or similar arrangements                           |                                            |            | 1,851,200         |           
|                                                                                                                                                                                      | Investment securities:                                                                                                |                                            |            |                   |           
|                                                                                                                                                                                      |                                                                                                                       | Available-for-sale                         |            |                   | 1,866,436 
|                                                                                                                                                                                      |                                                                                                                       | Held-to-maturity                           |            |                   |          
|                                                                                                                                                                                      | Loans receivable, less allowance for credit losses of $1,527,805 at June 30, 2001 and $1,445,638 at December 31, 2000 |                                            |            | 12,947,725        |           
|                                                                                                                                                                                      | Premises and equipment, net                                                                                           |                                            |            | 201,942           |           
|                                                                                                                                                                                      | Interest receivable                                                                                                   |                                            |            | 143,685           |           
|                                                                                                                                                                                      | Due from securitizations                                                                                              |                                            |            | 1,529,898         |           
|                                                                                                                                                                                      | Deferred taxes                                                                                                        |                                            |            | 612,729           |           
|                                                                                                                                                                                      | Other assets                                                                                                          |                                            |            | 549,841           |           
|                                                                                                                                                                                      |                                                                                                                       |                                            |            |                   |           
|                                                                                                                                                                                      |                                                                                                                       | Total assets                               |            | $                 | 20,917,103
|                                                                                                                                                                                      |                                                                                                                       |                                            |            |                   |           
|Liabilities                                                                                                                                                                           |                                                                                                                       |                                            |            |                   |           
|                                                                                                                                                                                      | Deposits:                                                                                                             |                                            |            |                   |           
|                                                                                                                                                                                      |                                                                                                                       | Non interest-bearing                       |            | $                 | 70,579    
|                                                                                                                                                                                      |                                                                                                                       | Interest-bearing                           |            |                   | 15,318,907
|                                                                                                                                                                                      |                                                                                                                       |                                            |            |                   |           
|                                                                                                                                                                                      |                                                                                                                       |                                            | 15,389,486 |                   |           
|                                                                                                                                                                                      | Short-term borrowings                                                                                                 |                                            |            | 81,689            |           
|                                                                                                                                                                                      | Long-term borrowings                                                                                                  |                                            |            | 1,195,676         |           
|                                                                                                                                                                                      | Deferred fee revenue                                                                                                  |                                            |            | 524,144           |           
|                                                                                                                                                                                      | Accrued expenses and other liabilities                                                                                |                                            |            | 1,177,734         |           
|                                                                                                                                                                                      |                                                                                                                       |                                            |            |                   |           
|                                                                                                                                                                                      |                                                                                                                       | Total liabilities                          |            |                   | 18,368,729
|Company obligated mandatorily redeemable capital securities of subsidiary trust holding solely junior subordinated deferrable interest debentures of the Company (capital securities) |                                                                                                                       |                                            | 111,057    |                   |           
|Shareholders' Equity                                                                                                                                                                  |                                                                                                                       |                                            |            |                   |           
|Common stock, par value $0.01 per share (authorized: 800,000,000 shares; issued: June 30, 2001286,215,960 shares; December 31, 2000286,215,960 shares)                              |                                                                                                                       |                                            | 2,862      |                   |           
|Retained earnings                                                                                                                                                                     |                                                                                                                       |                                            | 2,457,078  |                   |           
|Cumulative other comprehensive income                                                                                                                                                 |                                                                                                                       |                                            | 8,287      |                   |           
|Common stock held in treasuryat cost: (June 30, 2001655,037 shares; December 31, 2000304,530 shares)                                                                               |                                                                                                                       |                                            | (30,910    | )                 |           
|                                                                                                                                                                                      |                                                                                                                       |                                            |            |                   |           
|                                                                                                                                                                                      |                                                                                                                       | Total shareholders' equity                 |            |                   | 2,437,317 
|                                                                                                                                                                                      |                                                                                                                       |                                            |            |                   |           
|                                                                                                                                                                                      |                                                                                                                       | Total liabilities and shareholders' equity |            | $                 | 20,917,103
|                                                                                                                                                                                      |                                                                                                                       |                                            |            |                   |           

See
Notes to Condensed Consolidated Financial Statements.

3

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

|                                                              |                                                                                             | Three months ended
June 30,                           |         | Six months ended
June 30,
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------- | -------------------------
|
|
|Interest Income                                               |                                                                                             |                                                       |         |                          
|                                                              | Loans                                                                                       |                                                       | $       | 662,987                  
|                                                              | Federal funds sold and securities purchased under resale agreements or similar arrangements |                                                       |         | 7,822                    
|                                                              | Other                                                                                       |                                                       |         | 36,417                   
|                                                              |                                                                                             |                                                       |         |                          
|Total interest income                                         |                                                                                             |                                                       | 707,226 |                          
|Interest Expense                                              |                                                                                             |                                                       |         |                          
|                                                              | Deposits                                                                                    |                                                       |         | 219,236                  
|                                                              | Borrowings                                                                                  |                                                       |         | 17,108                   
|                                                              |                                                                                             |                                                       |         |                          
|Total interest expense                                        |                                                                                             |                                                       | 236,344 |                          
|                                                              |                                                                                             |                                                       |         |                          
|                                                              |                                                                                             | Net interest income                                   |         |                          
|Provision for credit losses                                   |                                                                                             |                                                       | 378,829 |                          
|                                                              |                                                                                             |                                                       |         |                          
|                                                              |                                                                                             | Net interest income after provision for credit losses |         |                          
|Non-Interest Income                                           |                                                                                             |                                                       |         |                          
|                                                              | Servicing and securitizations                                                               |                                                       |         | 276,910                  
|                                                              | Credit product fee income                                                                   |                                                       |         | 579,582                  
|                                                              | Other                                                                                       |                                                       |         | 57,118                   
|                                                              |                                                                                             |                                                       |         |                          
|                                                              |                                                                                             |                                                       | 913,610 |                          
|Non-Interest Expense                                          |                                                                                             |                                                       |         |                          
|                                                              | Salaries and employee benefits                                                              |                                                       |         | 188,034                  
|                                                              | Solicitation and advertising                                                                |                                                       |         | 150,729                  
|                                                              | Occupancy, furniture, and equipment                                                         |                                                       |         | 56,579                   
|                                                              | Data processing and communication                                                           |                                                       |         | 56,950                   
|                                                              | Other                                                                                       |                                                       |         | 169,282                  
|                                                              |                                                                                             |                                                       |         |                          
|                                                              |                                                                                             |                                                       | 621,574 |                          
|                                                              |                                                                                             |                                                       |         |                          
|                                                              |                                                                                             | Income from operations before income taxes            |         |                          
|Income tax expense                                            |                                                                                             |                                                       | 151,729 |                          
|                                                              |                                                                                             |                                                       |         |                          
|                                                              |                                                                                             | Income from operations                                |         |                          
|Cumulative effect of change in accounting principle           |                                                                                             |                                                       |        |                          
|                                                              |                                                                                             |                                                       |         |                          
|                                                              |                                                                                             | Net Income                                            |         | $                        
|                                                              |                                                                                             |                                                       |         |                          
|Earnings per common sharebasic                               |                                                                                             | $                                                     | 0.82    |                          
|                                                              |                                                                                             |                                                       |         |                          
|Earnings per common shareassuming dilution                   |                                                                                             | $                                                     | 0.79    |                          
|                                                              |                                                                                             |                                                       |         |                          
|Cash dividends paid per common share                          |                                                                                             | $                                                     | 0.030   |                          
|                                                              |                                                                                             |                                                       |         |                          
|Weighted average common shares outstandingbasic              |                                                                                             |                                                       | 284,602 |                          
|                                                              |                                                                                             |                                                       |         |                          
|Weighted average common shares outstanding
assuming dilution |                                                                                             |                                                       | 297,601 |                          
|                                                              |                                                                                             |                                                       |         |                          

See
Notes to Condensed Consolidated Financial Statements.

4

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Condensed Consolidated Statements of Changes in Shareholders' Equity  (unaudited)    Providian Financial Corporation and Subsidiaries

|(dollars in thousands, except per share data)                                                           |                                   | Common
Stock                                                                |       | Additional
Paid-In
Capital |   | Retained
Earnings |   | Cumulative
Other
Comprehensive
Income |           | Common
Stock
Held in
Treasury |   | Total  |  
|------------------------------------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------------------------------- | ----- | -------------------------- | - | ----------------- | - | ------------------------------------- | --------- | ----------------------------- | - | ------ | -
|Balance at December 31, 1999                                                                            |                                   | $                                                                           | 954   |                            | $ |                  |   | $                                     | 1,394,293 |                               | $ | (2,161 | )
|Comprehensive income:                                                                                   |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        | Net Income                        |                                                                             |       |                            |   |                   |   |                                       |           | 237,090                       |   |        |  
|                                                                                                        | Other comprehensive income:       |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   | Unrealized gain on securities, net of income tax expense of $3,111          |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   | Foreign currency translation adjustments, net of income tax benefit of $286 |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        | Other comprehensive income        |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Comprehensive income                                                                                    |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Cash dividend: Common$0.05 per share                                                                   |                                   |                                                                             |       |                            |   |                   |   |                                       | (14,252   | )                             |   |        |  
|Purchase of 140,468 common shares for treasury                                                          |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Exercise of stock options and other awards                                                              |                                   |                                                                             |       |                            |   | 11,432            |   |                                       | (26,490   | )                             |   |        |  
|Issuance of restricted and unrestricted stock less forfeited shares                                     |                                   |                                                                             |       |                            |   | (8,603            | ) |                                       |           |                               |   |        |  
|Deferred compensation related to grant of restricted and unrestricted stock less amortization of $7,229 |                                   |                                                                             |       |                            |   | (14,039           | ) |                                       |           |                               |   |        |  
|Net tax effect from employee stock plans                                                                |                                   |                                                                             |       |                            |   | 11,210            |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Balance at June 30, 2000                                                                                |                                   | $                                                                           | 954   |                            | $ |                  |   | $                                     | 1,590,641 |                               | $ | 2,075  |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Balance at December 31, 2000                                                                            |                                   | $                                                                           | 2,862 |                            | $ |                  |   | $                                     | 2,014,205 |                               | $ | 21,092 |  
|Comprehensive income:                                                                                   |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        | Net Income                        |                                                                             |       |                            |   |                   |   |                                       |           | 462,824                       |   |        |  
|                                                                                                        | Other comprehensive income:       |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   | Unrealized loss on securities, net of income tax benefit of $8,774          |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   | Foreign currency translation adjustments, net of income tax benefit of $31  |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        | Other comprehensive income (loss) |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Comprehensive income                                                                                    |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Cash dividend: Common$0.06 per share                                                                   |                                   |                                                                             |       |                            |   |                   |   |                                       | (17,153   | )                             |   |        |  
|Purchase of 2,397,673 common shares for treasury                                                        |                                   |                                                                             |       |                            |   | (959              | ) |                                       |           |                               |   |        |  
|Exercise of stock options and other awards                                                              |                                   |                                                                             |       |                            |   | (38,134           | ) |                                       | (2,798    | )                             |   |        |  
|Issuance of restricted and unrestricted stock less forfeited shares                                     |                                   |                                                                             |       |                            |   | 5,218             |   |                                       |           |                               |   |        |  
|Deferred compensation related to grant of restricted and unrestricted stock less amortization of $7,081 |                                   |                                                                             |       |                            |   | (6,117            | ) |                                       |           |                               |   |        |  
|Net tax effect from employee stock plans                                                                |                                   |                                                                             |       |                            |   | 39,992            |   |                                       |           |                               |   |        |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  
|Balance at June 30, 2001                                                                                |                                   | $                                                                           | 2,862 |                            | $ |                  |   | $                                     | 2,457,078 |                               | $ | 8,287  |  
|                                                                                                        |                                   |                                                                             |       |                            |   |                   |   |                                       |           |                               |   |        |  

See Notes to Condensed Consolidated Financial Statements.

5

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

|                                                 |                                                                                                          | Six months ended
June 30,                                                                                          |                                          
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | -----------------------------------------
|
|
|Operating Activities                             |                                                                                                          |                                                                                                                    |                                          
|                                                 | Net Income                                                                                               |                                                                                                                    | $                                        
|                                                 |                                                                                                          | Less: Cumulative effect of change in accounting principle                                                          |                                          
|                                                 |                                                                                                          |                                                                                                                    |                                          
|                                                 |                                                                                                          | 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) increase in deferred fee revenue                                                                        |                                          
|                                                 |                                                                                                          | Decrease (increase) in deferred income tax benefit                                                                 |                                          
|                                                 |                                                                                                          | Decrease (increase) in interest receivable                                                                         |                                          
|                                                 |                                                                                                          | Gain from sale of home loans                                                                                       |                                          
|                                                 |                                                                                                          | Net increase in other assets                                                                                       |                                          
|                                                 |                                                                                                          | Net increase in accrued expenses and other liabilities                                                             |                                          
|                                                 |                                                                                                          |                                                                                                                    |                                          
|                                                 |                                                                                                          |                                                                                                                    | Net cash provided by operating activities
|Investing Activities                             |                                                                                                          |                                                                                                                    |                                          
|                                                 |                                                                                                          | Net cash used for loan originations and principal collections on loans receivable                                  |                                          
|                                                 |                                                                                                          | Net increase in securitized loans                                                                                  |                                          
|                                                 |                                                                                                          | Net proceeds from sale of home loans                                                                               |                                          
|                                                 |                                                                                                          | (Increase) decrease in due from securitizations                                                                    |                                          
|                                                 |                                                                                                          | Purchases of investment securities                                                                                 |                                          
|                                                 |                                                                                                          | Proceeds from maturities and sale of investment securities                                                         |                                          
|                                                 |                                                                                                          | (Increase) decrease in federal funds sold and securities purchased under resale agreements or similar arrangements |                                          
|                                                 |                                                                                                          | Net purchases of premises and equipment                                                                            |                                          
|                                                 |                                                                                                          |                                                                                                                    |                                          
|                                                 |                                                                                                          |                                                                                                                    | Net cash used by investing activities    
|Financing Activities                             |                                                                                                          |                                                                                                                    |                                          
|                                                 |                                                                                                          | Net increase in deposits                                                                                           |                                          
|                                                 |                                                                                                          | Proceeds from issuance of term federal funds                                                                       |                                          
|                                                 |                                                                                                          | Repayment of term federal funds                                                                                    |                                          
|                                                 |                                                                                                          | Increase in other short-term borrowings                                                                            |                                          
|                                                 |                                                                                                          | Proceeds from long-term borrowings                                                                                 |                                          
|                                                 |                                                                                                          | Repayment of long-term borrowings                                                                                  |                                          
|                                                 |                                                                                                          | Purchase of treasury stock                                                                                         |                                          
|                                                 |                                                                                                          | Dividends paid                                                                                                     |                                          
|                                                 |                                                                                                          | Proceeds from exercise of stock options and other awards                                                           |                                          
|                                                 |                                                                                                          |                                                                                                                    |                                          
|                                                 |                                                                                                          |                                                                                                                    | Net cash provided by financing activities
|                                                 |                                                                                                          |                                                                                                                    |                                          
|Net Increase in Cash and Cash Equivalents        |                                                                                                          |                                                                                                                    | 766,942                                  
|Cash and cash equivalents at beginning of period |                                                                                                          |                                                                                                                    | 446,705                                  
|                                                 |                                                                                                          |                                                                                                                    |                                          
|Cash and cash equivalents at end of period       |                                                                                                          | $                                                                                                                  | 1,213,647                                
|                                                 |                                                                                                          |                                                                                                                    |                                          

See Notes to Condensed Consolidated Financial Statements.

6

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PROVIDIAN FINANCIAL CORPORATION    Notes to Condensed Consolidated Financial Statements  June 30, 2001 (unaudited)

Note 1. Organization and Basis of Presentation

Providian Financial Corporation (the "Company") is a Delaware corporation, with executive offices located in San Francisco, California. Through its
subsidiaries, the Company provides consumer lending and deposit products in the United States, the United Kingdom, and Argentina. The Company's principal wholly owned subsidiaries are Providian
National Bank ("PNB") and Providian Bank ("PB"). The Company markets consumer loans and deposits using distribution channels such as mail, telephone, television, and the Internet.

The
accompanying unaudited condensed consolidated financial statements of the Company 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, they 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 to a fair statement of the
results for the interim period presented have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six month periods ended June 30, 2001
are not necessarily indicative of the results for the year ended December 31, 2001. The notes to the financial statements contained in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 should be read in conjunction with these condensed consolidated financial statements. All significant intercompany balances and
transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the 2001 presentation.

Note 2. Loans Receivable and Allowance for Credit Losses

The following is a summary of the Company's loans receivable at June 30, 2001 and December 31, 2000:

(dollars in thousands)

June 30, 2001

December 31, 2000Credit cards

$
14,436,704

$
13,734,789Other loans


38,826


35,368Allowance for credit losses


(1,527,805
)

(1,445,638
)$
12,947,725

$
12,324,519


The
activity in the allowance for credit losses for the six months ended June 30, 2001 and 2000 is as follows:

Six months ended June 30,(dollars in thousands)2001

2000Balance at beginning of period

$
1,445,638

$
1,028,377Provision for credit losses


798,328


734,803Credit losses


(791,275
)

(529,461
)Recoveries


74,072


52,871Other


1,042


(22,794
)Balance at end of period

$
1,527,805

$
1,263,796


7

---

Note 3. Earnings per Common Share

The
following table sets forth the computation of both the basic and assumed conversion methods of earnings per common share:

|                                                                                    |                                                                           | Three months ended June 30, |         | Six months ended June 30,
|----------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------- | ------- | -------------------------
|
|
|Basic                                                                               |                                                                           |                             |         |                          
|Income before accounting change                                                     |                                                                           | $                           | 232,360 |                          
|                                                                                    | Cumulative effect of change in accounting principle, net of related taxes |                             |         |                         
|                                                                                    |                                                                           |                             |         |                          
|Net income available to common stockholders                                         |                                                                           | $                           | 232,360 |                          
|                                                                                    |                                                                           |                             |         |                          
|Weighted average common shares outstanding                                          |                                                                           |                             | 284,602 |                          
|Earnings per common share before effect of change in accounting principle           |                                                                           | $                           | 0.82    |                          
|                                                                                    |                                                                           |                             |         |                          
|Earnings per common share after effect of change in accounting principle            |                                                                           | $                           | 0.82    |                          
|                                                                                    |                                                                           |                             |         |                          
|Diluted                                                                             |                                                                           |                             |         |                          
|Income before change in accounting principle                                        |                                                                           | $                           | 232,360 |                          
|Plus: Income impact of assumed conversions                                          |                                                                           |                             |         |                          
|                                                                                    | Interest on 3.25% convertible senior notes, net of related taxes          |                             |         | 1,979                    
|                                                                                    |                                                                           |                             |         |                          
|Net income available before change in accounting principle with assumed conversions |                                                                           |                             | 234,339 |                          
|                                                                                    | Cumulative effect of change in accounting principle, net of related taxes |                             |         |                         
|                                                                                    |                                                                           |                             |         |                          
|Net income available to common stockholders with assumed conversions                |                                                                           | $                           | 234,339 |                          
|                                                                                    |                                                                           |                             |         |                          
|Weighted average common shares outstanding                                          |                                                                           |                             | 284,602 |                          
|Plus: Incremental shares from assumed conversions                                   |                                                                           |                             |         |                          
|                                                                                    | Restricted stock issuednon vested                                        |                             |         | 904                      
|                                                                                    | Employee stock options (1)                                                |                             |         | 6,024                    
|                                                                                    | 3.25% convertible senior notes                                            |                             |         | 5,832                    
|                                                                                    | Forward purchase contracts                                                |                             |         | 239                      
|                                                                                    |                                                                           |                             |         |                          
|Dilutive potential common shares                                                    |                                                                           |                             | 12,999  |                          
|                                                                                    |                                                                           |                             |         |                          
|Adjusted weighted average common shares                                             |                                                                           |                             | 297,601 |                          
|                                                                                    |                                                                           |                             |         |                          
|Earnings per common share before effect of change in accounting principle           |                                                                           | $                           | 0.79    |                          
|                                                                                    |                                                                           |                             |         |                          
|Earnings per common share after effect of change in accounting principle            |                                                                           | $                           | 0.79    |                          
|                                                                                    |                                                                           |                             |         |                          

---

8

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Note 4. Accounting Policy for Derivative Financial Instruments and Cumulative Effect of Change in Accounting Principle

Initially,
upon adoption of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, and
prospectively, on the date a derivative contract is entered into, the Company designates the derivative as one of the following: (1) a hedge of a recognized asset or liability or an
unrecognized firm commitment (a fair value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability
(a cash flow hedge), (3) a hedge of a net investment in a foreign operation (a net investment hedge), or (4) a natural hedging instrument whose change in fair value is recognized to act
as an economic hedge against changes in the values of the hedged item (an economic hedge).

For
fair value hedges, both the effective and ineffective portions of the change in the fair value of the derivative, along with the gain or loss on the hedged item that is
attributable to the hedged risk, are recorded in earnings and reported in the condensed consolidated statements of income in "other non-interest income." The effective portion of the
change in the fair value of a derivative that is designated as a cash flow hedge is recorded in cumulative other comprehensive income. When the cash flows associated with the hedged item are realized,
the gain or loss included in cumulative other comprehensive income is recognized on the same line in the condensed consolidated statements of income as the hedged item. The effective portion of the
change in the fair value of a derivative used as a net investment hedge of a foreign operation is recorded in the foreign currency translation adjustment account within stockholders' equity. The
ineffective portion of the change in the fair value of a net investment hedge is recorded in "other non-interest income." For derivatives designated as economic hedges, changes in fair
value are reported in current earnings in "other non-interest income."

The
Company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and
strategies for undertaking the hedge transaction. Derivatives are recorded in the condensed consolidated statements of financial condition at fair value in other assets and accrued expenses and other
liabilities. This process includes linking derivatives that are designated as hedges of specific assets, liabilities, firm commitments or forecasted transactions. The Company also formally assesses,
both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of
the hedged item. When it is determined that a derivative ceases to be a highly effective hedge, the Company discontinues hedge accounting.

The
Company adopted SFAS No. 133 on January 1, 2001. Upon adoption, the Company recorded a transition adjustment, the effect of which was to increase reported income by
$1.8 million, net of taxes, for the quarter ended March 31, 2001. For the three and six months ended June 30, 2001, the Company's fair value and net investment hedge
ineffectiveness was immaterial. None of the Company's hedges are currently designated as cash flow hedges.

Note 5. Recently Issued Accounting Pronouncements

In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilitiesa replacement of FASB Statement No. 125." SFAS No. 140 revised the standards for accounting for securitizations and other transfers
of financial assets and required certain additional disclosures. SFAS No. 140 is effective for all transfers and servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001. The SFAS No. 140 disclosure requirements were required for financial statements for fiscal years ending after December 15, 2000 and were adopted by the Company in
the financial statements contained in its 2000 Annual Report to stockholders. In April 2001, the FASB

9

---

stated that certain one-step securitization structures utilized in the marketplace, including one-step securitization structures such as the ones used by the Company, would not
meet certain isolation criteria that are required by SFAS No. 140 to account for asset securitizations as sales. In July 2001, the FASB issued Technical Bulletin
No. 01-1, "Effective Date for Certain Financial Institutions of Certain Provisions of Statement 140 Related to the Isolation of Transferred Financial Assets," which stated that it
was delaying the effective date of SFAS 140 as it applies to certain financial institutions' one-step securitization structures and that two-step securitization
structures would be required for transactions occurring after December 31, 2001, with an extended transition period for conversion of one-step master trust securitization structures
(five years from the publication of the FASB Technical Bulletin) to allow issuers to obtain sufficient approvals from the beneficial interest holders of the transferred assets. Implementation of
SFAS 140 did not have a material impact on the Company's consolidated financial statements or results of operations, nor is it, including the required changes in securitization structures,
expected to have a material impact on the Company's future consolidated financial statements and results of operations.

In
July 2001, the FASB issued SFAS No. 141, "Business Combinations," which supersedes APB Opinion No. 16, "Business Combinations." SFAS No. 141 eliminates
the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. SFAS
No. 141 also changes the criteria for recognizing intangible assets apart from goodwill. The FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets," which supersedes APB
Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually, or more frequently if
impairment indicators arise, for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives, for which SFAS No. 142 does not impose a
limit. With respect to goodwill and intangible assets acquired prior to July 1, 2001, companies are required to adopt SFAS No. 141 in their fiscal year beginning after January 1,
2002. Management does not believe that implementation of SFAS No. 141 or SFAS No. 142 is not expected to have a material impact on the Company's consolidated financial statements.

In
November 1999, the Emerging Issues Task Force (EITF) of the FASB issued EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets." This pronouncement requires that the holders of retained beneficial interests in securitized financial assets, such as the Company, recognize a
portion of securitization (non-interest) income as interest income. It also presents guidelines for recording impairment of retained beneficial interests. EITF 99-20 is
effective for fiscal quarters beginning after March 15, 2001. The implementation of EITF 99-20 did not have a material impact on the Company's consolidated financial statements.

Note 6. Convertible Notes

In February 2001, the Company issued $884.0 million principal amount at maturity of its zero coupon convertible notes due February 15,
2021, with original issue discount accruing at a rate of 4.00% per annum on a semiannual bond equivalent basis, beginning on February 15, 2001. The Company will not pay interest on these notes
before maturity, except in limited circumstances under which the Company may elect to pay interest at the rate of 4.00% per annum after the occurrence of certain events. The notes are convertible at
the option of the holder, as long as specified conditions are met, into shares of the Company's common stock at a conversion rate of 6.2240 shares of common stock per note, subject to adjustment in
certain events. However, the Company may pay cash rather than deliver shares of its common stock upon conversion under certain circumstances, based on the formula provided for in the notes. The
Company may redeem all or a portion of the convertible notes for cash at any time on or after February 15, 2006. Holders of the notes have the option of requiring the Company to repurchase the
notes on certain specified dates at the prices provided for in the notes.

10

---

Note 7. Shareholders' Equity

The Company is party to an agreement in which it has contracted to purchase shares of its common stock on a forward basis. At the Company's election, the
agreement may be settled on a physical basis or, subject to certain conditions, on a net basis in shares of the Company's common stock or in cash. To the extent that the market price of the Company's
common stock on a settlement date is greater than the forward purchase price, the Company will receive the net differential. To the extent that the market price of the Company's common stock on a
settlement date is lower than the forward purchase price, the Company will settle the agreed-upon premium amount due to the counterparty. As of June 30, 2001, the agreement covered
1,767,268 shares of the Company's common stock at a weighted average forward price of $60.24 per share. The agreement is subject to final settlement in August 2001, but may be settled earlier
at the Company's option. If the agreement had been settled on a net share basis at the June 30, 2001 market price of the Company's common stock ($59.20 per share), the Company would have
delivered approximately 31,047 shares of its common stock to the counterparty. During the six months ended June 30, 2001, settlements from forward purchase agreements resulted in the Company
receiving 2,222,130 shares of its common stock and paying premiums of nearly $1.0 million, which were recorded as adjustments to additional paid-in-capital.

The
computation of basic and diluted earnings per share for the quarter and year to date ended June 30, 2000 have been retroactively adjusted to include the effect of the
Company's stock split in the fourth quarter of 2000.

Note 8. Cumulative Other Comprehensive Income

The components of cumulative other comprehensive income for the six months ended June 30, 2001 and 2000 are as follows:

(dollars in thousands)

Unrealized
Gain (Loss)
on Securities

Foreign
Currency
Translation

Cumulative
Other
Comprehensive
IncomeBalance at December 31, 1999

$
(2,207
)
$
46

$
(2,161
)Other comprehensive income


7,777


(716
)

7,061Tax benefit (expense)


(3,111
)

286


(2,825
)Balance at June 30, 2000

$
2,459

$
(384
)
$
2,075Balance at December 31, 2000

$
21,513

$
(421
)
$
21,092Other comprehensive income


(21,516
)

(94
)

(21,610
)Tax benefit


8,774


31


8,805Balance at June 30, 2001

$
8,771

$
(484
)
$
8,287


Note 9. Segment Information

The
Company derives its income primarily from credit card finance charges, various credit card fees, cardholder service product sales, and servicing fees and excess servicing on
securitized credit card loans.
After the sale of the home loan business in 2000, the Company reorganized its reporting segments to include the former Emerging Businesses segment and the Other segment in one aggregated Credit Card
segment. Prior periods have been restated to reflect the change in segment reporting.

11

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The Company analyzes its financial performance on a managed basis. Segment information is presented below on the Company's managed loan portfolios:

|(dollars in thousands)                                |  | Total
Managed |            | Securitization
Adjustment |   | Total
Reported
|----------------------------------------------------- |  | ------------- | ---------- | ------------------------- | - | --------------
|Three months ended June 30, 2001                      |  |               |            |                           |   |               
|Interest income                                       |  | $             | 1,384,396  |                           | $ | (677,170      
|Interest expense                                      |  |               | 422,239    |                           |   | (185,895      
|                                                      |  |               |            |                           |   |               
|Net interest income                                   |  |               | 962,157    |                           |   | (491,275      
|Provision for credit losses                           |  |               | 758,921    |                           |   | (380,092      
|                                                      |  |               |            |                           |   |               
|Net interest income after provision for credit losses |  |               | 203,236    |                           |   | (111,183      
|Non-interest income                                   |  |               | 802,427    |                           |   | 111,183       
|Non-interest expense                                  |  |               | 621,574    |                           |   |              
|                                                      |  |               |            |                           |   |               
|Income before income taxes                            |  |               | 384,089    |                           |   |              
|Income tax expense                                    |  |               | 151,729    |                           |   |              
|                                                      |  |               |            |                           |   |               
|Net income                                            |  | $             | 232,360    |                           | $ |              
|                                                      |  |               |            |                           |   |               
|Ending loans outstanding                              |  | $             | 30,467,042 |                           | $ | (15,991,512   
|                                                      |  |               |            |                           |   |               
|Total assets                                          |  | $             | 36,061,158 |                           | $ | (15,144,055   
|                                                      |  |               |            |                           |   |               
|Three months ended June 30, 2000                      |  |               |            |                           |   |               
|Interest income                                       |  | $             | 1,078,741  |                           | $ | (425,162      
|Interest expense                                      |  |               | 391,000    |                           |   | (174,129      
|                                                      |  |               |            |                           |   |               
|Net interest income                                   |  |               | 687,741    |                           |   | (251,033      
|Provision for credit losses                           |  |               | 545,745    |                           |   | (172,155      
|                                                      |  |               |            |                           |   |               
|Net interest income after provision for credit losses |  |               | 141,996    |                           |   | (78,878       
|Non-interest income                                   |  |               | 744,926    |                           |   | 78,878        
|Non-interest expense                                  |  |               | 782,291    |                           |   |              
|                                                      |  |               |            |                           |   |               
|Income before income taxes                            |  |               | 104,631    |                           |   |              
|Income tax expense                                    |  |               | 41,859     |                           |   |              
|                                                      |  |               |            |                           |   |               
|Net income                                            |  | $             | 62,772     |                           | $ |              
|                                                      |  |               |            |                           |   |               
|Ending loans outstanding                              |  | $             | 22,301,724 |                           | $ | (9,745,044    
|                                                      |  |               |            |                           |   |               
|Total assets                                          |  | $             | 26,816,943 |                           | $ | (9,574,974    
|                                                      |  |               |            |                           |   |               
|Six months ended June 30, 2001                        |  |               |            |                           |   |               
|Interest income                                       |  | $             | 2,702,797  |                           | $ | (1,275,003    
|Interest expense                                      |  |               | 851,387    |                           |   | (389,994      
|                                                      |  |               |            |                           |   |               
|Net interest income                                   |  |               | 1,851,410  |                           |   | (885,009      
|Provision for credit losses                           |  |               | 1,481,593  |                           |   | (683,265      
|                                                      |  |               |            |                           |   |               
|Net interest income after provision for credit losses |  |               | 369,817    |                           |   | (201,744      
|Non-interest income                                   |  |               | 1,597,123  |                           |   | 201,744       
|Non-interest expense                                  |  |               | 1,204,993  |                           |   |              
|                                                      |  |               |            |                           |   |               
|Income from operations before income taxes            |  |               | 761,947    |                           |   |              
|Income tax expense                                    |  |               | 300,969    |                           |   |              
|Cumulative effect of change in accounting principle   |  |               | 1,846      |                           |   |              
|                                                      |  |               |            |                           |   |               
|Net income                                            |  | $             | 462,824    |                           | $ |              
|                                                      |  |               |            |                           |   |               
|Ending loans outstanding                              |  | $             | 30,467,042 |                           | $ | (15,991,512   
|                                                      |  |               |            |                           |   |               
|Total assets                                          |  | $             | 36,061,158 |                           | $ | (15,144,055   
|                                                      |  |               |            |                           |   |               
|Six months ended June 30, 2000                        |  |               |            |                           |   |               
|Interest income                                       |  | $             | 2,098,035  |                           | $ | (816,557      
|Interest expense                                      |  |               | 749,990    |                           |   | (328,461      
|                                                      |  |               |            |                           |   |               
|Net interest income                                   |  |               | 1,348,045  |                           |   | (488,096      
|Provision for credit losses                           |  |               | 1,065,006  |                           |   | (330,203      
|                                                      |  |               |            |                           |   |               
|Net interest income after provision for credit losses |  |               | 283,039    |                           |   | (157,893      
|Non-interest income                                   |  |               | 1,393,451  |                           |   | 157,893       
|Non-interest expense                                  |  |               | 1,281,362  |                           |   |              
|                                                      |  |               |            |                           |   |               
|Income before income taxes                            |  |               | 395,128    |                           |   |              
|Income tax expense                                    |  |               | 158,038    |                           |   |              
|                                                      |  |               |            |                           |   |               
|Net income                                            |  | $             | 237,090    |                           | $ |              
|                                                      |  |               |            |                           |   |               
|Ending loans outstanding                              |  | $             | 22,301,724 |                           | $ | (9,745,044    
|                                                      |  |               |            |                           |   |               
|Total assets                                          |  | $             | 26,816,943 |                           | $ | (9,574,974    
|                                                      |  |               |            |                           |   |               

12

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

Introduction

The Company is a leading provider of consumer lending and deposit products offered primarily through its banking subsidiaries, Providian National Bank, a
national bank, and Providian Bank, a Utah industrial loan corporation. The Company's products are offered to consumers in the United States, the United Kingdom, and Argentina. The Company's market
focus is to seek out profitable consumer segments and develop products and services to meet their needs while applying its risk adjusted return approach to market segmentation and product pricing.
This approach allows the Company to offer a variety of products with a range of yields based on the level of risk undertaken. The primary factors affecting the profitability of the Company's consumer
lending business are growth in the number of customer accounts and outstanding loan balances, net interest spread on loans, fee revenue, credit usage, credit quality (delinquencies and credit losses),
solicitation and marketing expenses, and account servicing efficiency.

Forward-Looking Information

Certain statements contained herein are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the "safe harbor" created by those sections. Forward-looking statements include expressions of "belief,"
"anticipation," or "expectations" of management, statements as to industry trends or future results of operations of the Company, and other statements 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, competition, delinquencies, credit losses, vendor relationships, funding costs and availability, general economic conditions, government
policy and regulations, risks related to growth, product development, acquisitions, operations, legal and regulatory proceedings, the ability to attract and retain key personnel, and international
factors. These and other risks and uncertainties are described in detail in the Company's 2000 Annual Report on Form 10-K under the heading "Cautionary Statements." Readers are
cautioned not to place undue reliance on any forward-looking statement, which speaks only as of the date thereof. The Company undertakes no obligation to update any forward-looking statements.

Earnings Summary

Net income for the three months ended June 30, 2001 was $232.4 million, an increase of 24% over net income of $187.6 million(1) for the
three months ended June 30, 2000. Net income for the six months ended June 30, 2001 was $462.8 million, an increase of 28% over net income of $361.9 million for the six
months ended June 30, 2000, excluding one time adjustments. The key drivers of this second quarter and year to date performance were growth in outstanding loan balances and customer accounts
combined with improved customer retention.

As
of June 30, 2001, managed loans were $30.47 billion, an increase of $3.34 billion, or 12.3%, over the balance at December 31, 2000. This growth in
managed loans was achieved through increases in the Company's loan originations, improved customer retention, and increased purchase activity by existing customers, which was facilitated by the
Company's ability to offer proven customers enhanced products and higher credit lines. Managed accounts grew by 1.4 million during the first six months of 2001 as a result of various marketing
campaigns and customer satisfaction programs.

---

13

---

For
the three months ended June 30, 2001, managed net interest income increased 40% to $962.2 million, compared to $687.8 million for the second quarter of 2000.
The Company's managed net interest margin on loans increased to 13.13% for the second quarter of 2001, compared to 12.05% for the same period in 2000. For the second quarter of 2001, the managed net
credit loss rate was 10.29%, compared to 7.42% for the second quarter of 2000 and 9.34% for the first quarter of 2001. This increase was attributable primarily to the seasoning of the managed loan
portfolio and a rise in year-to-date consumer bankruptcies. The 30+ day managed delinquency rate as of June 30, 2001 increased to 8.04% from 7.64% as of March 31,
2001. The contribution to managed revenue from non-interest income for the second quarter of 2001 increased 18% over the same period in 2000, excluding the one-time gain, to
$802.4 million, due to increased revenue from credit product fees and servicing and securitization income. Year over year, managed non-interest expense increased
$111.9 million to $621.6 million in the second quarter of 2001, compared to $509.7 million in 2000, excluding one-time adjustments. The increase in
non-interest expense reflects the Company's continued investments in marketing initiatives and its customer service and collections infrastructure.

The
Company's return on managed assets was 2.71% and 2.72%, excluding one-time adjustments, for the second quarter of 2001 and 2000. The return on equity for the second
quarter of 2001 was 40.08%, compared to 47.23%, excluding one-time adjustments, for the same period in 2000.

Managed Consumer Loan Portfolio and the Impact of Securitization

The Company securitizes consumer loans in order to diversify funding sources and to obtain an efficient all-in cost of funds. For additional
discussion of the Company's securitization activities, see "Funding and Liquidity." Securitized loans sold to investors are not considered assets of the Company and therefore are not
shown on the Company's statements of financial condition. It is, however, the Company's practice to analyze its financial performance on a managed basis. To perform this analysis, the Company uses an
adjusted income statement and statement of financial condition, which add back the effect of securitizations.

Financial Statement Impact.The Company's securitizations are treated as sales under GAAP. The Company receives the
proceeds of the sale and the securitized loans are removed from the Company's consolidated statements of financial condition. In certain cases, the Company has retained a subordinated interest in the
pool of assets included in a securitization, with a right to receive collections allocated to such subordinated interest after payment to senior investors. Such retained interests are recorded at fair
value and are included in due from securitizations on the Company's consolidated statements of financial condition. At the time it enters into a securitization, the Company recognizes an
"interest-only strip receivable" asset, which is the present value of the projected excess servicing income during the period the securitized loans are projected to be outstanding. "Excess
servicing income" refers to the excess of the finance charge and fee revenue generated by the securitized loans over the sum of the interest paid to investors, related credit losses, servicing fees,
and other transaction expenses.

During
the revolving period of a securitization, no principal payments are made to the investors. Instead, monthly principal payments received on the loans are used to purchase
replacement loans receivable from the Company, and the Company recognizes additional interest-only strips receivable. Revenue resulting from excess servicing income is recognized each
month, first as a reduction of the interest-only strip receivable and then, to the extent the amount received exceeds the related component of the interest-only strip
receivable, as servicing and securitization income.

When
loans are securitized, the Company retains a "seller's interest" generally equal to the total amount of the pool of assets included in the securitization less the sum of the
investors' portion of those assets and the subordinated interests retained by the Company. As the amount of the loans in the securitized pool fluctuates due to customer payments, purchases, cash
advances, and credit losses,

14

---

the amount of the seller's interest will vary. The seller's interest is classified on the Company's consolidated statements of financial condition as loans receivable at par with an associated
allowance for credit losses. Periodically, the Company may transfer new loans into a securitized pool in order to maintain the seller's interest above an agreed-upon minimum.

The
Company continues to service the accounts underlying the securitized loans and earns a monthly servicing fee, which is generally offset by the servicing costs incurred by the
Company. Accordingly, servicing assets have not been recognized in connection with the Company's securitizations.

The
effect of securitization accounting on the Company's consolidated statements of income is to reduce net interest income and the provision for credit losses, and to increase
non-interest income. For the three months ended June 30, 2001 and 2000, securitization accounting had the effect of reducing net interest income by $491.3 million and
$251.0 million; reducing the provision for credit losses by $380.1 million and $172.1 million; and increasing non-interest income by $111.2 million and
$78.9 million. For the six months ended June 30, 2001 and 2000, securitization accounting had the effect of reducing net interest income by $885.0 million and
$488.1 million; reducing the provision for credit losses by $683.3 million and $330.2 million; and increasing non-interest income by $201.7 million and
$157.9 million. Credit losses on the securitized loans are reflected as a reduction of servicing and securitization income rather than a reduction of the allowance for credit losses. Therefore,
the Company's provision for credit losses is lower than if such loans had not been securitized.

The
following table summarizes the Company's managed loan portfolio:

|                           |                          | Three months ended
June 30, |                                               | Six months ended
June 30, |  
|-------------------------- | ------------------------ | --------------------------- | --------------------------------------------- | ------------------------- | -
|
|
|Period-End Balances        |                          |                             |                                               |                           |  
|Reported consumer loans    |                          |                             |                                               |                           |  
|Securitized consumer loans |                          |                             |                                               |                           |  
|                           |                          |                             |                                               |                           |  
|                           |                          |                             | Total managed consumer loan portfolio         |                           |  
|                           |                          |                             |                                               |                           |  
|Average Balances           |                          |                             |                                               |                           |  
|Reported consumer loans    |                          | $                           | 14,656,124                                    |                           | $
|Securitized consumer loans |                          |                             | 14,648,408                                    |                           |  
|                           |                          |                             |                                               |                           |  
|                           |                          |                             | Total average managed consumer loan portfolio |                           | $
|                           |                          |                             |                                               |                           |  
|Operating Data and Ratios  |                          |                             |                                               |                           |  
|Reported:                  |                          |                             |                                               |                           |  
|                           | Average earning assets   |                             | $                                             | 18,099,820                |  
|                           | Return on average assets |                             |                                               | 4.59                      | %
|                           | Net interest margin (1)  |                             |                                               | 10.41                     | %
|Managed:                   |                          |                             |                                               |                           |  
|                           | Average earning assets   |                             | $                                             | 32,748,228                |  
|                           | Return on average assets |                             |                                               | 2.71                      | %
|                           | Net interest margin (1)  |                             |                                               | 11.75                     | %

---

Cash Flow Impact.When loans are securitized, the Company receives cash proceeds from investors net of transaction fees
and expenses. The Company uses these proceeds to reduce alternative funding liabilities, invest in short-term liquid investments, and for other general corporate purposes.

15

---

The investors' share of finance charge and fee revenue generated by the securitized loans is distributed each month to pay interest to investors, related credit losses, servicing fees, credit
enhancement costs, and other transaction expenses. Any finance charge and fee cash flow remaining after such payments is treated as excess servicing income and is generally retained by or remitted
back to the Company. During the revolving period of a securitization, the Company retains the investors' share of monthly principal collections, net of credit losses, which is used to purchase
additional loans receivable for transfer into the securitized pool of assets. During the amortization or accumulation period of a securitization, the investors' share of principal collections (in
certain cases, up to a specified amount each month) is either distributed each month to the investors or held in an account for accumulation and later distribution to the investors.

Risk Adjusted Revenue and Return

One measure of product profitability that incorporates revenue and the most significant costs inherent in consumer loan risk analysis is risk adjusted revenue,
which is net interest income on loans plus
non-interest income less net credit losses. The Company uses risk adjusted revenue as a measure of loan portfolio profitability, consistent with its goal of matching the revenue base of
customer accounts with the risks undertaken. Risk adjusted revenue may also be expressed as a percentage of average consumer loans, in which case it is referred to as risk adjusted return.

Managed
risk adjusted revenue and return for the three months ended June 30, 2001 were $1.01 billion and 13.79%, compared to $0.94 billion and 16.67% for the same
period in 2000, excluding one-time adjustments. For the six months ended June 30, 2001, managed risk adjusted return and revenue were $2.04 billion and 14.34%, compared to
$1.86 billion and 16.84% for the same period in 2000, excluding one-time adjustments. The decrease in managed risk adjusted return was primarily due to an increase in the managed
net credit loss rate.

The
components of risk adjusted revenue are discussed in more detail in subsequent sections of this Management's Discussion and Analysis.

Net Interest Income and Margin

Net interest income is interest earned from loan and investment portfolios less interest expense on deposits and borrowings. Managed net interest income also
includes interest earned from securitized loans less interest paid to securitization investors.

Managed
net interest income for the three months ended June 30, 2001 was $962.2 million, compared to $687.8 million for the same period in 2000, representing an
increase of $274.4 million, or 40%. Managed net interest margin on average managed earning assets increased to 11.75% for the three months ended June 30, 2001, from 10.53% during the
second quarter of 2000. For the six months ended June 30, 2001, managed net interest income was $1.85 billion, compared to $1.35 billion for the same period in 2000, representing
an increase of $503.4 million, or 37%. This increase was attributable primarily to an increase of $6.70 billion in average managed loans and higher finance charge yields resulting from a
change in the credit card loan portfolio mix. Managed net interest margin on average managed earning assets increased to 11.68% for the six months ended June 30, 2001, from 10.54% during the
same period in 2000. Managed net interest margin on average managed loans increased to 13.13% for the three months ended June 30, 2001, up from 12.05% for the same period in 2000, excluding
one-time adjustments.

16

---

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

The following tables provide an analysis of reported interest income, interest expense, net interest spread, and average balances for the three and six months
ended June 30, 2001 and 2000 (interest income and interest expense margins are presented as a percentage of average earning assets, which include interest-earning consumer loan portfolios and
investments held for liquidity purposes):

|                                                    |                       | Three months ended June 30, |           
|--------------------------------------------------- | --------------------- | --------------------------- | ----------
|
|
|Assets                                              |                       |                             |           
|Interest-earning assets                             |                       |                             |           
|                                                    | Consumer loans        |                             | $         
|                                                    | Interest-earning cash |                             |           
|                                                    | Federal funds sold    |                             |           
|                                                    | Investment securities |                             |           
|                                                    |                       |                             |           
|Total interest-earning assets                       |                       |                             | 18,099,820
|Allowance for loan losses                           |                       |                             | (1,493,469
|Other assets                                        |                       |                             | 3,631,041 
|                                                    |                       |                             |           
|Total assets                                        |                       | $                           | 20,237,392
|                                                    |                       |                             |           
|Liabilities and Equity                              |                       |                             |           
|Interest-bearing liabilities                        |                       |                             |           
|                                                    | Deposits              |                             | $         
|                                                    | Borrowings            |                             |           
|                                                    |                       |                             |           
|Total interest-bearing liabilities                  |                       |                             | 15,810,041
|Other liabilities                                   |                       |                             | 1,997,598 
|                                                    |                       |                             |           
|Total liabilities                                   |                       |                             | 17,807,639
|Capital securities                                  |                       |                             | 111,057   
|Equity                                              |                       |                             | 2,318,696 
|                                                    |                       |                             |           
|Total liabilities and equity                        |                       | $                           | 20,237,392
|                                                    |                       |                             |           
|Net Interest Spread                                 |                       |                             |           
|                                                    |                       |                             |           
|Interest income to average interest-earning assets  |                       |                             |           
|Interest expense to average interest-earning assets |                       |                             |           
|                                                    |                       |                             |           
|Net interest margin                                 |                       |                             |           
|                                                    |                       |                             |           

17

---

|                                                    |                       | Six months ended June 30, |           
|--------------------------------------------------- | --------------------- | ------------------------- | ----------
|
|
|Assets                                              |                       |                           |           
|Interest-earning assets                             |                       |                           |           
|                                                    | Consumer loans        |                           | $         
|                                                    | Interest-earning cash |                           |           
|                                                    | Federal funds sold    |                           |           
|                                                    | Investment securities |                           |           
|                                                    |                       |                           |           
|Total interest-earning assets                       |                       |                           | 17,668,577
|Allowance for loan losses                           |                       |                           | (1,496,327
|Other assets                                        |                       |                           | 3,439,914 
|                                                    |                       |                           |           
|Total assets                                        |                       | $                         | 19,612,164
|                                                    |                       |                           |           
|Liabilities and Equity                              |                       |                           |           
|Interest-bearing liabilities                        |                       |                           |           
|                                                    | Deposits              |                           | $         
|                                                    | Borrowings            |                           |           
|                                                    |                       |                           |           
|Total interest-bearing liabilities                  |                       |                           | 15,237,343
|Other liabilities                                   |                       |                           | 2,043,672 
|                                                    |                       |                           |           
|Total liabilities                                   |                       |                           | 17,281,015
|Capital securities                                  |                       |                           | 111,057   
|Equity                                              |                       |                           | 2,220,092 
|                                                    |                       |                           |           
|Total liabilities and equity                        |                       | $                         | 19,612,164
|                                                    |                       |                           |           
|Net Interest Spread                                 |                       |                           |           
|                                                    |                       |                           |           
|Interest income to average interest-earning assets  |                       |                           |           
|Interest expense to average interest-earning assets |                       |                           |           
|                                                    |                       |                           |           
|Net interest margin                                 |                       |                           |           
|                                                    |                       |                           |           

18

---

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 volume and rates:

|                      |                        | Three months ended June 30,
2001 vs. 2000 |         | Six months ended June 30,
2001 vs. 2000 |  
|--------------------- | ---------------------- | ----------------------------------------- | ------- | --------------------------------------- | -
|
|
|
|Interest Income       |                        |                                           |         |                                         |  
|Consumer loans        |                        | $                                         | 68,842  |                                         | $
|Federal funds sold    |                        |                                           | (11,791 | )                                       |  
|Other securities      |                        |                                           | (3,404  | )                                       |  
|                      |                        |                                           |         |                                         |  
|Total interest income |                        |                                           | 53,647  |                                         |  
|Interest Expense      |                        |                                           |         |                                         |  
|Deposits              |                        |                                           | 17,811  |                                         |  
|Borrowings            |                        |                                           | 1,662   |                                         |  
|                      |                        |                                           |         |                                         |  
|                      | Total interest expense |                                           |         | 19,473                                  |  
|                      |                        |                                           |         |                                         |  
|                      | Net interest income    |                                           | $       | 34,174                                  |  
|                      |                        |                                           |         |                                         |  

---

19

---

Non-Interest Income

Non-interest income, which consists primarily of servicing and securitization income and credit product fee income, represented approximately 56%
of gross reported revenues for the three months ended June 30, 2001. Total non-interest income increased 20.4%, or $154.5 million, to $913.6 million for the three
months ended June 30, 2001, compared to $759.1 million for the same period in 2000, excluding the one-time gain. For the six months ended June 30, 2001, total
non-interest income increased 21%, or $312.2 million, to $1.80 billion, compared to $1.49 billion for the same period in 2000, excluding the one-time gain.
This increase was attributable to increased credit product fee income and higher average securitized loan balances.

Servicing and Securitization Income.Servicing and securitization income relates directly to securitized loans. It
includes a servicing fee, which generally offsets the Company's cost of servicing the securitized loans, excess servicing income, and gains or losses from the securitization of financial assets (see
"Managed Consumer Loan Portfolio and the Impact of Securitization").

The
Company has issued more than $22 billion in public and private asset-backed securities since 1989 and has increased the amount of receivables securitized as the amount of
total managed loans has increased. As of June 30, 2001, securitizations outstanding provided $15.14 billion in funding, representing 48% of total managed funding, compared with
$12.81 billion, or 45%, as of December 31, 2000 and $9.6 billion, or 38%, as of June 30, 2000. A more detailed discussion of the Company's funding sources and the role of
securitization activities is set forth in "Funding and Liquidity."

Because
excess servicing income on securitized loans essentially represents a recharacterization of net interest income and credit product fee income less the provision for loan
losses and servicing expense, it will vary based upon the same factors that affect those items. Thus, changes in net credit losses (see "Asset Quality, Net Credit Losses") and changes in
interest rates (to the extent that the finance charges on the receivables or the interest payable to investors are based upon floating rates) will cause excess servicing income to vary (see
"Asset/Liability Risk Management").

For
the three months ended June 30, 2001, servicing and securitization income increased $123.8 million from the same period in the prior year, to $276.9 million.
For the six months ended June 30, 2001, servicing and securitization income increased $218.0 million from the same period in the prior year, to $525.2 million. This increase
resulted primarily from higher average securitized loans outstanding.

Credit Product Fee Income.Credit product fee income includes interchange income, annual membership income, cash
advance and processing fees, and other revenue arising primarily from cross-marketing of cardholder service products. In addition, credit product fee income includes loan performance fees, such as
late, overlimit, and returned check charges.

For
the three months ended June 30, 2001 and 2000, credit product fee income was $579.6 million and $575.4 million. For the six months ended June 30, 2001
and 2000, credit product fee income was $1.17 billion and $1.12 billion. The Company expects continued moderation in the growth rate of credit product fee income as the Company focuses
on product offerings that have fewer up-front and annual fees. For the three months ended June 30, 2001 and 2000, loan performance fees totaled $155.5 million and
$103.3 million. For the six months ended June 30, 2001 and 2000, loan performance fees totaled $345.2 million and $209.9 million. Fee revenue realized from securitized
loans is not included in credit product fee income but is instead recorded as part of servicing and securitization income.

20

---

Non-Interest Expense

Non-interest expense includes salaries and employee benefits; loan solicitation and advertising costs; occupancy, furniture, and equipment costs;
data processing and communication costs; and other non-interest expense. Loan solicitation and advertising costs include printing, postage, telemarketing, list processing, and credit
bureau costs paid to third parties in connection with account solicitation efforts, and also include costs incurred to promote the Company's products. In accordance with GAAP, the loan origination
costs capitalized by the Company are the direct nonsolicitation costs associated with successful account acquisition efforts, after offsetting up-front processing fees. Capitalized loan
origination costs are amortized over the privilege period (currently one year) for credit card loans unless the loans are securitized, in which case the costs are taken as an expense prior to the
securitization. The majority of loan origination costs are expensed as incurred. In the three months ended June 30, 2001 and 2000, the Company amortized loan origination costs of
$16.6 million and $7.7 million. For the three months ended June 30, 2001 and 2000, total loan solicitation and advertising costs, including amortized loan origination costs, were
$150.7 million and $119.0 million. For the six months ended June 30, 2001 and 2000, total loan solicitation and advertising costs, including amortized loan origination costs, were
$304.4 million and $231.1 million. This increase in loan solicitation costs reflects new marketing initiatives.

Non-interest
expense also includes salary and benefit expenses, such as staffing costs associated with marketing, customer service, collections, and administration. Other
non-interest expense includes third-party data processing and communication costs, occupancy expenses, and other operational expenses, such as collection costs, fraud losses, and bankcard
association assessments. The following table presents non-interest expense for the three and six months ended June 30, 2001 and 2000:

Three months ended
June 30,

Six months ended
June 30,(dollars in thousands)2001

2000

2001

2000Non-Interest ExpenseSalaries and employee benefits

$
188,034

$
173,335

$
370,830

$
348,315Solicitation and advertising


150,729


119,020


304,357


231,142Occupancy, furniture, and equipment


56,579


37,828


111,582


75,214Data processing and communication


56,950


44,690


111,778


85,308Other(1)


169,282


407,418


306,446


541,382Total

$
621,574

$
782,291

$
1,204,993

$
1,281,362


---

Income Taxes

The Company recognized income tax expense of $151.7 million and $41.9 million for the three months ended June 30, 2001 and 2000. The
Company's effective tax rate was 39.5% and 40.0% for the three and six months ended June 30, 2001 and 2000. The decrease in the Company's effective tax rate was primarily the result of
diversification of operations into states with varied tax rates.

Asset Quality

The Company's delinquencies and net credit losses reflect, among other factors, the quality of loans, the average age of the Company's loans receivable
(generally referred to as "seasoning"), the success of the Company's collection efforts, and general economic conditions. The quality of loans is subject to the segmentation and underwriting criteria
used, account management, seasoning, and demographic and other factors.

21

---

The level of credit losses directly affects earnings when reserves are established through recognition of provisions for credit losses. Provisions for credit losses generally depend
on historical levels of credit losses and current trends. As new portfolios of consumer loans are originated or acquired, management uses historical credit loss and delinquency analysis of similar,
more seasoned loan portfolios and certain qualitative factors to establish an allowance for credit losses inherent in the existing portfolio (see "Allowance and Provision for Credit
Losses"). As actual net credit losses are experienced, the previously established reserve is used to absorb the credit losses. The Company also adjusts the allowance for credit losses to reflect the
sale of securitized loans and the removal of the related net loan value from the consolidated statements of financial condition.

The
Company's policy is to recognize principal credit losses on all delinquent unsecured loans (including the unsecured portion of any partially secured credit card loans) no more
than 180 days after the delinquency occurs, unless the accountholder cures the default by making a partial payment that qualifies under the Company's standards. Accounts of bankrupt credit card
customers are charged off no later than the next billing date following notification of bankruptcy. Accounts of deceased credit card customers are charged off upon determination of uncollectibility,
but in no case later than 180 days after such loans become delinquent. At the time a loan is charged off, accrued but unpaid finance charge and fee income, if any, is reversed against current
earnings but is maintained on the customer's record in the event of a future recovery. After a loan is charged off, the Company continues collection activity to the extent legally permissible. Any
collections on previously charged off loans are recognized as recoveries.

Delinquencies.An account is contractually delinquent if the minimum payment is not received by the next billing date.
The 30+ day delinquency rate on managed loans was 8.04% as of June 30, 2001 compared to 7.52% as of December 31, 2000 and 6.48% as of June 30, 2000. This increase reflects the
overall change in the loan portfolio composition and the growth and seasoning of the Company's higher yielding portfolios.

The
following table presents the delinquency trends of the Company's reported and managed consumer loan portfolios as of June 30, 2001 and 2000:

June 30,2001

2000(dollars in thousands)

Loans

% of
Total Loans

Loans

% of
Total LoansReportedLoans outstanding(1)

$
14,460,329

100.00%

$
12,556,680

100.00%Loans delinquent3059 days

$
434,364

3.00%

$
306,531

2.44%6089 days


318,290

2.20%


245,144

1.95%90 or more days


524,532

3.63%


473,251

3.77%Total

$
1,277,186

8.83%

$
1,024,926

8.16%ManagedLoans outstanding(1)

$
30,451,841

100.00%

$
22,301,724

100.00%Loans delinquent3059 days

$
807,065

2.65%

$
452,653

2.03%6089 days


587,402

1.93%


340,635

1.53%90 or more days


1,053,615

3.46%


651,608

2.92%Total

$
2,448,082

8.04%

$
1,444,896

6.48%


---

22

---

Net Credit Losses.Net credit losses for consumer loans represent the principal amount of losses from
customers who have not paid their existing loan balances (including charged-off bankrupt and deceased customer accounts) less current period recoveries. The principal amounts of such
losses include cash advances, purchases, and certain financed cardholder service product sales, and exclude accrued finance charge income, fee income, and fraud losses.

The
managed net credit loss rate was 10.29% for the three months ended June 30, 2001 and 7.42% for the same period in 2000. The increased managed net credit loss rate, which
was partially offset by higher net interest margins, reflects the overall change in the loan portfolio composition, including the sale of home loans and the growth and seasoning of the Company's
higher yielding portfolios, as well as an increase in consumer bankruptcies. Based on the 90+ day delinquency rate, the managed credit loss rate is expected to improve in the third quarter of 2001,
but may increase in the fourth quarter. The Company's pricing for finance charge and fee income incorporates an expected higher credit loss rate when appropriate, consistent with the Company's risk
adjusted return approach.

The
following table presents the Company's net credit losses for consumer loans for the periods indicated and is presented both on a financial statement reporting basis and a managed
portfolio basis:

|                                                               |  | Three months ended
June 30, |            | Six months ended
June 30,
|-------------------------------------------------------------- |  | --------------------------- | ---------- | -------------------------
|
|
|Reported                                                       |  |                             |            |                          
|Average loans outstanding                                      |  | $                           | 14,656,124 |                          
|Net credit losses                                              |  | $                           | 374,121    |                          
|Net credit losses as a percentage of average loans outstanding |  |                             | 10.21%     |                          
|Managed                                                        |  |                             |            |                          
|Average loans outstanding                                      |  | $                           | 29,304,532 |                          
|Net credit losses                                              |  | $                           | 754,213    |                          
|Net credit losses as a percentage of average loans outstanding |  |                             | 10.29%     |                          

Allowance and Provision for Credit Losses.The Company maintains its allowance for credit losses at a level estimated
to be adequate to absorb future credit losses, net of recoveries, inherent in the existing reported loan portfolio. The allowance for credit losses is maintained for reported loans only (see
"Managed Consumer Loan Portfolio and the Impact of Securitization"). Accordingly, the entire allowance is allocated to designated portfolios or pools of the Company's reported loans.

As
part of the quantitative evaluation of the allowance for credit losses, the Company segregates loans by portfolio type. These include portfolios of various types of credit card
products and acquired loan portfolios. The quantitative factors the Company uses to establish portfolio-level reserves include historical delinquencies, historical credit loss rates, level of security
(if applicable), customer characteristics, and other factors. Loan portfolios are grouped into homogenous pools, and certain qualitative factors, consistent with applicable bank regulatory guidelines,
are applied to each pool and portfolio to further evaluate the adequacy of the allowance for that pool or portfolio. These qualitative factors include general economic conditions, trends in loan
portfolio volume and seasoning, geographic concentrations, and recent modifications to loan review and underwriting procedures. The Company compares actual credit loss performance against estimated
credit losses, and may modify its loan loss allowance evaluation model accordingly.

23

---

The following table sets forth the activity in the allowance for credit losses for the periods indicated:

|                                                   |  | Three months ended
June 30, |           | Six months ended
June 30, |  
|-------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | -
|
|
|Balance at beginning of period                     |  | $                           | 1,523,267 |                           | $
|Provision for credit losses                        |  |                             | 378,829   |                           |  
|Credit losses                                      |  |                             | (416,158  | )                         |  
|Recoveries                                         |  |                             | 42,037    |                           |  
|Other                                              |  |                             | (170      | )                         |  
|                                                   |  |                             |           |                           |  
|Balance at end of period                           |  | $                           | 1,527,805 |                           | $
|                                                   |  |                             |           |                           |  
|Allowance for credit losses to loans at period-end |  |                             |           |                           |  
|                                                   |  |                             |           |                           |  
|Reported loan balance                              |  |                             |           |                           |  
|                                                   |  |                             |           |                           |  

The
allowance for credit losses increased to $1.53 billion, or 10.55% of reported loans, as of June 30, 2001, from $1.45 billion, or 10.50% of reported loans, as
of December 31, 2000 and $1.26 billion, or 10.06% of reported loans, as of June 30, 2000. This increase in the allowance for credit losses as a
percentage of reported loans reflects the expected trend in credit losses (see "Risk Adjusted Return and Revenue").

Funding and Liquidity

The Company funds its assets through a diversified mix of funding products designed to appeal to a broad range of investors, with the goal of generating
funding at the lowest cost possible while maintaining liquidity at prudent levels and managing interest rate risk.

The
primary goal of the Company's liquidity management is to ensure that funding will be available to support Company operations in varying business environments. The Company employs
multiple strategies to maintain a strong liquidity position, including diversification of funding sources, dispersion of maturities, maintenance of a prudent investment portfolio and cash balances,
and maintenance of committed credit facilities.

Funding Sources and Maturities.The Company seeks to fund its assets by diversifying its distribution channels and
offering a variety of funding products. Among the products offered are retail and institutional deposits, money market accounts, public and private asset-backed securities, term federal funds, and
bank notes. Distribution channels include direct phone and mail, brokerage and investment banking relationships, and the Internet.

The
Company offers maturity terms for its funding products that range from one week to 30 years. Actual maturity distributions depend on several factors, including expected
asset duration, investor demand, relative costs, shape of the yield curve, and anticipated issuances in the securitization and capital markets. Maturities are managed by the types of funding sources
available and by the rates offered on different products. The Company seeks to maintain a balanced distribution of maturities, avoiding undue concentration in any one period. The Company monitors
existing funding maturities and loan growth projections to ensure that liquidity levels are adequate to support maturities.

24

---

The following table summarizes the contractual maturities of deposits:

|                                        |  | June 30, 2001 |           | December 31, 2000
|--------------------------------------- |  | ------------- | --------- | -----------------
|
|Three months or less                    |  | $             | 978,181   |                  
|Over three months through twelve months |  |               | 2,043,447 |                  
|Over one year through five years        |  |               | 1,915,693 |                  
|Over five years                         |  |               |          |                  
|Deposits without contractual maturity   |  |               | 1,116,157 |                  
|                                        |  |               |           |                  
|Total Deposits                          |  | $             | 6,053,478 |                  
|                                        |  |               |           |                  

Deposits increased to $15.39 billion as of June 30, 2001 from $13.11 billion as of December 31, 2000. This increase
is attributable to the Company's continuing strategy to maintain a large deposit funding base and strong demand for FDIC-insured deposits.

The
Company securitizes loans in order to diversify funding sources and to obtain efficient all-in cost of funds, including the cost of capital. The securitizations are
diversified across the public and private securitization markets and across maturity terms.

Private
securitizations may utilize commercial paper based conduit facilities and other variable funding programs to securitize loans. The conduit facilities and variable funding
programs are generally renewable annually. Balances securitized under conduit facilities and variable funding programs totaled $3.55 billion and $3.07 billion as of June 30, 2001
and 2000. Term securitizations have expected maturities of greater than one year and the securities may be sold to investors in public or private offerings. During the first six months of 2001, the
Company completed five term securitizations totaling $3.59 billion.

The
Company's term securitizations are expected to amortize over the periods indicated below, based on outstanding securitized loans as of June 30, 2001:

Year

Amount Amortizing
(dollars in millions)2001

$
3262002


2,1392003


2,9652004


2,9062005


2,0622006


5862007


3632008


121


The
Company believes that it can attract deposits, borrow funds from other sources, and issue additional asset-backed securities to replace securitization funding as it amortizes, but
no assurances can be given to that effect.

The
Company, through one of its banking subsidiaries, maintains a program for the issuance of senior and subordinated debt. Under this program, the Company from time to time may issue
fixed or variable rate debt with maturities ranging from seven days to 15 years.

25

---

The following table shows the Company's unsecured funding availability and corresponding outstandings as of June 30, 2001:

|                                                       |  | June 30, 2001
|------------------------------------------------------ |  | -------------
|
|Senior and subordinated bank note program(2),(3)       |  | 2/98         
|Short-term credit facilities (four 364-day facilities) |  | Various      
|Short-term U.K. credit facility (364-day facility)(4)  |  | 6/01         
|Revolving credit facility                              |  | 1/99         
|Providian Financial shelf registration                 |  | 6/98         
|Capital Securities                                     |  | 2/97         

---

In
February 2001, the Company issued $884.0 million principal amount at maturity of its zero coupon convertible notes due February 15, 2021, with original issue
discount accruing at a rate of 4.00% per annum on a semiannual bond equivalent basis, beginning on February 15, 2001. The Company will not pay interest on these notes before maturity, except in
limited circumstances under which the Company may elect to pay interest at the rate of 4.00% per annum after the occurrence of certain events. The convertible notes are convertible at the option of
the holder, as long as specified conditions are met, into shares of the Company's common stock at a conversion rate of 6.2240 shares of common stock per note, subject to adjustment in certain events.
However, the Company may pay cash rather than deliver shares of its common stock upon conversion under certain circumstances, based on the formula provided for in the notes. The Company may redeem all
or a portion of the convertible notes for cash at any time on or after February 15, 2006. Holders of the notes have the option of requiring the Company to repurchase the notes on certain
specified dates at the prices provided for in the notes.

The
Company's strategy of opportunistic acquisitions may from time to time require funding. Potential sources of funding for such acquisitions include the following: cash flow from
operations; sale of investment securities; repurchase agreements; borrowings under revolving credit facilities; asset securitizations; and issuance of publicly offered or privately placed debt or
equity securities. There can be no certainty, however, that funding for future acquisitions will be available on terms favorable to the Company.

The
primary source of funds for payment of dividends on the Company's common stock is dividends received from its banking subsidiaries. The amount of dividends that a banking
subsidiary may declare without pre-approval from its primary regulator is generally limited to the sum of its net income for the current year and its retained net income for the previous
two years, less any dividends declared during the related three-year measurement period. In addition, a bank may not declare dividends if such declaration would leave the bank inadequately
capitalized. Therefore, the Company's ability to pay dividends on its common stock depends on the future net income and capital requirements of its banking subsidiaries.

26

---

Investments.The Company maintains cash reserves to provide short-term liquidity. Additional liquidity is
provided by the Company's interest-earning deposits with other banks, federal funds sold, securities purchased under resale agreements and similar arrangements, and other cash equivalents. The Company
also maintains 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 $1.87 billion as of June 30, 2001 from $2.57 billion as of December 31, 2000. Federal funds sold and securities purchased under resale agreements or similar
arrangements increased to $1.85 billion as of June 30, 2001 from $307.2 million as of December 31, 2000.

Credit Facilities.The Company has additional backup liquidity in the form of a $750 million unsecured committed
revolving credit facility from a group of financial institutions, which is scheduled to expire in January 2003. Pursuant to this credit facility, the Company's two banking subsidiaries,
Providian National Bank and Providian Bank, as borrowers, have access to revolving loans, which bear interest determined by a competitive bid process or based on the federal funds rate, the London
Interbank Offered Rate (LIBOR), or the prime rate, plus a spread. The Company guarantees the payment, when due, of the borrowers' obligations under this credit facility. During the first half of 2001,
there were no borrowings under this credit facility. The Company is also a party to four separate 364-day committed lines of credit totaling $250 million, under which
short-term borrowings are available for general corporate purposes. The Company did not borrow funds under these 364-day lines of credit during the first half of 2001.

The
United Kingdom branch of Providian National Bank is a party to a sterling denominated 364-day committed line of credit for £50 million
($70.8 million equivalent based on the exchange rate at June 30, 2001), under which short-term borrowings are available for general corporate purposes. The Company guarantees
the payment, when due, of the borrower's obligations under the sterling facility.

As
of June 30, 2001, the Company had guaranteed the payment, when due, of $47.5 million of borrowings by Providian Financial S.A. and Banco Liniers Sudamericano, S.A.,
the Company's Argentine subsidiaries.

Capital Adequacy

Each of the Company's banking subsidiaries is subject to capital adequacy guidelines as defined by its primary federal regulator. Core capital (Tier
1) consists principally of shareholders' equity less goodwill. Total risk-based capital (Tier 1 + Tier 2) includes a portion of the reserve for credit losses
and other capital components. Based on these classifications of capital, the capital adequacy regulations establish
three capital adequacy ratios that are used to measure whether a financial institution is "well capitalized" or "adequately capitalized," as set forth below:

|Capital Ratio    |  | Calculation                               |  | Well
Capitalized
Ratios |  | Adequately
Capitalized
Ratios
|---------------- |  | ----------------------------------------- |  | ----------------------- |  | -----------------------------
|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%                    

27

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At
June 30, 2001, each of the Company's banking subsidiaries was "well capitalized" in all regulatory capital ratio categories, as set forth below:

Capital Ratio

Providian National
Bank

Providian
BankTotal risk-based

10.82
%
14.67
%Tier 1

9.47
%
13.33
%Leverage

13.51
%
7.76
%


The
capital requirements and classifications of the Company's banking subsidiaries are also subject to qualitative judgments by their regulators with respect to components, risk
weighting, and other factors. 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 under the recourse agreement. 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. The Company's 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.

Asset/Liability Risk Management

The Company's 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). As a result, the Company's earnings are subject to risk resulting from interest rate fluctuations to the extent that there
is a difference between the amount of interest-earning assets and the amount of interest-bearing liabilities that mature, reprice, prepay or withdraw in a specific period.

The
Company's receivables generally have a fixed yield or float at a spread above the prime rate. While the Company's fixed rate credit card receivables have no stated maturity or
repricing period, the Company generally may adjust the rate charged after providing notice to the customer in accordance with applicable laws. Interest rates on the Company's liabilities are generally
indexed to LIBOR or bear a fixed rate until maturity. This asset/liability structure exposes the Company to two types of interest rate risk: (a) repricing risk, which results from differences
between the timing of rate changes and the
timing of cash flows; and (b) basis risk, which arises from changing spread relationships between yield curves and indexes.

The
principal objective of the Company's asset/liability risk management activities is to monitor and control the Company's exposure to adverse effects resulting from movements of
interest rates over time. The Company measures and manages interest rate risk individually for each banking subsidiary and on a consolidated basis, including both reported and managed assets and
liabilities in its measurement and management. To measure exposure to interest rate changes, the Company uses net interest income (NII) and market value of portfolio equity (MVPE) simulation analysis.

28

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The following table presents the estimated effects of positive and negative parallel shifts in interest rates as calculated at June 30, 2001 and takes into consideration the
Company's current hedging activity:

Percentage Change In(1)Change in Interest Rates (in basis points)NII(2)

MVPE(3)+200

(2.8)%

(8.1)%Flat

0%

0%-200

3.0%

8.5%


---

As
part of its interest rate risk measurement process, the Company must estimate how its customers and competitors will respond to changes in market interest rates. In addition, the
repricing of certain categories of assets and liabilities is subject to competitive and other pressures beyond the Company's control. As a result, certain assets and liabilities assumed to mature or
otherwise reprice within a certain period may in fact mature or reprice at different times and at different volumes. Therefore, the table above should be viewed as the Company's estimate of the
general effect of broad and sustained interest rate movements on the Company's net income and portfolio value.

The
Company generally seeks to mitigate earnings volatility associated with interest rate movement by matching the repricing characteristics of reported and managed assets and
liabilities. When matching the repricing characteristics of reported and managed assets and liabilities is not possible or efficient, the Company uses derivative financial instruments, including
interest rate swap and cap agreements, to reduce interest rate risk.

Foreign
currency exchange rate risk refers to the potential changes in current and future earnings or capital arising from movements in foreign exchange rates. The Company's foreign
currency exchange rate risk is primarily limited to the unhedged portion of the Company's net investment in its foreign subsidiaries and branches. The Company uses foreign exchange forward contracts
to reduce its exposure to foreign currency exchange rate risk. As of June 30, 2001, the Company's foreign currency exposure included British pounds sterling and Argentine pesos, and the risk
was substantially hedged. As the Company's foreign operations grow, the Company's exposure to foreign exchange risk is also likely to grow.

29

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The Company does not trade derivatives or use derivatives to speculate on interest rates. The following table presents the notional amounts of interest rate swap and cap agreements
purchased for the periods indicated:

|                |                   | Three months ended
June 30, |   | Six months ended
June 30,
|--------------- | ----------------- | --------------------------- | - | -------------------------
|
|
|Interest Rate   |                   |                             |   |                          
|Swap Agreements |                   |                             |   |                          
|                | Beginning balance |                             | $ | 2,167,976                
|                | Additions         |                             |   | 165,000                  
|                | Maturities        |                             |   | 342,500                  
|                |                   |                             |   |                          
|                | Ending balance    |                             | $ | 1,990,476                
|                |                   |                             |   |                          
|Interest Rate   |                   |                             |   |                          
|Caps Agreements |                   |                             |   |                          
|                | Beginning balance |                             | $ | 636,730                  
|                | Additions         |                             |   | 74,701                   
|                | Maturities        |                             |   | 76,125                   
|                |                   |                             |   |                          
|                | Ending balance    |                             | $ | 635,306                  
|                |                   |                             |   |                          

Notional
amounts of interest rate swaps outstanding have increased, over the prior year, to offset the growth of both fixed rate deposits and loans. As market conditions or the
Company's asset/liability mix change, the Company may increase or decrease the notional amount of interest rate swaps and caps outstanding in order to manage the Company's interest rate risk profile.

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

30

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Beginning in May 1999, a number of lawsuits were filed against the Company, and in some cases against certain of the Company's subsidiaries, by current
and former customers of the Company's banking subsidiaries. A consolidated putative class action lawsuit (In re Providian Credit Card Litigation) (the "Consolidated Action") was filed in
August 1999 in California state court in San Francisco against the Company, PNB, and certain other subsidiaries of the Company, and sought unspecified damages, including actual and punitive
damages, attorneys' fees and injunctive relief. The complaint alleged unfair and deceptive business practices, including failure to credit payments in a timely fashion, adding products and charging
fees without customer authorization, changing rates and terms without proper notice or authorization, and misleading or deceptive sales practices. Similar actions filed in other California counties
were transferred to San Francisco County and coordinated with the Consolidated Action. Several putative class actions, containing substantially the same allegations as those alleged in the
Consolidated Action, were also filed in federal court. The Federal Judicial Panel on Multidistrict Litigation transferred these actions (the "Multidistrict Action") to the Eastern District of
Pennsylvania.

In
December 2000, the Company reached an agreement to settle the Consolidated Action and the Multidistrict Action. The Court preliminarily approved the classwide settlement on
April 20, 2001. The Company estimates the total value of the settlement at approximately $105 million, including attorneys' fees and restitution in the form of cash and
in-kind payments. The Company recorded a net pre-tax charge of $36.7 million to non-interest expense during the fourth quarter of 2000 in connection with
such settlement.

Three
other class actions are pending in state courts in San Mateo County, California, Cook County, Illinois, and Bullock County, Alabama. These actions were not consolidated with the
Consolidated Action and are proceeding separately. The parties have reached an agreement to settle the San Mateo County, California action, which involves a class consisting of a relatively small
number of California customers. The settlement, which will not have a material impact on the Company, is subject to court approval. No class has been certified in the Cook County, Illinois or Bullock
County, Alabama actions. A motion to dismiss the Cook County, Illinois action has been granted with prejudice, and the plaintiff has filed an appeal. These other state actions also contain
substantially the same allegations as those alleged in the Consolidated Action. Certain of the actions also allege unconscionable or improper terms and fees, disclosure violations, failure to honor
customer requests and breach of promises to customers.

A
putative class action (In re Providian Securities Litigation), which is a consolidation of complaints filed in the United States District Court for the Eastern District of New York
in June 1999, arises out of alleged unfair business practices similar to the ones at issue in the Multidistrict Action and the Consolidated Action and alleges, in general, that the Company and
certain of its officers made false and misleading statements in violation of the federal securities laws concerning its future prospects and financial results. The putative class, which is alleged to
have acquired the Company's stock between January 15, 1999 and May 26, 1999, seeks damages in an unspecified amount, in addition to pre-judgment and post-judgment
interest, costs and attorneys' fees. In February 2000, the Federal Judicial Panel on Multidistrict Litigation transferred the consolidated securities cases to the Eastern District of
Pennsylvania. In June and September 2000, amended consolidated class action complaints were filed. In October 2000, a motion to dismiss the amended consolidated class action complaint
was filed on behalf of all defendants. In June 2001, the Court denied the Company's motion to dismiss and discovery is commencing.

31

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Two shareholder derivative actions were filed in June and July 2000 in California state court in San Francisco. In addition, a shareholder derivative lawsuit was filed in
Delaware state court in December 2000. These actions seek redress against the members of the Company's board of directors and certain executive officers for breach of their fiduciary duties and
for corporate waste arising out of their approval of, or failure to prevent, alleged unfair business practices similar to the ones at issue in the Multidistrict Action and the Consolidated Action,
which allegedly resulted in liability, or potential liability, for restitution, penalties, and litigation costs. The Company has not yet filed a response to these actions.

In
February 2001, the Company was named as a defendant in a 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 have since been filed in California and New York.

Beginning
in May 1999, the Company was the subject of media coverage concerning complaints made by some customers of the Company's banking subsidiaries regarding certain sales
and collections practices, which were followed by investigations into the Company's sales and collections practices by the San Francisco District Attorney's Office and the Connecticut Attorney
General's Office. In June 2000, the Company reached settlements with the San Francisco District Attorney, the California Attorney General and the Connecticut Attorney General, and PNB reached a
settlement with the Office of the Comptroller of the Currency. Under these settlements, the Company and certain subsidiaries of the Company, including PNB, agreed to make certain changes to their
business practices and to pay restitution to customers determined in accordance with the procedures in the settlement agreements.
The total restitution payable in connection with these settlements is expected to be approximately $310 million. Substantially all the restitution payments were made in the fourth quarter of
2000. As part of the settlements, PNB stipulated to the issuance by the Comptroller of a Consent Order obligating PNB to make such changes and to pay the aforementioned restitution, and the Company
and certain of its subsidiaries stipulated to the entry of a judgment and the issuance of a permanent injunction effecting the terms of the settlement. In addition, the Company agreed to pay
$5.5 million in civil penalties to the City and County of San Francisco. During the second quarter of 2000, the Company recorded a net pre-tax charge of $272.6 million to
non-interest expense in connection with such settlements.

An
informed assessment of the ultimate outcome or potential liability associated with the remaining pending lawsuits described above and other potential claims that could arise out of
the Company's business practices is not feasible at this time. Due to the uncertainties of litigation, there can be no assurance that the Company will prevail on all the claims made against it in the
lawsuits or that similar proceedings will not be brought. However, management believes that the Company has substantive defenses and intends to defend the actions vigorously.

In
addition, the Company is commonly subject to various other pending and threatened legal actions arising in the ordinary course of business from the conduct of its business
activities. In the opinion of the Company, any liability that is likely to arise with respect to these additional actions will not have a material adverse effect on the consolidated financial
condition or results of operations of the Company.

32

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Item 4. Submission of Matters to a Vote of Security Holders.

| |  | J. David Grissom
Leonard D. Schaeffer
| |  | -------------------------------------

The
following directors continued their term of office after such meeting:

|Christina L. Darwall |  | James V. Elliott  
|-------------------- |  | ------------------
|Lyle Everingham      |  | F. Warren McFarlan
|Shailesh J. Mehta    |  | Ruth M. Owades    
|John L. Weinberg     |  |                   

|Election of Directors |  | Votes For   |  | Votes Withheld
|--------------------- |  | ----------- |  | --------------
|J. David Grissom      |  | 255,253,047 |  | 1,543,785     
|Leonard D. Schaeffer  |  | 255,118,175 |  | 1,678,657     

|Item                                                                                               |  | Votes For   |  | Votes Against |  | Abstain
|-------------------------------------------------------------------------------------------------- |  | ----------- |  | ------------- |  | -------
|Ratification of the selection of Ernst & Young LLP
as independent auditors of the Company for 2001 |  | 238,956,313 |  | 17,055,150    |  | 785,369

No
other matter was voted upon at such meeting.

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

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

None.

|                                       |                                | Six months
ended
June 30,
2001 |       | Year ended December 31,
|-------------------------------------- | ------------------------------ | ------------------------------ | ----- | -----------------------
|
|Earnings to Fixed Charges              |                                |                                |       |                        
|                                       | Excluding interest on deposits |                                | 16.52 |                        
|                                       | Including interest on deposits |                                | 2.61  |                        
|Earnings to Combined Fixed Charges and |                                |                                |       |                        
|                                       | Preferred Stock (1)            |                                |       |                        
|                                       | Excluding interest on deposits |                                | 16.52 |                        
|                                       | Including interest on deposits |                                | 2.61  |                        

---

33

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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: August 14, 2001 | /s/JAMES H. ROWEJames H. Rowe
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Signatory)

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