** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

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

 

**For the quarterly period ended March31, 2002**

 

**OR**

 

| o |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|---|--------|-----------------------------------------------------------------------------------------------|

 

**For the transition period from               to               **

 

**1-12897**

**(Commission File Number)**

 

**PROVIDIANFINANCIAL CORPORATION**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

**Yes**  ý    **No**  o

 

As of April 30, 2002,there were 288,731,961 shares of the registrant’s Common Stock, par value $0.01per share, outstanding.

 

 

----

 

**PROVIDIANFINANCIAL CORPORATION**

**FORM10-Q**

** **

**INDEX**

** **

**March 31, 2002**

** **
|           |                       | **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 | 12 |
|           |                       |                                                                                        |
| **PART II**    | **OTHER INFORMATION**      |                                                                                        |
|           | **Item 1.**                | Legal  Proceedings                                                                          | 36 |
|           |                       |                                                                                        |   |
|           | **Item  2.**               | Exhibits  and Reports on Form 8-K                                                           | 39 |
|           |                       |                                                                                        |
| **SIGNATURES** | **41**                     |
|                |                            |                                                                                             |  |  |  |  |  |

 

2

----

 

# **PART I.  FINANCIAL INFORMATION**

# ** **

# **Item 1.  Financial Statements.**

** **

**CondensedConsolidated Statements of Financial Condition**

Providian Financial Corporation and Subsidiaries  

 
|                                                                                                                                                                                    |   | **March 31,**   |       | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|------------|------------------|--------|
| **(dollars in thousands, except per share data)**                                                                                                                                       |   | **2002**        |       | **2001**         |
|                                                                                                                                                                                    |   | **(unaudited)** |       |             |   |
|                                                                                                                                                                                    |   |            |       |             |   |
| Assets                                                                                                                                                                                  |   |            |       |             |   |
| Cash and cash equivalents                                                                                                                                                               |   | $               | 388,008    |             | $      | 449,586 |   |
| Federal funds sold and securities purchased under resale agreements                                                                                                                     |   | 3,535,500       |       | 1,611,000        |   |
| Investment securities:                                                                                                                                                                  |   |            |       |             |   |
| Available-for-sale (at market value, amortized cost of $1,695,845 at  March 31, 2002 and $1,302,435 at December 31, 2001)                                                               |   | 1,709,030       |       | 1,324,465        |   |
| Loans held for securitization or sale                                                                                                                                                   |   | 1,606,467       |       | 1,410,603        |   |
| Loans receivable, less allowance for credit losses of $1,413,734 at  March 31, 2002 and $1,932,833 at December 31, 2001                                                                 |   | 6,893,027       |       | 9,626,307        |   |
| Premises and equipment, net                                                                                                                                                             |   | 168,454         |       | 183,829          |   |
| Interest receivable                                                                                                                                                                     |   | 105,819         |       | 116,053          |   |
| Due from securitizations                                                                                                                                                                |   | 2,277,453       |       | 2,926,181        |   |
| Deferred taxes                                                                                                                                                                          |   | 1,043,515       |       | 1,030,340        |   |
| Other assets                                                                                                                                                                            |   | 419,282         |       | 521,159          |   |
| Assets of discontinued operations                                                                                                                                                       |   | 582,161         |       | 738,643          |   |
| Total assets                                                                                                                                                                            |   | $               | 18,728,716 |             | $      | 19,938,166 |   |
|                                                                                                                                                                                    |   |            |       |             |   |
| Liabilities                                                                                                                                                                             |   |            |       |             |   |
| Deposits:                                                                                                                                                                               |   |            |       |             |   |
| Non-interest  bearing                                                                                                                                                                   |   | $               | 66,335     |             | $      | 71,232 |   |
| Interest bearing                                                                                                                                                                        |   | 14,358,938      |       | 15,246,933       |   |
|                                                                                                                                                                                    |   | 14,425,273      |       | 15,318,165       |   |
|                                                                                                                                                                                    |   |            |       |             |   |
| Short-term borrowings                                                                                                                                                                   |   | 91,550          |       | 117,176          |   |
| Long-term borrowings                                                                                                                                                                    |   | 865,446         |       | 959,281          |   |
| Deferred fee revenue                                                                                                                                                                    |   | 394,966         |       | 468,310          |   |
| Accrued expenses and other liabilities                                                                                                                                                  |   | 936,476         |       | 885,780          |   |
| Liabilities of discontinued operations                                                                                                                                                  |   | 20,551          |       | 177,611          |   |
| Total liabilities                                                                                                                                                                       |   | 16,734,262      |       | 17,926,323       |   |
|                                                                                                                                                                                    |   |            |       |             |   |
| Company obligated mandatorily redeemable capital securities of  subsidiary trust holding solely junior subordinated deferrable interest  debentures of the Company (Capital Securities) |   | 104,332         |       | 104,332          |   |
|                                                                                                                                                                                    |   |            |       |             |   |
| Shareholders’ equity                                                                                                                                                               |   |            |       |             |   |
| Common stock, par value $0.01 per share (authorized: 800,000,000  shares; issued: March 31, 2002—290,410,503 shares; December 31,  2001—286,209,960 shares)                   |   | 2,904           |       | 2,862            |   |
| Retained earnings                                                                                                                                                                       |   | 1,985,040       |       | 1,971,359        |   |
| Cumulative other comprehensive income                                                                                                                                                   |   | (20,553         | )          | 9,807            |   |
| Common stock held in treasury—at cost: (March 31, 2002—1,532,442  shares; December 31, 2001—1,383,562 shares)                                                            |   | (77,269         | )          | (76,517          | )      |
| Total shareholders’ equity                                                                                                                                                         |   | 1,890,122       |       | 1,907,511        |   |
| Total liabilities and shareholders’ equity                                                                                                                                         |   | $               | 18,728,716 |             | $      | 19,938,166 |   |

 

See Notes to Condensed Consolidated FinancialStatements.

 

3

----

 

**CondensedConsolidated Statements of Income** (unaudited)

**Providian Financial Corporationand Subsidiaries**

 
|                                                                                                                                    |   | **Three months ended March 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
| **(dollars in thousands, except per share data)**                                                                                       |   | **2002**                         |    | **2001** |   |
| Interest Income                                                                                                                         |   |                             |    |   |   |
| Loans                                                                                                                                   |   | $                                | 488,085 |   | $ | 665,589 |   |
| Federal funds sold and securities purchased under resale agreements                                                                     |   | 5,609                            |    | 8,281 |   |
| Other                                                                                                                                   |   | 38,641                           |    | 38,119 |   |
| Total interest income                                                                                                                   |   | 532,335                          |    | 711,989 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Interest Expense                                                                                                                        |   |                             |    |   |   |
| Deposits                                                                                                                                |   | 195,303                          |    | 204,765 |   |
| Borrowings                                                                                                                              |   | 11,752                           |    | 19,503 |   |
| Total interest expense                                                                                                                  |   | 207,055                          |    | 224,268 |   |
| Net interest income                                                                                                                     |   | 325,280                          |    | 487,721 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Provision for credit losses                                                                                                             |   | 880,079                          |    | 411,595 |   |
| Net interest  income after provision for credit losses                                                                                  |   | (554,799                         | )       | 76,126 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Non-Interest Income                                                                                                                     |   |                             |    |   |   |
| Servicing and securitizations                                                                                                           |   | 320,360                          |    | 245,786 |   |
| Credit product fee income                                                                                                               |   | 344,927                          |    | 580,165 |   |
| Other                                                                                                                                   |   | 447,893                          |    | 46,698 |   |
|                                                                                                                                    |   | 1,113,180                        |    | 872,649 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Non-Interest Expense                                                                                                                    |   |                             |    |   |   |
| Salaries and employee benefits                                                                                                          |   | 165,018                          |    | 175,049 |   |
| Solicitation and advertising                                                                                                            |   | 108,682                          |    | 144,632 |   |
| Occupancy, furniture, and equipment                                                                                                     |   | 53,232                           |    | 51,837 |   |
| Data processing and communication                                                                                                       |   | 49,286                           |    | 53,697 |   |
| Other                                                                                                                                   |   | 170,866                          |    | 134,270 |   |
|                                                                                                                                    |   | 547,084                          |    | 559,485 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Income from continuing operations before income taxes                                                                                   |   | 11,297                           |    | 389,290 |   |
| Income tax expense                                                                                                                      |   | 4,462                            |    | 153,756 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Income from continuing operations                                                                                                       |   | 6,835                            |    | 235,534 |   |
| Gain (loss) from discontinued operations (net of related tax expense  (benefit) of $2,079 and ($4,515) for 2002 and 2001, respectively) |   | 3,184                            |    | (6,916 | ) |
| Cumulative effect of change in accounting principle (net of related tax  expense of $1,284)                                             |   | —                           |    | 1,846 |   |
| Net Income                                                                                                                              |   | $                                | 10,019  |   | $ | 230,464 |   |
|                                                                                                                                    |   |                             |    |   |   |
| **Earnings per  common share—basic**                                                                                               |   |                             |    |   |   |
| Income from continuing operations                                                                                                       |   | $                                | 0.02    |   | $ | 0.83 |   |
| Loss from discontinued operations**—**net of related taxes                                                                         |   | 0.01                             |    | (0.03 | ) |
| Cumulative effect of change in accounting principle**—**net of related taxes                                                       |   | —                           |    | 0.01 |   |
| Net Income                                                                                                                              |   | $                                | 0.03    |   | $ | 0.81 |   |
|                                                                                                                                    |   |                             |    |   |   |
| **Earnings per  common share—assuming dilution**                                                                                   |   |                             |    |   |   |
| Income from continuing operations                                                                                                       |   | $                                | 0.02    |   | $ | 0.80 |   |
| Loss from discontinued operations**—**net of related taxes                                                                         |   | 0.01                             |    | (0.03 | ) |
| Cumulative effect of change in accounting principle**—**net of related taxes                                                       |   | —                           |    | 0.01 |   |
| Net Income                                                                                                                              |   | $                                | 0.03    |   | $ | 0.78 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Cash  dividends paid per common share                                                                                                   |   | $                                | —  |   | $ | 0.03 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Weighted  average common shares outstanding**—**basic (000)                                                                        |   | 283,893                          |    | 284,794 |   |
|                                                                                                                                    |   |                             |    |   |   |
| Weighted  average common shares outstanding**—**assuming dilution (000)                                                            |   | 288,540                          |    | 298,042 |   |

 

See Notes to Condensed Consolidated Financial Statements.

 

4

----

 

**CondensedConsolidated 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, 2000**                                                                          |   | **$**             | **2,862** |                             | **$**  | **—**             |       | **$**                                        | **2,014,205** |                                 | **$**      | **21,092**  |       | **$** | **(5,976)** |   | **$** | **2,032,183** |   |
| Comprehensive income:                                                                                     |   |              |      |                             |   |                   |       |                                         |          |                                 |       |        |       |
| Net Income                                                                                                |   |              |      |                             |   | 230,464                |       |                                         |          |                                 |       | 230,464     |       |
| Other comprehensive  income:                                                                              |   |              |      |                             |   |                   |       |                                         |          |                                 |       |        |       |
| Unrealized loss  on securities, net of income tax benefit of $2,502                                       |   |              |      |                             |   |                   |       | (3,325                                       | )             |                                 |       | (3,325      | )          |
| Foreign currency  translation adjustments, net of income tax benefit of $47                               |   |              |      |                             |   |                   |       | (16                                          | )             |                                 |       | (16         | )          |
| Other comprehensive  income                                                                               |   |              |      |                             |   |                   |       |                                         |          |                                 |       | (3,341      | )          |
| Comprehensive income                                                                                      |   |              |      |                             |   |                   |       |                                         |          |                                 |       | 227,123     |       |
|                                                                                                      |   |              |      |                             |   |                   |       |                                         |          |                                 |       |        |       |
| Cash dividend:  Common—$0.03 per share                                                               |   |              |      |                             |   | (8,570                 | )          |                                         |          |                                 |       | (8,570      | )          |
| Purchase of  1,722,203 common shares for treasury                                                         |   |              |      | (599                             | )      |                   |       |                                         |          | (72,820                              | )          | (73,419     | )          |
| Exercise of  stock options and other awards                                                               |   |              |      | (9,260                           | )      | (8,163                 | )          |                                         |          | 28,998                               |       | 11,575      |       |
| Issuance of  restricted and unrestricted stock less forfeited shares                                      |   |              |      | 5,386                            |   |                   |       |                                         |          | 8,310                                |       | 13,696      |       |
| Deferred  compensation related to grant of restricted and unrestricted stock less  amortization of $3,576 |   |              |      | (10,119                          | )      |                   |       |                                         |          |                                 |       | (10,119     | )          |
| Net tax effect  from employee stock plans                                                                 |   |              |      | 14,592                           |   |                   |       |                                         |          |                                 |       | 14,592      |       |
| **Balance at March 31, 2001**                                                                             |   | **$**             | **2,862** | ** **                       | **$**  | **—**             | ** ** | **$**                                        | **2,227,936** | ** **                           | **$**      | **17,751**  | ** ** | **$** | **(41,488** | **)** | **$** | **2,207,061** | ** ** |
|                                                                                                      |   |              |      |                             |   |                   |       |                                         |          |                                 |       |        |       |
| **Balance at December 31, 2001**                                                                          |   | **$**             | **2,862** | ** **                       | **$**  | **—**             | ** ** | **$**                                        | **1,971,359** | ** **                           | **$**      | **9,807**   | ** ** | **$** | **(76,517** | **)** | **$** | **1,907,511** | ** ** |
| Comprehensive income:                                                                                     |   |              |      |                             |   |                   |       |                                         |          |                                 |       |        |       |
| Net Income                                                                                                |   |              |      |                             |   | 10,019                 |       |                                         |          |                                 |       | 10,019      |       |
| Other comprehensive  income:                                                                              |   |              |      |                             |   |                   |       |                                         |          |                                 |       |        |       |
| Unrealized loss  on securities, net of income tax benefit of $3,225                                       |   |              |      |                             |   |                   |       | (4,939                                       | )             |                                 |       | (4,939      | )          |
| Foreign currency  translation adjustments, net of income tax benefit of $16,597                           |   |              |      |                             |   |                   |       | (25,421                                      | )             |                                 |       | (25,421     | )          |
| Other comprehensive  income                                                                               |   |              |      |                             |   |                   |       |                                         |          |                                 |       | (30,360     | )          |
| Comprehensive income                                                                                      |   |              |      |                             |   |                   |       |                                         |          |                                 |       | (20,341     | )          |
|                                                                                                      |   |              |      |                             |   |                   |       |                                         |          |                                 |       |        |       |
| Purchase of  180,874 common shares for treasury                                                           |   |              |      |                             |   |                   |       |                                         |          | (719                                 | )          | (719        | )          |
| Exercise of  stock options and other awards                                                               |   |              |      | (3,640                           | )      | 3,662                  |       |                                         |          |                                 |       | 22          |       |
| Issuance of  restricted and unrestricted stock less forfeited shares                                      |   | 42                |      | 14,092                           |   |                   |       |                                         |          | (33                                  | )          | 14,101      |       |
| Deferred  compensation related to grant of restricted and unrestricted stock less  amortization of $6,120 |   |              |      | (7,981                           | )      |                   |       |                                         |          |                                 |       | (7,981      | )          |
| Net tax effect  from employee stock plans                                                                 |   |              |      | (2,471                           | )      |                   | ** ** |                                         | ** **    |                                 | ** ** | (2,471      | )          |
| **Balance at March 31, 2002**                                                                             |   | **$**             | **2,904** | ** **                       | **$**  | **—**             | ** ** | **$**                                        | **1,985,040** | ** **                           | **$**      | **(20,553** | **)**      | **$** | **(77,269** | **)** | **$** | **1,890,122** | ** ** |
|                                                                                                           |        |                   |           |                                  |        |                        |            |                                              |               |                                      |            |             |            |  |  |  |  |  |  |  |

 

See Notes to Condensed Consolidated Financial Statements.

 

5

----

 

**CondensedConsolidated Statements of Cash Flows** (unaudited)

Providian Financial Corporation and Subsidiaries  

 
|                                                                                                                |   | **Three months ended March 31,** |    |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
| **(dollars in thousands)**                                                                                          |   | **2002**                         |    | **2001** |   |
| **Operating Activities**                                                                                            |   |                             |    |   |   |
| Net Income                                                                                                          |   | $                                | 10,019  |   | $ | 230,464 |   |
| (Gain) loss from discontinued operations                                                                            |   | (3,184                           | )       | 6,916 |   |
| Cumulative effect of change in accounting principle                                                                 |   | —                           |    | (1,846 | ) |
| Income from continuing operations                                                                                   |   | 6,835                            |    | 235,534 |   |
| Adjustments to reconcile income from continuing operations  to net cash provided by operating activities:           |   |                             |    |   |   |
| Provision for credit losses                                                                                         |   | 880,079                          |    | 411,595 |   |
| Depreciation and amortization of premises and equipment                                                             |   | 16,042                           |    | 28,828 |   |
| Amortization of net loan acquisition costs                                                                          |   | 13,148                           |    | 13,474 |   |
| Amortization of deferred compensation related to restricted  and unrestricted stock                                 |   | 6,120                            |    | 3,576 |   |
| Decrease in deferred fee revenue                                                                                    |   | (73,344                          | )       | (63,005 | ) |
| (Increase) decrease in deferred income tax benefit                                                                  |   | (32,438                          | )       | 375 |   |
| Decrease in interest receivable                                                                                     |   | 10,234                           |    | 13,231 |   |
| Gain from sale of interests in Providian Master Trust                                                               |   | (401,903                         | )       | — |   |
| Net decrease (increase) in other assets                                                                             |   | 98,407                           |    | (128,814 | ) |
| Net increase in accrued expenses and other liabilities                                                              |   | 41,480                           |    | 41,755 |   |
| Net cash provided by operating activities                                                                           |   | 564,660                          |    | 556,549 |   |
|                                                                                                                |   |                             |    |   |   |
| **Investing Activities**                                                                                            |   |                             |    |   |   |
| Net cash from (used for) loan originations and principal  collections on loans receivable                           |   | 2,939,258                        |    | (1,537,550 | ) |
| Net (decrease) increase in securitized loans                                                                        |   | (891,947                         | )       | 552,487 |   |
| Net decrease in held-to-maturity investment                                                                         |   | —                           |    | 686,214 |   |
| Decrease (increase) in due from securitizations                                                                     |   | 648,728                          |    | (212,909 | ) |
| Purchases of available-for-sale investment securities                                                               |   | (919,174                         | )       | (3,941,149 | ) |
| Proceeds from maturities and sales of investment securities                                                         |   | 525,763                          |    | 2,724,649 |   |
| (Increase) decrease in federal funds sold and securities  purchased under resale agreements or similar arrangements |   | (1,924,500                       | )       | 88,706 |   |
| Net purchases of premises and equipment                                                                             |   | (667                             | )       | (30,866 | ) |
| Net cash provided (used) by investing activities                                                                    |   | 377,461                          |    | (1,670,418 | ) |
|                                                                                                                |   |                             |    |   |   |
| **Financing Activities**                                                                                            |   |                             |    |   |   |
| Net (decrease) increase in deposits                                                                                 |   | (886,147                         | )       | 793,859 |   |
| Proceeds from issuance of term federal funds                                                                        |   | 200,000                          |    | 343,000 |   |
| Repayment of term federal funds                                                                                     |   | (200,000                         | )       | (255,000 | ) |
| Increase in other short-term borrowings                                                                             |   | —                           |    | 383,805 |   |
| Repayment of short-term borrowings                                                                                  |   | (117,189                         | )       | — |   |
| Proceeds from long-term borrowings                                                                                  |   | 2,698                            |    | 400,354 |   |
| Repayment of long-term borrowings                                                                                   |   | (4,970                           | )       | (12,959 | ) |
| Purchase of treasury stock                                                                                          |   | (719                             | )       | (73,419 | ) |
| Dividends paid                                                                                                      |   | —                           |    | (8,570 | ) |
| Proceeds from exercise of stock options                                                                             |   | 22                               |    | 11,575 |   |
| Net cash (used) provided by financing activities                                                                    |   | (1,006,305                       | )       | 1,582,645 |   |
|                                                                                                                |   |                             |    |   |   |
| Net cash related to discontinued operations                                                                         |   | 2,606                            |    | (26,967 | ) |
|                                                                                                                |   |                             |    |   |   |
| **Net (Decrease) Increase in Cash and Cash Equivalents**                                                            |   | (61,578                          | )       | 441,809 |   |
| Cash and cash equivalents at beginning of period                                                                    |   | 449,586                          |    | 430,554 |   |
| Cash and cash equivalents at end of period                                                                          |   | $                                | 388,008 |   | $ | 872,363 |   |

 

See Notes to Condensed Consolidated Financial Statements.

 

6

----

 

**PROVIDIANFINANCIAL CORPORATION**

**Notes to CondensedConsolidated Financial Statements**

**March31, 2002 (unaudited)**

### ** **

### **Note 1.  Organization andBasis of Presentation**

 

Providian Financial Corporation (the “Company”) isincorporated under the laws of Delaware. The Company’s principal wholly owned banking subsidiaries are ProvidianNational Bank (“PNB”) and Providian Bank (“PB”).  Through its bankingsubsidiaries, the Company provides credit card and deposit products in theUnited States.  The Company marketsconsumer loans and deposits using distribution channels such as mail,telephone, and the Internet.

 

In November 2001, the Company announced that it woulddiscontinue its operations in the United Kingdom and Argentina.  Accordingly, the assets, liabilities, andoperations of these foreign subsidiaries and branches are reflected asdiscontinued operations on the Company’s condensed consolidated financialstatements.  The Company completed thesale of its United Kingdom operations in April 2002 and the sale of its Argentinaoperations in May 2002.

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States (“GAAP”) for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, we do notinclude all of the information and footnotes required by GAAP for completeconsolidated financial statements.  Inthe opinion of management, all adjustments considered necessary for a fairpresentation of the results for the interim period presented have beenincluded.  The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect reported amounts in the financial statements andaccompanying notes.  These estimates arebased on information available as of the date of the condensed consolidatedfinancial statements.  Therefore, actualresults could differ from those estimates. Operating results for the three month period ended March 31, 2002 arenot necessarily indicative of the results for the year ending December 31,2002.  The notes to the financialstatements contained in our Annual Report on Form 10-K for the year endedDecember 31, 2001 should be read in conjunction with these condensedconsolidated financial statements.  Allsignificant intercompany balances and transactions have been eliminated.  Certain prior period amounts, includingdiscontinued operations, have been reclassified to conform to the 2002presentation.

### ** **

### **Note 2.  Recognition ofIncome on Loans**

 

Duringthe first quarter of 2002, the Company began accruing only the estimatedcollectible portion of accrued finance charges and fees posted to customeraccount balances.  During 2001, theCompany accelerated the recognition of the estimated uncollectible portion ofaccrued finance charges and fees for all credit card receivables, includingthose that were current, due to deterioration in the underlying characteristicsof the loan portfolio and increased loss experience.  The Company continues to useprojected credit loss rates to estimate uncollectible revenue; therefore, thechange adopted during the first quarter is not expected to materially impactearnings or loans receivable.  Also, asa result of this change, previously established valuation 

 

7

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allowances for finance charge and fee income will bedepleted during 2002 as credit losses the Company previously estimated arerealized.

 

### **Note 3.  Loans Held forSecuritization or Sale**

 

OnMarch 31, 2002, the Company transferred $2.65 billion of higher risk loans, atthe lower of cost or fair value, to loans held for securitization or sale.Prior to the transfer, the net book value of the loans was decreased to fairvalue by adding $388.2 million to the allowance for credit losses related tothese loans. The loan balances and related allowances were then transferred toloans held for securitization or sale resulting in a new cost basis for theloans. The effect of transferring these loans to held for securitization orsale is to remove them from our managed loans. Effective April 1, 2002, theperformance of these loans will be reflected through adjustments to theirestimated fair value. Any decreases in fair value will be reflected innon-interest expense and any increases in fair value will be reflected innon-interest income.

 

### **Note 4.  Loans Receivable and Allowance for CreditLosses**

 

Thefollowing is a summary of loans receivable at March 31, 2002 and December 31,2001:

 

|                         |   | **March 31,** |      | **December  31,** |   |
|------------------------------|--------|---------------|-----------|-------------------|--------|
| **(dollars  in thousands)**  |   | **2002**      |      | **2001**          |   |
| Credit cards                 |   | $             | 8,271,998 |              | $      | 11,498,974 |   |
| Other                        |   | 34,763        |      | 60,166            |   |
| Allowance for  credit losses |   | (1,413,734    | )         | (1,932,833        | )      |
|                         |   | $             | 6,893,027 |              | $      | 9,626,307 |   |

 

Theactivity in the allowance for credit losses for the three months ended March31, 2002 and 2001 is as follows:

 

|                                                   |   | **Three  months ended March 31,** |      |
|--------------------------------------------------------|--------|-----------------------------------|-----------|
| **(dollars  in thousands)**                            |   | **2002**                          |      | **2001** |   |
| Balance at  beginning of period                        |   | $                                 | 1,932,833 |   | $ | 1,436,004 |   |
| Provision for  credit losses                           |   | 491,849                           |      | 411,595 |   |
| Fair value  adjustment — loans available for sale |   | 388,230                           |      | — |   |
| Credit losses                                          |   | (451,030                          | )         | (371,154 | ) |
| Recoveries                                             |   | 37,795                            |      | 31,927 |   |
| Transfer of  loans to available for sale               |   | (985,943                          | )         | — |   |
| Balance at end  of period                              |   | $                                 | 1,413,734 |   | $ | 1,508,372 |   |

 

During the first quarter of 2002, the Company accelerated itsrecognition of charge-offs for loans that are subject to payment plans underits consumer debt management program, substantially all of which are loansunder consumer credit counseling service programs through which customersestablish a plan to repay their outstanding balances under agreed-upon terms.Once customers have been accepted into the debt management program undercriteria established by the Company, their loans are considered to berestructured and are charged off no later than 120 days after they becomecontractually past due. Previously, these loans were charged off no later than180 days after they became contractually past due. As a result of the change,we recorded a provision for credit losses and an offsetting decrease to loansreceivable of approximately $2.9 million during the first quarter.

 

8

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**Note 5.  Earnings perCommon Share**

 

The following table sets forth the computation of both basic anddiluted earnings per common share: 

 
|                                                                            |   | **Three months ended March 31,** |   |
|---------------------------------------------------------------------------------|--------|----------------------------------|--------|
| **(in thousands, except per share data)**                                       |   | **2002**                         |   | **2001** |   |
| **Basic**                                                                       |   |                             |   |   |   |
| Income  from continuing operations                                              |   | $                                | 6,835  |   | $ | 235,534 |   |
| Discontinued  operations, net of related taxes                                  |   | 3,184                            |   | (6,916 | ) |
| Cumulative  effect of change in accounting principle, net of related taxes      |   | —                           |   | 1,846 |   |
| Net income available to common shareholders                                     |   | $                                | 10,019 |   | $ | 230,464 |   |
|                                                                            |   |                             |   |   |   |
| Weighted average common shares outstanding                                      |   | 283,893                          |   | 284,794 |   |
| Earnings per common share                                                       |   |                             |   |   |   |
| Income from discontinued operations, net of related taxes                       |   | $                                | 0.02   |   | $ | 0.83 |   |
| Income (loss) from discontinued operations, net of related  taxes               |   | 0.01                             |   | (0.03 | ) |
| Cumulative effect of change in accounting principle, net of  related taxes      |   | —                           |   | 0.01 |   |
| Net income per common share                                                     |   | $                                | 0.03   |   | $ | 0.81 |   |
|                                                                            |   |                             |   |   |   |
| **Diluted**                                                                     |   |                             |   |   |   |
| Income from continuing operations                                               |   | $                                | 6,835  |   | $ | 235,534 |   |
| Plus: Income impact of dilutive assumed conversions                             |   |                             |   |   |   |
|  Interest on 3.25%  convertible senior notes, net of related taxes         |   | —                           |   | 1,979 |   |
| Income from continuing operations with assumed conversions                      |   | 6,835                            |   | 237,513 |   |
| Discontinued operations, net of related taxes                                   |   | 3,184                            |   | (6,916 | ) |
| Cumulative effect of change in accounting principle, net of  related taxes      |   | —                           |   | 1,846 |   |
| Net income available to common shareholders with assumed  conversions           |   | $                                | 10,019 |   | $ | 232,443 |   |
| Weighted average common shares outstanding                                      |   | 283,893                          |   | 284,794 |   |
| Plus: Incremental shares from dilutive assumed conversions                      |   |                             |   |   |   |
|  Restricted stock  issued – non vested                                |   | 4,512                            |   | 891 |   |
|  Employee stock  options                                                   |   | 135                              |   | 6,269 |   |
|  3.25% convertible  senior notes                                           |   | —                           |   | 5,832 |   |
|  Forward purchase  contracts                                               |   | —                           |   | 256 |   |
| Dilutive potential common shares                                                |   | 4,647                            |   | 13,248 |   |
| Adjusted weighted average common shares                                         |   | 288,540                          |   | 298,042 |   |
| Earnings per common share:                                                      |   |                             |   |   |   |
| Income from continuing operations                                               |   | $                                | 0.02   |   | $ | 0.80 |   |
| Discontinued operations, net of related taxes                                   |   | 0.01                             |   | (0.03 | ) |
| Cumulative effect of change in accounting  principle, net of related taxes |   | —                           |   | 0.01 |   |
| Net income per common share                                                     |   | $                                | 0.03   |   | $ | 0.78 |   |

 

### **Note 6.  Asset Sales**

 

OnFebruary 5, 2002, the Company sold its interests in the Providian Master Trust,which primarily consisted of $1.4 billion of loans receivable and $472 millionof retained subordinated interests held by PNB. As of the date of sale, theProvidian Master Trust contained nearly $8 billion of loans receivable arisingfrom approximately 3.3 million active credit card accounts. This transactionresulted in cash proceeds of approximately $2.8 billion and a first quarterafter-tax gain of approximately $242 million.

 

OnFebruary 28, 2002, the Company terminated a securitization transaction whichfunded approximately $410 million of receivables arising from a portfolio ofaccounts acquired in 1998. Substantially all of these receivables are expectedto be included in the sale of higher risk credit card receivables projected toclose during the second quarter of 2002.

 

TheCompany announced in the first quarter of 2002 that it had entered intoagreements to sell its United Kingdom and Argentina credit card operations. OnApril 19, 2002, the Company completed the sale of its United Kingdomoperations.  The sale includedfacilities in London and Crawley, England. Thesale generated a second quarter 2002 after-tax gain of approximately $60million on proceeds of over $600 million.

 

9

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OnMay 10, 2002, the Company completed the sale of its Argentina operations,including Providian Financial S.A. and Providian Bank S.A.  After charges recognized during the fourthquarter of 2001, the Company expects to record a modest gain on the sale.

 

### **Note 7.  Cumulative Effect of Change in AccountingPrinciple – Derivative Instruments**

 

OnJanuary 1, 2001, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended.  SFAS No. 133requires that all derivative instruments be reported in the statement offinancial condition at fair value and establishes criteria for designatingvarious types of hedging activities.  Inaccordance with SFAS No.133, the Company reported a transition adjustment uponthe adoption of the standard to recognize its derivatives at fair value and torecognize the difference (attributable to hedged risks) between the carryingvalues and the fair values of related hedged assets and liabilities.  The effect of this transition adjustment wasto increase reported income during the first quarter of 2001 by $1.8 million,net of related taxes.

 

### **Note 8.  Cumulative Other Comprehensive Income**

 

Thecomponents of cumulative other comprehensive income for the three months endedMarch 31, 2002 and 2001 are as follows:

 

| **(dollars  in thousands)**   |   | **Unrealized    Gain (Loss)   on Securities** |   | **Foreign   Currency   Translation** |   | **Cumulative    Other   Comprehensive   Income** |   |
|-------------------------------|--------|-----------------------------------------------|--------|--------------------------------------|--------|--------------------------------------------------|--------|
| Balance at December 31, 2000  |   | $                                             | 21,513 |                                 | $      | (421                                             | )      | $ | 21,092 |   |
| Other  comprehensive income   |   | (5,827                                        | )      | (63                                  | )      | (5,890                                           | )      |
| Tax benefit  (expense)        |   | 2,502                                         |   | 47                                   |   | 2,549                                            |   |
| Balance at March  31, 2001    |   | $                                             | 18,188 |                                 | $      | (437                                             | )      | $ | 17,751 |   |
|                          |   |                                          |   |                                 |   |                                             |   |
| Balance at  December 31, 2001 |   | $                                             | 10,878 |                                 | $      | (1,071                                           | )      | $ | 9,807 |   |
| Other  comprehensive income   |   | (8,164                                        | )      | (42,018                              | )      | (50,182                                          | )      |
| Tax benefit  (expense)        |   | 3,225                                         |   | 16,597                               |   | 19,822                                           |   |
| Balance at March  31, 2002    |   | $                                             | 5,939  |                                 | $      | (26,492                                          | )      | $ | (20,553 | ) |

 

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### **Note 9.  Discontinued Operations**

 

Pursuantto SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” which the Company early adopted in the fourth quarter of 2001, theCompany has reclassified the balances relating to its United Kingdom andArgentina operations on its condensed consolidated financial statements toreflect the disposition of these operations. The revenues, costs and expenses, assets and liabilities, and cash flowsof these operations have been segregated in the condensed consolidatedstatements of income, statements of financial condition, and statements of cashflows for all periods presented and have been separately reported as“discontinued operations.”

 

TheCompany reported a $3.2 million gain from discontinued operations (net of $2.1million in related taxes) for the three months ended March 31, 2002.

 

Themajor classes of assets and liabilities of the discontinued operations as ofMarch 31, 2002, excluding intercompany balances and transactions, are asfollows:

 

| **(dollars in thousands)**                          |   | **United Kingdom** |       | **Argentina** |       | **Total** |       |
|-----------------------------------------------------|--------|--------------------|------------|---------------|------------|-----------|------------|
| **Assets**                                          |   |               |       |          |       |      |       |
| Cash and Cash  Equivalents                          |   | $                  | 14,758     |          | $          | 14,866    |       | $ | 29,624 |   |
| Loans Receivable,  less allowance for credit losses |   | 501,358            |       | 26,382        |       | 527,740   |       |
| Other                                               |   | 17,496             |       | 7,301         |       | 24,797    |       |
| Total Assets                                        |   | $                  | 533,612    |          | $          | 48,549    |       | $ | 582,161 |   |
|                                                |   |               |       |          |       |      |       |
| **Liabilities**                                     |   |               | ** ** |          | ** ** |      | ** ** |
| Deposits                                            |   | $                  | 4,160      |          | $          | 6,297     |       | $ | 10,457 |   |
| Long-term  borrowings                               |   | -                  |       | 2,181         |       | 2,181     |       |
| Other                                               |   | 5,019              |       | 2,894         |       | 7,913     |       |
| Total  Liabilities                                  |   | $                  | 9,179      |          | $          | 11,372    |       | $ | 20,551 |   |

 

### **Note 10.  Segment Information**

 

TheCompany derives its income primarily from credit card finance charges and fees,cardholder service product sales, servicing fees and excess servicing onsecuritized loans.  Because it retainsinterests in the loans that it securitizes, the Company has some exposure tothe performance of these securitized loans. Accordingly, the Company analyzes its financial performance on a managedbasis.  Segment information is presentedbelow on the managed loan portfolios. “Managed” financial information is adjusted financial information thatincludes the impact of securitized loan balances, credit losses related tothose securitized loans, and the related finance charge and fee income on keyaspects of the Company’s GAAP-basis financial information, such as net incomeand credit losses.  

 
| **Three months ended **

**(dollars in thousands)**                       |   | **Total   Managed** |       | **Securitization   Adjustment** |   | **Total   Reported** |   |
|--------------------------------------------------------------------------------|--------|---------------------|------------|---------------------------------|--------|----------------------|--------|
| **March  31, 2002**                                                            |   |                |       |                            |   |                 |   |
| Interest  income                                                               |   | $                   | 1,257,662  |                            | $      | (725,327             | )      | $ | 532,335 |   |
| Interest expense                                                               |   | 295,326             |       | (88,271                         | )      | 207,055              |   |
| Net interest  income                                                           |   | 962,336             |       | (637,056                        | )      | 325,280              |   |
| Provision for  credit losses                                                   |   | 1,483,096           |       | (603,017                        | )      | 880,079              |   |
| Net interest  income after provision for credit losses                         |   | (520,760            | )          | (34,039                         | )      | (554,799             | )      |
| Non-interest  income                                                           |   | 1,079,141           |       | 34,039                          |   | 1,113,180            |   |
| Non-interest  expense                                                          |   | 547,084             |       | —                          |   | 547,084              |   |
| Income from  continuing operations before income taxes                         |   | 11,297              |       | —                          |   | 11,297               |   |
| Income tax  expense                                                            |   | 4,462               |       | —                          |   | 4,462                |   |
| Income from  continuing operations                                             |   | 6,835               |       | —                          |   | 6,835                |   |
| Income from  discontinued operations—net of related taxes                 |   | 3,184               |       | —                          |   | 3,184                |   |
| Net income                                                                     |   | $                   | 10,019     |                            | $      | —               |   | $ | 10,019 |   |
|                                                                           |   |                |       |                            |   |                 |   |   |   |   |
| Ending loans outstanding                                                       |   | $                   | 22,143,880 |                            | $      | (12,230,652          | )      | $ | 9,913,228 |   |
|                                                                           |   |                |       |                            |   |                 |   |   |   |   |
| Total assets                                                                   |   | $                   | 28,993,506 |                            | $      | (10,264,790          | )      | $ | 18,728,716 |   |
|                                                                           |   |                |       |                            |   |                 |   |
| **March 31, 2001**                                                             |   |                |       |                            |   |                 |   |
| Interest income                                                                |   | $                   | 1,309,821  |                            | $      | (597,832             | )      | $ | 711,989 |   |
| Interest expense                                                               |   | 428,366             |       | (204,098                        | )      | 224,268              |   |
| Net interest  income                                                           |   | 881,455             |       | (393,734                        | )      | 487,721              |   |
| Provision for  credit losses                                                   |   | 714,768             |       | (303,173                        | )      | 411,595              |   |
| Net interest  income after provision for credit losses                         |   | 166,687             |       | (90,561                         | )      | 76,126               |   |
| Non-interest  income                                                           |   | 782,088             |       | 90,561                          |   | 872,649              |   |
| Non-interest  expense                                                          |   | 559,485             |       | —                          |   | 559,485              |   |
| Income from  continuing operations before income taxes                         |   | 389,290             |       | —                          |   | 389,290              |   |
| Income tax  expense                                                            |   | 153,756             |       | —                          |   | 153,756              |   |
| Income from  continuing operations                                             |   | 235,534             |       | —                          |   | 235,534              |   |
| Loss from discontinued  operations—net of related taxes                   |   | (6,916              | )          | —                          |   | (6,916               | )      |
| Cumulative  effect of change in accounting principle—net of related taxes |   | 1,846               |       | —                          |   | 1,846                |   |
| Net income                                                                     |   | $                   | 230,464    |                            | $      | -                    |   | $ | 230,464 |   |
|                                                                           |   |                |       |                            |   |                 |   |   |   |   |
| Ending loans  outstanding                                                      |   | $                   | 28,118,050 |                            | $      | (13,905,145          | )      | $ | 14,212,905 |   |
|                                                                           |   |                |       |                            |   |                 |   |   |   |   |
| Total assets                                                                   |   | $                   | 33,219,122 |                            | $      | (13,307,557          | )      | $ | 19,911,565 |   |

 

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## **Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

This discussion isintended to further the reader’s understanding of the consolidated financialcondition and results of operations of our company.  It should be read in conjunction with our historical financialstatements included in this Quarterly Report and with the information in ourAnnual Report on Form 10-K for the year ended December 31, 2001.  Our historical financial statements may notbe indicative of our future performance. Certain prior period amounts included in the tables herein have been reclassifiedto conform to the 2002 presentation, which excludes our discontinued operationsin the United Kingdom and Argentina.

* *

*Introduction and Recent Developments*

 

Through oursubsidiaries we provide credit card and deposit products to customers throughoutthe United States.  Our lending anddeposit taking activities are conducted primarily through Providian NationalBank (“PNB”) and Providian Bank (“PB”). Providian Bancorp Services (‘‘PBS’’) performs a variety of servicingactivities in support of PNB, PB and other affiliates.

 

We generaterevenue primarily through finance charges assessed on outstanding loanbalances, through fees paid by customers related to account usage andperformance (such as late, overlimit, cash advance, processing, and annualmembership fees), and from the sale of various cardholder serviceproducts.  We receive interchange feesfrom bankcard associations based on the purchase activity of our credit cardcustomers.  In addition, we earn revenueon our investments held for liquidity purposes and servicing fees and excessservicing on securitized loans.

 

Our primaryexpenses are asset funding costs (including interest), credit losses, operatingexpenses (including salaries and employee benefits, advertising andsolicitation costs, data processing, and communication costs), and incometaxes.

 

*Accounting Policies. *Our financial statementsare prepared in accordance with GAAP. Our key accounting policies are summarized in “Overview of SignificantAccounting Policies” in our annual report to shareholders included in Exhibit13 of our Annual Report on Form 10-K for the year ended December 31, 2001 (the“2001 Annual Shareholders Report”).

 

*Managed Financial Information. *We service (or manage) theloans that we own and the loans that we have sold through oursecuritizations.  Loans that have beensecuritized are not considered to be our assets under GAAP and, therefore, arenot shown on our balance sheet.  However,we typically retain interests in the securitized loan pools, and thus we stillhave a financial interest in and exposure to the performance of the securitizedloans.  Because the securitized loanscontinue to affect future cash flows, it is our practice to analyze ourfinancial performance on a “managed” basis. “Managed” financial information is adjusted financial information thatincludes the impact of securitized loan balances, credit losses related tothose securitized loans, and the related finance charge and fee income on keyaspects of our GAAP-basis financial information, such as net interest incomeand credit losses.  Managed financialinformation is not GAAP compliant, does not reverse all of the changes in ourfinancial 

 

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statementsthat result from securitizations (for example, gain on sale and allowance forcredit losses), and is not meant to be a comprehensive restatement of ourfinancial statements.

 

*Funding. *We fund our business through a variety offunding sources.  The majority of ourfunding is provided by deposits, securitizations and debt issuances.  The deterioration of our financialperformance and asset quality and downgrades by credit rating agencies sinceour third quarter 2001 earnings announcement have adversely affected ourability to attract deposits, obtain additional securitization funding andborrow funds from other sources, and have resulted in an increase in ourfunding costs.  For a more detaileddiscussion of our funding program, see “—Funding and Liquidity.”

 

*Capital Plan and Related RegulatoryMatters. *Our bankingsubsidiaries have entered into written agreements with their regulators, wehave entered into written agreements with our banking subsidiaries, and ourbanking subsidiaries have submitted Capital Plans accepted by their regulators,as described under “Our Capital Plan and Other Regulatory Matters” in our 2001Annual Shareholders Report.  As of March31, 2002, our banking subsidiaries met their commitments under the Capital Planto achieve the capital ratio goals for that date set forth in the CapitalPlan.  See “—Capital Adequacy.”

 

*Recent Developments. *Our first quarter 2002financial results reflect actions taken to reduce credit risk, refocus  our marketing strategy, and furtherstrengthen our balance sheet.  Theactions taken this year include:

 

•                  Completion of the sale of our interests in theProvidian Master Trust on February 5, 2002. This transaction resulted in cash proceeds of approximately $2.8 billionand a first quarter after-tax gain of approximately $242 million.  During the fourth quarter of 2001, loan lossreserves related to these assets were reduced by approximately $60 millionafter-tax as a result of designating these assets as held for sale.

 

•                  The agreements entered into on April 15, 2002with two limited liability companies formed by affiliates of Goldman, Sachs& Co., Salomon Smith Barney, CardWorks, Inc. and CompuCredit Corporation toinitiate a structured sale of approximately $2.6 billion in higher riskreceivables.  At the end of the firstquarter of 2002, we designated these loans as held for securitization or saleand reduced their book value, net of the related allowance, to reflect theanticipated sales price.  This resultedin an after-tax loss of approximately $240 million recognized during the first quarterof 2002.

 

•                  Strengthening our executive management team byhiring Anthony Vuoto as Chief Financial Officer. 

 

•                  Continuation of workforce reductions during thequarter, which resulted in the elimination of approximately 800 jobs and arelated charge in the first quarter of 2002 of approximately $17 million.  Since announcing our five-point plan inOctober 2001, we have reduced our total workforce by approximately 24%.

 

•                  Completion of the sale of our United Kingdomoperations on April 18, 2002. This sale generated proceeds of over $600million.  The after-tax gain ofapproximately $60 million from the sale will be reflected in our second quarter2002 results.

 

13

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•                  Completion of the sale of our Argentinaoperations on May 10, 2002.  Aftercharges recognized in the fourth quarter of 2001, we expect to record a modestgain on the sale.

 

*Earnings Summary*

 

Net income for thethree months ended March 31, 2002 and 2001 is presented in the following table:

 

|                                                 |   | **Three months ended   March 31,** |   |
|------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                 |   | **2002**                                |   | **2001** |   |
| Income  from continuing operations                   |   | $                                       | 6.8    |   | $ | 235.6 |   |
| Income  (loss) from discontinued operations          |   | 3.2                                     |   | (6.9 | ) |
| Cumulative  effect of change in accounting principle |   | —                                  |   | 1.8 |   |
| Net  Income                                          |   | $                                       | 10.0   |   | $ | 230.5 |   |

 

Income fromcontinuing operations declined to $6.8 million for the three months endedMarch 31, 2002 from $235.6 million during the same period in 2001.  The principal reason for the decrease was anincrease in net credit losses, reflecting continued weakness in the economy andthe deterioration in the credit quality of our loans. The deterioration in thecredit quality of our loans was in line with our expectations, as managed netcredit losses increased to $1.02 billion for the three months ended March 31,2002, an increase of $373.9 million over the same period in 2001. In addition,we realized a gain of approximately $402 million on the sale of our interestsin the Providian Master Trust and we realized a charge of approximately $388million to adjust the higher risk portfolio held for sale to fair value and acharge of $15 million in related transaction fees.

 

As of March 31,2002, managed credit card loans, which include reported and securitized loans,were $22.13 billion, a decrease of $5.97 billion, or 21%, from the balance atMarch 31, 2001.  This decline in managedcredit card loans was primarily due to the transfer of nearly $8 billion inmanaged loans receivable included in the Providian Master Trust in February2002.

 

For the threemonths ended March 31, 2002, managed net interest income increased 9% to $962.3million, compared to $881.5 million for the first quarter of 2001.  Our managed net interest margin on loansincreased to 14.45% for the first quarter of 2002, compared to 12.78% for thesame period in 2001.  For the firstquarter of 2002, the managed net credit loss rate was 15.05%, compared to12.70% and 9.37% for the fourth and first quarters of 2001.  The 30+ day managed delinquency rate as ofMarch 31, 2002 increased to 10.22% from 8.81% as of December 31, 2001.  The increase in yields, losses anddelinquency rates reflects the change in loan mix due to the sale of ourinterests in the Providian Master Trust, which included loans with generallylower yields and credit loss rates than other loans in our managed portfolio,as well as continued weakness in the economy and the deterioration in thecredit quality of our loans.

 

The managednon-interest income for the quarter ended March 31, 2002 was $1.08billion.  Excluding the $401.9 million gainfrom the sale of our interests in the Providian Master Trust, managednon-interest income decreased $104.9 million, from $782.1 million during the 

 

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firstquarter of 2001.  This decrease reflectslower credit product fee income.  Yearover year, managed non-interest expense decreased $12.4 million to $547.1million in the first quarter of 2002, primarily due to a reduction insolicitation expenses.

 

Our return onmanaged assets was 0.12% for the first quarter of 2002, down from 2.93% for thesame period in 2001.  The return onequity of 2.04% for the first quarter of 2002 was down from 43.52% for the sameperiod in 2001.

 

*Managed Consumer Loan Portfolio and the Impact ofSecuritization*

 

We securitize consumerloans in order to diversify funding sources and to manage our cost offunds.  For additional discussion of oursecuritization activities, see “—Funding and Liquidity.” Securitized loans soldto investors are not considered our assets and therefore are not shown on ourbalance sheet.  It is, however, ourpractice to analyze our financial performance on a managed basis because theimpact of securitized loans continues to affect future cash flows.  To perform this analysis, we use an adjustedincome statement and adjusted statements of financial condition, which add backthe effect of securitizations.

 

The followingtable summarizes our managed loan portfolio:

 

|                                           |   | **Three  months ended March 31,** |       |
|------------------------------------------------|--------|-----------------------------------|------------|
| **(dollars  in thousands)**                    |   | **2002**                          |       | **2001** |   |
| **Period-End Balances**                        |   |                              |       |   |   |
| Reported  consumer loans                       |   | $                                 | 9,913,228  |   | $ | 14,212,905 |   |
| Securitized  consumer loans                    |   | 12,230,652                        |       | 13,905,145 |   |
| Total managed  consumer loan portfolio         |   | $                                 | 22,143,880 |   | $ | 28,118,050 |   |
|                                           |   |                              |       |   |   |   |   |
| **Average Balances**                           |   |                              |       |   |   |
| Reported  consumer loans                       |   | $                                 | 11,757,911 |   | $ | 14,004,365 |   |
| Securitized  consumer loans                    |   | 15,245,763                        |       | 13,425,071 |   |
| Total average  managed consumer loan portfolio |   | $                                 | 27,003,674 |   | $ | 27,429,436 |   |
|                                           |   |                              |       |   |   |   |   |
| **Operating  Data and Ratios**                 |   |                              |       |   |   |
| Reported:                                      |   |                              |       |   |   |
| Average  earning assets                        |   | $                                 | 16,427,334 |   | $ | 16,957,954 |   |
| Return  on average assets                      |   | 0.21                              | %          | 4.94 | % |
| Net  interest margin on earning assets (1)     |   | 7.92                              | %          | 11.50 | % |
| Managed:                                       |   |                              |       |   |   |
| Average earning  assets                        |   | $                                 | 31,673,097 |   | $ | 30,383,025 |   |
| Return on  average assets                      |   | 0.12                              | %          | 2.93 | % |
| Net interest  margin on earning assets (1)     |   | 12.15                             | %          | 11.60 | % |

 

____________________

(1)    Net interest margin is equal to net interestincome divided by average earning assets.

 

*Financial Statement Impact*.  Our outstanding securitizations are treatedas sales under GAAP.  We receive the proceedsof the sale, and the securitized loans and related allowances are removed fromour balance sheet.  In certain cases, wehave retained an interest in the securitized pool of assets that is subordinateto the interests of third party investors. As the holder of a subordinated interest, we retain a right to receivecollections allocated to the subordinated interest after payments to seniorinvestors.  Certain events result in theexcess cash flow being used to fund spread accounts, which we also retain aninterest in.  Subordinated retained 

 

15

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interestsand spread accounts are recorded at estimated fair value, which is less thanthe face amount, and are included in “due from securitizations” on our balancesheet.  At least quarterly, we adjustthe valuation of our retained interests to reflect changes in the amount of thesecuritized loans outstanding and any changes to key estimates that we make.These adjustments are reflected in servicing and securitization income.

 

At the time weenter into a securitization, we recognize an “interest-only strip receivable”asset, which is the present value of the estimated excess servicing incomeduring the period the securitized loans are projected to be outstanding.  “Excess servicing income” refers to the netpositive cash flow from finance charge and fee revenues generated by thesecuritized loans less the sum of the interest paid to investors, relatedcredit losses, servicing fees, and other transaction expenses.

 

We recognize a netgain or loss on our income statement when we enter into a securitization, basedon: the income recognized from the release of reserves related to thesecuritized loans; the value of the interest-only strip recorded at the time ofthe securitization; the discount recognized at the time of the securitizationin recording the fair value of any retained subordinated interests; and theexpenses related to the consummation of the securitization transaction.

 

During therevolving period of a securitization, no principal payments are made to theinvestors.  Instead, monthly principalpayments received on the loans are used to purchase replacement loansreceivable, and we recognize additional interest-only strips receivable.  Excess servicing revenue is recognized eachmonth, through the accretion of interest-only strips receivable and, to theextent the amounts received exceed the related interest-only strip receivable,as servicing and securitization income. During the amortization or accumulation period of a securitization,principal payments are either made to investors or they are held in an accountfor accumulation and later distribution to investors.

 

When loans aresecuritized, we retain a “seller’s interest” generally equal to the total amountof the pool of loans included in the securitization less the investors’ portionand our subordinated retained interests in those loans.  As the amount of the loans in thesecuritized pool fluctuates due to customer payments, purchases, cash advances,and credit losses, the amount of the seller’s interest will vary.  The seller’s interest is classified as loansreceivable at par on our balance sheet. At March 31, 2002, we maintained an allowance for credit losses, as wellas a valuation allowance for uncollectible finance charges and fees, on theseller’s interest.  Periodically, we maybe required to transfer new loans into a securitized pool in order to maintainthe seller’s interest above a minimum required by the securitization documents.

 

We continue toservice the accounts included in the pool of securitized loans and earn amonthly servicing fee, which is generally offset by the servicing costs weincur.  Accordingly, servicing assets orliabilities have not been recognized in connection with our securitizations.

 

The ongoing effectof securitization accounting on our income statement includes a reduction innet interest income and the provision for credit losses, and an increase innon-interest income.  For the threemonths ended March 31, 2002 and 2001, securitization accounting had the effectof reducing net interest income by $637.1 million and $393.7 million; reducingthe 

 

16

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provisionfor credit losses by $603.0 million and $303.2 million; and increasingnon-interest income by $34.1 million and $90.5 million.  Unamortized loan acquisition costs areexpensed upon securitization.  Creditlosses on securitized loans are reflected as a reduction of servicing andsecuritization income rather than a reduction of the allowance for creditlosses.  Therefore, our provision forcredit losses is lower than if the loans had not been securitized.

 

If certain earlyamortization events specified in the securitization documents were to occur,principal collections from the securitized receivables would be applied torepay the related securitization funding before the commencement of thescheduled amortization period.  Theseearly amortization events include excess spread triggers (based on a formulathat takes into account finance charge and fee yield, interest, servicing andother administrative costs and credit losses allocated to a particular series),certain breaches of representations, warranties or covenants, insolvency orreceivership, servicer defaults, and, in more recent series, early amortizationevents relating to credit ratings, regulatory capital, and early amortizationwith respect to our other securitization transactions.  Early amortization of a securitizationtransaction increases the seller’s interest and could thereby require us tomaintain additional regulatory capital and establish credit loss reserves,which could negatively impact our financial results and liquidity.  As a result of the recent deterioration inthe performance of our loan portfolio, there is an increased risk that an earlyamortization event based on excess spread triggers could occur with respect tosome of the series of the Providian Gateway Master Trust.

 

In the fourthquarter of 2001, we completed the $1.15 billion restructuring of ProvidianGateway Master Trust Series 2000-D and the $1.0 billion Providian GatewayMaster Trust Series 2001-J securitization. In these securitizations, early amortization can be triggered by: adowngrade in PNB’s credit rating below BB-/Ba3 unless PNB has entered into aback-up servicing agreement with a back-up servicer satisfactory to theinvestors within 60 days of the downgrade; the failure of PNB to be “wellcapitalized” as shown on its Call Report beginning with the quarter endingMarch 31, 2002; or an early amortization with respect to any of our otherProvidian Gateway Master Trust securitizations. In addition, early amortizationof the Series 2000-D securitization can be triggered by a downgrade of theClass B certificates below their current rating of A/A2 if a specifiedpercentage of the investors declare the downgrade to be an amortization event.As of the date of this report, none of these trigger events has occurred. Inthe Providian Gateway Master Trust, substantially all the receivables currentlybear interest at fixed rates while all the outstanding securitizations of thatTrust bear interest at floating rates of interest.  We are taking steps to convert several billion dollars of thereceivables in the Trust to variable rate pricing.  Should interest rates rise substantially, excess servicing couldbe adversely affected.

 

*Cash Flow Impact*.  When loans are securitized, we receive cashproceeds from investors net of up-front transaction fees and expenses.  We use these proceeds to reduce alternativefunding liabilities, invest in short-term liquid investments, and for othergeneral corporate purposes.  Theinvestors’ share of finance charges and fees received from the securitizedloans is collected each month and used to pay investors for interest and creditlosses, to pay us for servicing fees and to pay other third parties for creditenhancement costs, and other transaction expenses.  Any finance charge and fee cash flow remaining after such paymentsis treated as excess servicing income and is generally retained by or remittedback to us.  Certain negative events,such as deterioration of excess servicing below certain specified levels,result in 

 

17

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theexcess cash flow being retained in the securitization through the funding ofspread accounts as additional credit enhancement rather than remitted back tous.  As a consequence of our creditrating downgrades in late 2001 and projected increases in spread accountfunding requirements, approximately $600 million of Providian Gateway MasterTrust collections constituting excess servicing is currently expected to beused to fund spread accounts during 2002. Of this amount, approximately $200 million was funded in these spreadaccounts during the first quarter of 2002. The amount expected to be fundedwill change from time to time, depending on securitization maturities and theperformance of the securitized loans.

 

Duringthe revolving period of a securitization, the investors’ share of monthlyprincipal collections and certain finance charge and fee collections are usedto purchase replacement loans receivable from us.  During the amortization or accumulation period of asecuritization, the investors’ share of principal collections (in certaincases, up to a specified amount each month) is either distributed each month tothe investors or held in an account for accumulation and later distribution tothe investors.

 

Our right toreceive excess finance charges and fees and principal collections allocated toa series of investor securities is, in some cases, subject to the prior rightof other investors in other series of a master trust to use such collections tocover shortfalls.

 

We use riskadjusted revenue (net interest income on loans plus non-interest income lessnet credit losses) as a measure of loan portfolio profitability, consistentwith our goal of matching the revenue generated by customer accounts with therisks undertaken.  Risk adjusted revenuemay also be expressed as a percentage of average consumer loans, in which caseit is referred to as risk adjusted return.

 

Managed riskadjusted revenue and return on loans for the three months ended March 31, 2002were $1.04 billion and 15.38%, compared to $1.02 billion and 14.82% for thesame period in 2001.  Increased netinterest income offset by higher net credit losses during the first quarter of2002 resulted in a slight increase in managed risk adjusted revenue and return.

 

*Net Interest Income and Margin*

 

Net interestincome is interest earned from loan and investment portfolios less interestexpense on deposits and borrowings. Managed net interest income also includes interest earned fromsecuritized loans less securitization funding costs.

 

Managed netinterest income for the three months ended March 31, 2002 was $962.3 million,compared to $881.5 million for the same period in 2001, representing anincrease of $80.9 million, or 9%.  Thisincrease was primarily attributable to lower funding costs and higher yieldsrelated to the change in the loan portfolio mix during the first quarter of2002 reflecting the sale of our interests in the Providian Master Trust.  Managed net interest margin on averagemanaged earning assets increased to 12.15% for the three months ended March 31,2002, from 11.60% for the same period in 2001.

 

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

 

The followingtable provides an analysis of reported interest income, interest expense, netinterest spread, and average balances for the three months ended March 31, 2002and 2001 (interest income and interest expense margins are presented as apercentage of average earning 

 

18

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assets,which include interest-earning consumer loan portfolios and investments heldfor liquidity purposes): 

 
|                                                 |   | **Three  months ended March 31,** |       |
|------------------------------------------------------|--------|-----------------------------------|------------|
|                                                 |   | **2002**                          |       | **2001** |   |
|                                                 |   | **Average**                       |       | **Income/** |   |   |   | **Average** |   | **Income/** |   |   |   |
| **(dollars  in thousands)**                          |   | **Balance**                       |       | **Expense** |   | **Yield/ Rate** |   | **Balance** |   | **Expense** |   | **Yield/ Rate** |   |
| **Assets**                                           |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest-earnings  assets                            |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| Consumer loans                                       |   | $                                 | 11,757,911 |   | $ | 488,085 |   | 16.60 | % | $ | 14,004,365 |   | $ | 665,589 |   | 19.01 | % |
| Interest-earning cash                                |   | 1,577,703                         |       | 7,093 |   | 1.80 | % | 163,652 |   | 2,197 |   | 5.37 | % |
| Federal funds sold                                   |   | 1,280,120                         |       | 5,609 |   | 1.75 | % | 603,758 |   | 8,281 |   | 5.49 | % |
| Investment securities                                |   | 1,390,302                         |       | 17,645 |   | 5.08 | % | 2,186,179 |   | 35,922 |   | 6.57 | % |
| Other                                                |   | 421,298                           |       | 13,903 |   | 13.20 | % | — |   | — |   | — |   |
| Total interest-earning assets                        |   | 16,427,334                        |       | $ | 532,335 |   | 12.96 | % | 16,957,954 |   | $ | 711,989 |   | 16.79 | % |
| Allowance for  loan losses                           |   | (1,969,281                        | )          |   |   |   |   | (1,492,931 | ) |   |   |   |   |
| Other assets                                         |   | 4,816,994                         |       |   |   |   |   | 3,178,242 |   |   |   |   |   |
| Total assets                                         |   | $                                 | 19,275,047 |   |   |   |   |   | $ | 18,643,265 |   |   |   |   |   |
|                                                 |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Equity**                           |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                        |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| Deposits                                             |   | $                                 | 14,752,470 |   | $ | 195,303 |   | 5.30 | % | $ | 13,176,526 |   | $ | 204,765 |   | 6.22 | % |
| Borrowings                                           |   | 1,055,507                         |       | 11,752 |   | 4.45 | % | 1,480,636 |   | 19,503 |   | 5.27 | % |
| Total  interest-bearing liabilities                  |   | 15,807,977                        |       | $ | 207,055 |   | 5.24 | % | 14,657,162 |   | $ | 224,268 |   | 6.12 | % |
| Other  liabilities                                   |   | 1,400,412                         |       |   |   |   |   | 1,756,815 |   |   |   |   |   |
| Total  liabilities                                   |   | 17,208,389                        |       |   |   |   |   | 16,413,977 |   |   |   |   |   |
| Capital  securities                                  |   | 104,332                           |       |   |   |   |   | 111,057 |   |   |   |   |   |
| Equity                                               |   | 1,962,326                         |       |   |   |   |   | 2,118,231 |   |   |   |   |   |
| Total  liabilities and equity                        |   | $                                 | 19,275,047 |   |   |   |   |   | $ |  18,643,265 |   |   |   |   |   |
|                                                 |   |                              |       |   |   |   |   |   |   |   |   |   |   |
| **Net Interest Spread**                              |   |                              |       |   |   | 7.72 | % |   |   |   |   | 10.67 | % |
| Interest income  to average interest-earning assets  |   |                              |       |   |   | 12.96 | % |   |   |   |   | 16.79 | % |
| Interest expense  to average interest-earning assets |   |                              |       |   |   | 5.04 | % |   |   |   |   | 5.29 | % |
| Net interest  margin                                 |   |                              |       |   |   | 7.92 | % |   |   |   |   | 11.50 | % |

 

*Interest Volume And Rate Variance Analysis*

 

Net interestincome is affected by changes in the average interest rate earned oninterest-earning assets and the average interest rate paid on interest-bearingliabilities.  Net interest income isalso affected by changes in the volume of interest-earning assets andinterest-bearing liabilities.  Thefollowing table sets forth the dollar amount of the increase (decrease) inreported interest income and expense resulting from changes in volume andrates:

 

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|                        |   | **Three  months ended March 31,** |       |
|-----------------------------|--------|-----------------------------------|------------|
|                        |   | **2002  vs.  2001**          |       |
|                        |   | **Increase   (Decrease)**         |       | **Change due  to (1)** |   |
| **(dollars  in thousands)** |   |                              | **Volume** |   | **Rate** |   |
|                        |   |                              |       |   |   |   |   |
| **Interest Income**         |   |                              |       |   |   |   |   |
| Consumer loans              |   | $                                 | (177,504   | ) | $ | (99,147 | ) | $ | (78,357 | ) |
| Federal funds  sold         |   | (2,672                            | )          | 5,359 |   | (8,031 | ) |
|                        |   |                              |       |   |   |   |   |
| Other securities            |   | 522                               |       | 9,901 |   | (9,379 | ) |
| Total interest  income      |   | (179,654                          | )          | (83,887 | ) | (95,767 | ) |
|                        |   |                              |       |   |   |   |   |
| **Interest Expense**        |   |                              |       |   |   |   |   |
| Deposits                    |   | (9,462                            | )          | 22,869 |   | (32,331 | ) |
| Borrowings                  |   | (7,751                            | )          | (5,027 | ) | (2,724 | ) |
| Total interest  expense     |   | (17,213                           | )          | 17,842 |   | (35,055 | ) |
| Net interest  income        |   | $                                 | (162,441   | ) | $ | (101,729 | ) | $ | (60,712 | ) |

 

____________________

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

 

*Non-Interest Income*

 

Non-interestincome during the first quarter of 2002 consisted primarily of servicing andsecuritization income, credit product fee income and the gain from the sale ofour interests in the Providian Master Trust. Total non-interest income, excluding the gain on sale, decreased 18%, or$161.3 million, to $711.3 million for the three months ended March 31, 2002,compared to $872.6 million for the same period in 2001.  This decrease in non-interest income wasprimarily attributable to lower credit product fee income that was partiallyoffset by increased servicing and securitization income.

 

*Servicing and Securitization Income*.  Servicing and securitization income relatesprimarily to securitized loans.  Itincludes a servicing fee, which generally offsets our cost of servicing thesecuritized loans, excess servicing income, and gains or losses from thesecuritization of financial assets (see “—Managed Consumer Loan Portfolio andthe Impact of Securitization”).

 

As of March 31,2002, securitizations outstanding provided $10.26 billion in funding,representing 40% of total managed funding, compared with $13.31 billion, or42%, as of March 31, 2001.  A moredetailed discussion of our funding sources and the role of securitizationactivities is set forth in “—Funding and Liquidity.”

 

Because excessservicing income on securitized loans essentially represents arecharacterization of net interest income and credit product fee income lessthe provision for credit losses and servicing expense, it will vary based uponthe same factors that affect those items. Thus, changes in net credit losses (see “—Asset Quality —Net CreditLosses”) and changes in interest rates will cause excess servicing income tovary (see “—Asset/Liability Risk Management”).

 

20

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For the threemonths ended March 31, 2002, servicing and securitization income was $320.3million, an increase of $74.5 million over the $245.8 million earned during thefirst quarter of 2001.  Higher averagesecuritized loans outstanding in the first quarter of 2002 resulted in higherservicing and excess servicing income, but this increase was partially offsetby discounts taken on retained interests required in connection withsecuritization activity.

 

*Credit Product Fee Income. *Credit product fee incomeincludes performance fees (late, overlimit and returned check charges), annualmembership fees, cash advance fees, line management fees, and processing fees,all of which are generally recorded as fees receivable.  Credit product fee income also includesrevenue from cardholder service products, which are generally recorded as feerevenue if billed monthly and as customer purchases if billed annually orsemi-annually.  Cardholder service productand annual membership revenue is recognized ratably over the customer privilegeperiod.  Credit product fee income alsoincludes interchange fees received from bankcard associations.

 

For the threemonths ended March 31, 2002 and 2001, credit product fee income was $344.9million and $580.2 million.  Thisdecrease reflects the change of our marketing focus away from the standardsegment, the sale of our interests in the Providian Master Trust, whichresulted in lower interchange fees, and lower cardholder service product andannual membership revenue.

* *

*Non-interest Expense*

 

Non-interestexpense includes salary and employee benefit costs, loan solicitation andadvertising costs, occupancy, furniture, and equipment costs, data processingand communication costs, and other non-interest expense.  Salary and benefit costs include staffingcosts associated with marketing, customer service, collections, andadministration.  Loan solicitation andadvertising costs include printing, postage, telemarketing, list processing,and credit bureau costs paid to third parties in connection with accountsolicitation efforts, and also include costs incurred to promote ourproducts.  Advertising costs and themajority of solicitation expenses are expensed as incurred.  In accordance with GAAP, we capitalize onlythe direct loan origination costs associated with successful accountacquisition efforts, after they are reduced by up-front processing fees.  Capitalized loan origination costs areamortized over the customer privilege period (currently one year) for credit cardloans unless the loans are securitized, in which case the costs are taken as anexpense upon securitization.  For thethree months ended March 31, 2002 and 2001, we amortized loan origination costsof $14.7 million and $12.5 million. Total loan solicitation and advertising costs, including amortized loanorigination costs, were $108.7 million and $144.6 million for the three monthsended March 31, 2002 and 2001.  Thisdecrease in loan solicitation costs reflects a reduction in the volume ofcustomer mailings as we changed our marketing strategy to focus on the middleand prime market segments and began testing new product offerings.  In addition, in the first quarter of 2002 werecorded a $16.7 million charge in connection with workforce reductions and a$15 million charge related to the planned sale of higher risk receivables.

 

Other non-interestexpense includes operational expenses such as collection costs, fraud losses,and bankcard association assessments. The following table presents non-interest expense for the three monthsended March 31, 2002 and 2001:

 

|                                 |   | **Three  months ended March 31,** |    |
|--------------------------------------|--------|-----------------------------------|---------|
| **(dollars  in thousands)**          |   | **2002**                          |    | **2001** |   |
| **Non-Interest Expense**             |   |                              |    |   |   |
| Salaries and  employee benefits      |   | $                                 | 165,018 |   | $ | 175,049 |   |
| Solicitation and  advertising        |   | 108,682                           |    | 144,632 |   |
| Occupancy,  furniture, and equipment |   | 53,232                            |    | 51,837 |   |
| Data processing  and communication   |   | 49,286                            |    | 53,697 |   |
| Other                                |   | 170,866                           |    | 134,270 |   |
| Total                                |   | $                                 | 547,084 |   | $ | 559,485 |   |

 

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*Income Taxes*

 

We recognizedincome tax expense of $6.5 million and $150.5 million for the three monthsended March 31, 2002 and 2001.  Oureffective tax rate was 39.5% for the three months ended March 31, 2002 and2001.

* *

*Asset Quality*

 

Our delinquenciesand net credit losses reflect, among other factors, the credit quality ofloans, the average age of our loans receivable (generally referred to as“seasoning”), the success of our collection efforts, and general economicconditions.  Initially, credit qualityis primarily determined by the characteristics of the targeted segment and theunderwriting criteria utilized during the credit approval process.  Subsequently, account management efforts,seasoning, demographic, and economic conditions will impact credit quality.

 

Except for loansthat are restructured under our consumer debt management program, which arecharged off no more than 120 days after they become contractually past due, ourpolicy is to recognize principal charge-offs on loans no more than 180 daysafter they become contractually past due. Accountholders may cure account delinquencies by making a partialpayment that qualifies under our standards and applicable regulatoryrequirements.  We batch notifications ofcustomers who have declared bankruptcy or died and charge off the relatedamounts once a month.

 

At the time a loanis charged off, any accrued but unpaid finance charge and fee income is removedfrom our loan balances but is maintained on the customer’s record in the eventof a future recovery.  After a loan ischarged off, we continue collection activity to the extent legallypermissible.  Any collections on, orproceeds from the sale of, charged off loans are recognized as recoveries, andare offset against current period charged off balances to determine net creditlosses.

* *

*                Delinquencies. *An account iscontractually delinquent if the minimum payment is not received by the nextbilling date.  The 30+ day delinquencyrate on managed loans was 10.22% as of March 31, 2002, compared to 8.81% as ofDecember 31, 2001 and 7.65% as of March 31, 2001. In addition to overall loanseasoning, the increase in managed delinquency rates reflects the deteriorationof the credit quality of our loan portfolio and the sale of the ProvidianMaster Trust, which increased the percentage of our customers in the standardand middle market segments.

 

The 30+ daydelinquency rate on reported loans was 8.32% as of March 31, 2002, compared to7.58% as of December 31, 2001, and 8.92% as of March 31, 2001.  The increase from December 31, 2001 to March31, 2002 reflects the overall change in the loan portfolio 

 

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compositionresulting from the sale of our interests in the Providian Master Trust. Thedecrease in reported delinquencies year over year is a result of the change inthe estimate of uncollectible finance charges and fees subsequent to March 31,2001. 

 

The sale of ourinterests in the Providian Master Trust had a greater effect on manageddelinquency rates than on reported delinquency rates, because the loans relatedto the Providian Master Trust represented a larger percentage of managed loansthan of reported loans.

 

The followingtable presents the delinquency trends of our reported and managed consumer loanportfolios as of March 31, 2002 and 2001:

 

|                        |   | **March 31,** |       |
|-----------------------------|--------|---------------|------------|
|                        |   | **2002**      |       | **2001** |   |
| **(dollars  in thousands)** |   | **Loans**     |       | **% of Total  Loans** |   | **Loans** |   | **% of Total  Loans** |   |
|                        |   |          |       |   |   |   |   |   |   |
| **Reported**                |   |          |       |   |   |   |   |   |   |
| Loans  outstanding (1)      |   | $             | 10,881,235 |   | 100.00 | % | $ | 14,206,559 |   | 100.00 | % |
| Loans delinquent            |   |          |       |   |   |   |   |   |   |
| 30 — 59 days           |   | $             | 286,575    |   | 2.63 | % | $ | 368,503 |   | 2.59 | % |
| 60 — 89 days           |   | 206,075       |       | 1.89 | % | 289,726 |   | 2.04 | % |
| 90 or more days             |   | 413,163       |       | 3.80 | % | 609,430 |   | 4.29 | % |
| Total                       |   | $             | 905,813    |   | 8.32 | % | $ | 1,267,659 |   | 8.92 | % |
|                        |   |          |       |   |   |   |   |   |   |
| **Managed**                 |   |          |       |   |   |   |   |   |   |
| Loans  outstanding (1)      |   | $             | 23,111,887 |   | 100.00 | % | $ | 28,111,704 |   | 100.00 | % |
| Loans delinquent            |   |          |       |   |   |   |   |   |   |
| 30 — 59 days           |   | $             | 670,325    |   | 2.90 | % | $ | 636,617 |   | 2.26 | % |
| 60 — 89 days           |   | 509,754       |       | 2.21 | % | 483,764 |   | 1.72 | % |
| 90 or more days             |   | 1,181,527     |       | 5.11 | % | 1,030,658 |   | 3.67 | % |
| Total                       |   | $             | 2,361,606  |   | 10.22 | % | $ | 2,151,039 |   | 7.65 | % |

 

____________________

(1)    Loans outstanding include loans held forsale at par, and exclude SFAS No. 133 market value adjustments.

 

 

*Net Credit Losses*.  Net credit losses for consumer loansrepresent the principal amount of losses from customers who have not paid theirexisting loan balances (including charged-off bankrupt and deceased customeraccounts) less current period recoveries (i.e., collections on previouslycharged off accounts).  The principalamounts of such losses include cash advances, purchases, and certain financedcardholder service product sales, and exclude accrued finance charge income,fee income, and fraud losses.  Fraudlosses (losses due to the unauthorized use of credit cards, including creditcards obtained through fraudulent applications) are charged to non-interestexpense after an investigation period of up to 60 days.  Our goal when pricing for finance charge andfee levels on customer accounts is to factor in expected higher credit lossrates for higher risk segments of our loan portfolio.

 

The managed netcredit loss rate was 15.05% for the three months ended March 31, 2002 and 9.37%for the same period in 2001.  Asexpected, our managed net credit loss rate trended up over the course of thefirst quarter of 2002, reaching 17.64% for the month of March. While we areexperiencing currently favorable delinquency trends, we believe that losseswill remain relatively high throughout the remainder of 2002.

 

23

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The followingtable presents our net credit losses for consumer loans for the periodsindicated and is presented both on a financial statement reporting basis and amanaged portfolio basis:

 

|                                                            |   | **Three months ended March 31,** |       |
|-----------------------------------------------------------------|--------|----------------------------------|------------|
| **(dollars in thousands)**                                      |   | **2002**                         |       | **2001** |   |
| **Reported**                                                    |   |                             |       |   |   |
| Average  loans outstanding  (1)                            |   | $                                | 11,769,464 |   | $ | 14,004,365 |   |
| Net  credit losses  (2)                                    |   | $                                | 413,235    |   | $ | 339,227 |   |
| Net credit losses as a percentage of average loans  outstanding |   | 14.04                            | %          | 9.69 | % |
|                                                            |   |                             |       |   |   |
| **Managed**                                                     |   |                             |       |   |   |
| Average  loans outstanding  (1)                            |   | $                                | 27,015,227 |   | $ | 27,429,436 |   |
| Net  credit losses  (2)                                    |   | $                                | 1,016,252  |   | $ | 642,397 |   |
| Net credit  losses as a percentage of average loans outstanding |   | 15.05                            | %          | 9.37 | % |

 

____________________

(1)        Average loans outstanding includes loansheld for securitization or sale at par.

(2)        Excludes fair value adjustment on loansheld for sale.

 

*Allowance and Provision for CreditLosses*.  We maintainour allowance for credit losses at a level estimated to be adequate to absorbfuture principal charge-offs, net of recoveries, inherent in the existingreported loan portfolio.  The allowancefor credit losses is maintained for reported loans only (see “—Managed ConsumerLoan Portfolio and the Impact of Securitization”).  Accordingly, the entire allowance is allocated to designatedportfolios or pools of our reported loans.

 

The allowance forcredit losses is established through analysis of historical credit loss trendsand reviews of current loss expectations that incorporate general economicconditions that may impact future losses. Loans are segregated by product type into general risk classificationsby market segment.  Quantitative factors(including historical delinquency roll rates, historical credit loss rates,customer risk scores, and other data) are used to prepare comparativeevaluations of the allowance for credit losses.

 

In addition to theallowance for credit losses quantified through the review of historical andcurrent portfolio characteristics, additional provisions for credit losses are recorded to address general credit riskfactors.  The general credit riskfactors are consistent with applicable bank regulatory guidelines and includeassessment of general macroeconomic conditions, trends in loan portfolio volumeand seasoning, geographic concentrations, and recent modifications to loanreview and underwriting procedures, among other factors.  Also, we compare allowances established inprior periods with subsequent actual credit losses and perform peer groupcomparative analyses of lagged loss rates to coverage ratios.

 

The followingtable sets forth the activity in the allowance for credit losses for theperiods indicated:

 

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|                                                  |   | **Three months ended March 31,** |      |
|-------------------------------------------------------|--------|----------------------------------|-----------|
| **(dollars in thousands)**                            |   | **2002**                         |      | **2001** |   |
|                                                  |   |                             |      |   |   |
| Balance at beginning of period                        |   | $                                | 1,932,833 |   | $ | 1,436,004 |   |
| Provision for credit losses                           |   | 491,849                          |      | 411,595 |   |
| Fair value adjustment — loans available for sale |   | 388,230                          |      | — |   |
| Credit losses                                         |   | (451,030                         | )         | (371,154 | ) |
| Recoveries                                            |   | 37,795                           |      | 31,927 |   |
| Transfer of loans to available for sale               |   | (985,943                         | )         | — |   |
| Balance at end of period                              |   | $                                | 1,413,734 |   | $ | 1,508,372 |   |
|                                                  |   |                             |      |   |   |
| Allowance for credit losses to loans at period-end    |   | 17.06                            | %         | 10.61 | % |
|                                                  |   |                             |      |   |   |
| Reported loan balance (1)                             |   | 8,288,825                        |      | 14,212,905 |   |

 

____________________

(1)    The 2002 loan balance excludes SFAS No. 133market value adjustments of $17.9 million.

 

The allowance forcredit losses was $1.41 billion, or 17.06% of reported loans, as of March 31,2002, from $1.93 billion, or 16.76% of reported loans, as of December 31, 2001and $1.51 billion, or 10.61% of reported loans, as of March 31, 2001.  The year over year increase in the allowancefor credit losses as a percentage of reported loans reflects the expected trendin credit losses after adjusting our loan mix for the sales of our interests inthe Providian Master Trust and the higher risk portfolio. The overall decreasein the allowance for credit losses as a dollar amount reflects the transfer ofhigher risk loans to held for securitization or sale (see “—Risk AdjustedReturn and Revenue”).  As we continue toevaluate the allowance for credit losses in light of changes in asset quality,regulatory requirements, general economic trends, and the effects of our middleand prime marketing strategy, the amount of the allowance and the ratio of theallowance for credit losses to loans may be adjusted.

 

*Funding and Liquidity*

 

We seek to fundour assets through a diversified mix of funding products designed to appeal toa broad range of investors, with the goal of generating funding at the lowestcost available to us while maintaining liquidity at prudent levels and managinginterest rate risk.

 

The primary goalof our liquidity management is to provide funding to support our operations invarying business environments.  Weemploy multiple strategies, including diversification of funding sources,dispersion of maturities, and maintenance of a prudent investment portfolio andcash balances.

 

Since our thirdquarter 2001 earnings announcement, our debt ratings and those of PNB have beendowngraded. These downgrades have had and, together with any future downgrades,may continue to have a negative effect on our ability to obtain funding.  In addition, access to funding has been andmay continue to be at a higher cost and on terms less favorable to us thanthose previously available to us, as we continue to experience the effects ofthe deterioration in our financial performance and asset quality.

 

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Our currentlong-term senior debt ratings are as follows:

 
|                             |   | **Standard &  Poors(1)** |   | **Moody’s  Investors Service(2)** |   | **Fitch IBCA  Duff & Phelps(2)** |   |
|----------------------------------|--------|------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                             |   |                         |   |                                   |   |                                 |   |
| Providian Financial  Corporation |   | B                            |   | B2                                     |   | B+                                   |   |
|                             |   |                         |   |                                   |   |                                 |   |
| Providian National Bank          |   | BB-                          |   | Ba3                                    |   | BB-                                  |   |

 

____________________

(1)    Stableoutlook.

(2)    Negativeratings outlook.

 

During the firstquarter of 2002, our liquidity position (cash and cash equivalents, federalfunds sold and securities purchased under resale agreements,and available-for-sale investment securities) increased by approximately$2.25 billion to end the first quarter at $5.63 billion.  This increase was primarily due to theproceeds from the sale of our interests in the Providian Master Trust andconsumer loan repayments, offset by a reduction in securitization fundingrelated to the sale of the Providian Master Trust, normal operating cash needsand deposit maturities in excess of new deposits

 

As part of ourcommitment to meet our goals under the Capital Plan, which we described in our2001 Annual Shareholders Report, management continues to implement measures tomaintain strong levels of liquidity.  Asof April 30, 2002, our liquidity position was approximately $6 billion.  This balance includes proceeds of $600million from the sale of our United Kingdom operations. We are also working tocomplete the sale of a portfolio of higher risk credit card receivablesprojected to close during the second quarter of 2002.

 

In addition, underthe capital assurances and liquidity maintenance agreements we entered intowith our banking subsidiaries, which we also described in our 2001 AnnualShareholders Report, we have agreed to provide liquidity support to them.  Our agreements with the banks to providecapital and liquidity support exempt certain near-term cash obligations ofthe parent, including current interest obligations on our 3.25% convertiblesenior notes due August 15, 2005 and current payments on the ProvidianCapital I 9.525% capital securities. In addition, certain accrued deferred compensation, miscellaneousworking capital needs not to exceed $25 million, and severance payments aregenerally exempt from our obligations under the agreements.

 

*Funding Sources and Maturities*.  We seek to fund our assets by diversifyingour distribution channels and offering a variety of funding products.  Among the products we have used are directand brokered deposits, money market accounts, asset-backed securities, termfederal funds, and debt issuances. Distribution channels include direct phone and mail, brokerage andinvestment banking relationships, and the Internet.

 

We offer maturityterms for our funding products that range up to 30 years.  Actual maturity distributions depend onseveral factors, including expected asset duration, investor demand, relativecosts, shape of the yield curve, and anticipated issuances in thesecuritization and capital markets.  Weseek to maintain a balanced distribution of maturities and avoid undueconcentration in any one period.  Wemonitor existing funding maturities and loan growth projections to manageliquidity levels to support maturities.

 

Given thedowngrades in our credit ratings and deterioration in our financial performanceand asset quality, our ability to attract deposits, borrow funds from othersources, and issue 

 

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additionalasset-backed securities has been adversely impacted and our cost of funds hasrisen relative to our historical standards.

 

For the remainderof the year (May 1, 2002 through December 31, 2002), we have fundingrequirements for maturing deposits of $3.0 billion, maturing securitizations of$2.4 billion, and no debt maturities. We anticipate that we will meet these funding requirements, along withany incremental asset growth, with securitization issuances, our liquidityposition, new deposits, and proceeds from strategic asset sales, but we cannotassure you that this funding strategy will be successful.

 

*Deposits*.  Deposits decreased to $14.43 billion as ofMarch 31, 2002 from $15.32 billion as of December 31, 2001.  The decrease in deposits during the firstquarter of 2002 is primarily due to maturities of dealer deposits that were notreplaced.  Our ability to attract retaildeposits through the broker channel diminished after our third quarter 2001earnings announcement. While still providing a substantial source of funding,we anticipate that during the remainder of 2002, and consistent with theCapital Plan, deposit issuances will be at lower levels than those we haveexperienced historically. We suspended offering new brokered deposits duringJanuary 2002. During the remainder of 2002, we expect to raise modest amountsof new brokered deposits while continuing to reduce our overall reliance ondeposit funding.

 

The followingtable summarizes the contractual maturities of our deposits: 

 
|                                         |   | **March 31,  2002**   |      | **December  31, 2001** |   |
|----------------------------------------------|--------|-----------------------|-----------|------------------------|--------|
| **(dollars  in thousands)**                  |   | **Direct   Deposits** |      | **Other  Deposits**    |   | **Total  Deposits** |   | **Direct  Deposits** |   | **Other  Deposits** |   | **Total  Deposits** |   |
|                                         |   |                  |      |                   |   |   |   |   |   |   |   |   |   |
| Three months or  less                        |   | $                     | 709,496   |                   | $      | 307,676 |   | $ | 1,017,172 |   | $ | 672,361 |   | $ | 961,046 |   | $ | 1,633,407 |   |
| Over three  months through twelve months (1) |   | 1,812,873             |      | 1,580,155              |   |   | 3,393,028 |   | 1,935,051 |   | 1,281,858 |   |   | 3,216,909 |   |
| Over one year  through five years            |   | 2,336,741             |      | 4,887,825              |   |   | 7,224,566 |   | 2,265,691 |   | 5,399,250 |   |   | 7,664,941 |   |
| Over five years                              |   | 21,887                |      | 1,646,061              |   |   | 1,667,948 |   | 29,433 |   | 1,687,232 |   |   | 1,716,665 |   |
| Deposits without  contractual maturity       |   | 1,122,559             |      | —                 |   |   | 1,122,559 |   | 1,086,204 |   | 39 |   |   | 1,086,243 |   |
| Total Deposits                               |   | $                     | 6,003,556 |                   | $      | 8,421,717 |   | $ | 14,425,273 |   | $ | 5,988,740 |   | $ | 9,329,425 |   | $ | 15,318,165 |   |
|                                              |        |                       |           |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

____________________

(1)                                  Maturities of deposits over three months throughtwelve months by quarter is as follows: third quarter 2002: $1.11 billion; fourthquarter 2002: $1.12 billion; first quarter 2003: $1.16 billion.

 

As of December 31,2001, capital ratios for PNB were below the “well capitalized” levels asreported on its Call Report.  As aresult PNB was only “adequately capitalized” and was therefore subject toceilings on rates paid for deposits (limited to not more than 75 basis pointshigher than the prevailing rate in its market) and was restricted from takingbrokered deposits without a waiver from the FDIC.  PNB applied for and received the required waiver.  As of December 31, 2001, capital ratios forPB were above the “well capitalized” levels on a Call Report basis and PB wastherefore not subject to such restrictions regarding deposit rates and brokereddeposits.  See “—Our Capital Plan andOther Regulatory Matters,” “—Supervision and Regulation Generally—FederalDeposit Insurance Corporation Improvement Act of 1991" in our 2001 AnnualShareholders Report and “— Capital Adequacy” herein.  Restrictions on deposit rates may reduce the ability of ourbanking subsidiaries to raise deposits.

 

As of March 31,2002, capital ratios for both PNB and PB were both above the “well capitalized”levels on a Call Report basis. Accordingly, the restrictions on deposit taking activities describedabove do not currently apply to PNB and will not apply to either PNB or PB solong as they remain “well capitalized” on a Call Report basis.

 

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*Securitizations*.  We securitize loans in order to diversifyfunding sources and to obtain efficient all-in cost of funds, including thecost of capital.  Our securitizationshave a widely dispersed range of maturity terms.  During the first quarter of 2002, we issued no newsecuritizations.

 

Securitizationsmay utilize commercial paper based conduit and other variable fundingfacilities that allow the funded amount to fluctuate. Conduit and othervariable funding facilities are generally renewable annually.  Securitized funding under these facilitiestotaled $3.49 billion and $3.75 billion as of March 31, 2002 and2001.  Given the deterioration in ourcredit profile, asset quality and liquidity position since our third quarter2001 earnings statement, there is continuing uncertainty about our ability torenew these facilities.  The followingtable presents the amounts of these conduit and variable funding facilitiesexpected to amortize or otherwise become payable, based on current projectionsand the amounts outstanding as of March 31, 2002, during the following quartersif the facilities are not renewed:

 

| **During the Quarter Ending** |   | **Amount  (dollars in millions)** |   |
|-------------------------------|--------|-----------------------------------|--------|
| June 30, 2002                 |   | $                                 | 50     |   |
| September  30, 2002           |   | 1,132                             |   |
| December  31, 2002            |   | 738                               |   |
| March  31, 2003               |   | 1,374                             |   |
|                               |        |                                   |        |  |

 

In February 2002,we terminated a conduit securitization transaction which funded approximately$410 million of receivables arising from a portfolio of accounts acquired in1998.  Substantially all of thereceivables released to us in connection with the termination of that securitizationtransaction are expected to be included in the sale of higher risk credit cardreceivables projected to close during the second quarter of 2002.

 

Termsecuritizations are issued with expected maturities of one year or more.  Our term securitizations are expected toamortize over the periods indicated below, based on current projections and theamounts outstanding as of March 31, 2002:

 

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|     |   | **Amount Amortizing**     |      |
|----------|--------|---------------------------|-----------|
| **Year** |   | **(dollars in millions)** |      |
| 2002(1)  |   | $                         |  500 |   |
| 2003     |   | 711                       |      |
| 2004     |   | 1,958                     |      |
| 2005     |   | 1,928                     |      |
| 2006     |   | 906                       |      |
| 2007     |   | 553                       |      |
| 2008     |   | 220                       |      |
|          |        |                           |           |  |

 

____________________

| (1) | Amount amortizing during: second quarter 2002: $0;  third quarter 2002: $321; fourth quarter 2002: $179; first quarter 2003: $0. |
|-----|----------------------------------------------------------------------------------------------------------------------------------|

 

Given thedeterioration in our financial performance and liquidity position since ourthird quarter 2001 earnings announcement, there has been increased pressure onour ability to attract deposits, borrow funds from other sources, and issueadditional asset-backed securities as existing funding amortizes.

 

*Unsecured Funding Facilities*.  The following table shows our unsecuredfunding facilities and corresponding outstanding amounts as of March 31, 2002:

 
|                                           |   | **March 31, 2002**         |   |
|------------------------------------------------|--------|----------------------------|--------|
| **(in thousands)**                             |   | **Effective/  Issue Date** |   | **Facility  Amount(1)** |   | **Outstanding** |   | **Final  Maturity** |   |
| Senior  and subordinated bank note program (2) |   | 2/98                       |   | $ | 2,970,000 |   | $ | 202,367 |   | 2/13 |   |
| Providian  Financial shelf registration (3)    |   | 6/98                       |   | 1,197,145 |   | 754,629 |   | Various |   |
| Capital  Securities                            |   | 2/97                       |   | — |   | 104,332 |   | 2/27 |   |
|                                                |        |                            |        |  |  |  |  |  |  |  |  |

_____________________

(1)               Fundingavailability and/or funding costs are subject to market conditions andcontractual provisions.

(2)               Available for newissuances only if debt is rated investment grade.  Facility Amount includes a sub-limit of $500 million forsubordinated bank notes.  Bank notescurrently outstanding under this program are all medium-term senior bank notes.

(3)               Outstandingsecurities issued under the shelf registration consist of two convertible debtofferings with earliest possible required principal payment dates beginning inAugust 2005 and February 2006.

 

The senior andsubordinated bank note program was established by PNB and includes potentialfixed or variable rate debt with maturities ranging from seven days to 15years.  However, this program isavailable only for debt that is rated investment grade at the time of issuanceand is therefore not currently available to us.  There can be no assurance that we will be able to successfullyutilize this program in the future.

 

The principalsource of funds for payment of dividends on our common stock is dividendsreceived from our banking subsidiaries. However, our banking subsidiaries have agreed not to pay any dividendsto us during the term of their regulatory agreements without first obtainingprior regulatory consent.  See “OurCapital Plan and Other Regulatory Matters” in our 2001 Annual ShareholdersReport.  Our banking subsidiaries do notcurrently have any plans to 

 

29

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seeksuch approval.  In addition, our board ofdirectors has suspended for an indefinite period the payment of quarterly cashdividends on our common stock.

 

*Investments*.  We maintain short-term liquidity throughinterest earning deposits with other banks, federal funds sold, money marketmutual funds, securities purchased under resale agreements and similararrangements, and other cash equivalents. We also maintain a portfolio of high-quality investment securities, suchas U.S. government and agency obligations, mortgage-backed securities, andcommercial paper.  Investment securitiesincreased to $1.71 billion as of March 31, 2002 from $1.32 billion as ofDecember 31, 2001.  Federal funds soldand securities purchased under resale agreements or similar arrangementsincreased to $3.54 billion as of March 31, 2002 from $1.61 billion as ofDecember 31, 2001.

 

*Capital Adequacy*

 

Each of ourbanking subsidiaries is subject to capital adequacy guidelines as defined byits primary federal regulator.  Corecapital (Tier 1) consists principally of shareholders’ equity lessgoodwill.  Total risk-based capital(Tier 1 + Tier 2) includes a portion of the reserve for credit losses and othercapital components.  Based on theseclassifications of capital, the capital adequacy regulations establish threecapital adequacy ratios that are used to measure whether a financialinstitution is “well capitalized” or “adequately capitalized,” as set forthbelow:

 

| **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%                |   |

 

See“Our Capital Plan and Other Regulatory Matters” and “Our Capital Plan and OtherRegulatory Matters—Capital Requirements”****in our2001 Annual Shareholders Report.  Asof March 31, 2002, our banking subsidiaries’ capital ratios, as reported ontheir Call Reports, were as follows:

 

Capital Ratios

(Call Report Basis)

 

|              |   | **Providian  National  Bank** |   | **Providian  Bank** |   |
|-------------------|--------|-------------------------------|--------|---------------------|--------|
| **Capital Ratio** |   |                          |   |
| Total  risk-based |   | 12.75                         | %      | 13.52               | %      |
| Tier  1           |   | 11.09                         | %      | 12.04               | %      |
| Leverage          |   | 13.07                         | %      | 6.04                | %      |

 

Pursuant to theCapital Plan, our capital is also evaluated under the Expanded Guidance forSubprime Lending Programs (“Subprime Guidance”).  See “Our Capital Plan and Other Regulatory Matters” and “OurCapital Plan and Other Regulatory Matters—Capital 

 

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Requirements”in our 2001 Annual Shareholders Report. Application of the Subprime Guidance in the Capital Plan results in ahigher overall risk weighting on the loan portfolio as a whole than wouldotherwise be required by the regulations. The resulting capital ratios, after applying the Subprime Guidance, asof March 31, 2002, were as follows:

 

Capital Ratios

(Applying Subprime Guidance)

 

|              |   | **Providian  National  Bank** |   | **Providian  Bank** |   |
|-------------------|--------|-------------------------------|--------|---------------------|--------|
| **Capital Ratio** |   |                          |   |
| Total  risk-based |   | 9.46                          | %      | 8.08                | %      |
| Tier  1           |   | 8.06                          | %      | 6.71                | %      |
| Leverage          |   | 13.07                         | %      | 6.04                | %      |

 

PNB and PB, on acombined basis (and PNB, prior to the planned merger of PNB and PB), committedin the Capital Plan to achieve, by March 31, 2002, a total risk-based capitalratio of at least 8% after applying the Subprime Guidance risk weightings andto achieve, by June 30, 2003, a total risk-based capital ratio of at least 10%after applying the Subprime Guidance risk weightings.  As of March 31, 2002, PNB and PB, individually and on a combinedbasis, had total risk-based capital ratios exceeding 8% after applying theSubprime Guidance risk weightings. Future capital ratios will depend on the level of internally generatedcapital as well as the level of loan growth and changes in loan mix.  Growth in on-balance sheet receivables,combined with the growth in spread accounts relating to our securitizations,may result in the fluctuation of the banks’ total risk-based capital ratios,after applying the Subprime Guidance. However, we expect that the recently completed sale of our interests inthe Providian Master Trust and the completion of other strategic initiativesthat are currently underway, as well as the generation of internal capitalthrough the recognition of net income, will permit our banking subsidiaries, ona combined basis, to achieve a total risk-based capital ratio of at least 10%after applying the Subprime Guidance risk weightings reflected in the CapitalPlan by the required June 30, 2003 date.

 

The capitalrequirements and classifications of our banking subsidiaries are also subjectto qualitative judgments by their regulators with respect to components, riskweightings, and other factors.  Thebanking regulators have the authority to require us to adhere to higher capitalrequirements.  This would necessitateincreasing capital ratios by various means, including asset sales or equityissuances.  In addition, the strategicinitiatives that we have taken, and those that we are in the process of takingor may take in the future, could have an impact on the capital requirements ofour banking subsidiaries.

 

In accordance withthe banking regulators’ risk-based capital standards, risk-based capital mustbe maintained for assets transferred with recourse in an amount no greater thanthe maximum amount of recourse for which a regulated entity is contractuallyliable.  This rule, known as thelow-level recourse rule, applies to transactions accounted for as sales underGAAP in which a bank contractually limits its risk of loss or recourse exposureto less than the full effective minimum risk-based capital requirement for theassets transferred.  Low-level recoursetransactions arise when a bank securitizes assets and uses contractual cashflows, retained 

 

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subordinatedinterests, or other assets as credit enhancements.  Accordingly, our banking subsidiaries are required to holdrisk-based capital equivalent to the maximum recourse exposure on the assetstransferred, not to exceed the amount of risk-based capital that would berequired if the low-level recourse rule did not apply.

 

In November 2001,the federal banking agencies published a final rule to revise the agencies’regulatory capital standards to address the treatment of recourse obligations,residual interests and direct credit substitutes that expose banks to creditrisk (the “residual interest rule”). The residual interest rule adds new standards for the treatment ofresidual interests, including a concentration limit for credit-enhancinginterest-only strips.  This rule isintended to result in more consistent regulatory capital treatment for certaintransactions involving similar risk, and capital requirements that more closelyreflect a banking organization’s relative exposure to credit risk.  The final rule was effective January 1,2002 for any transaction covered under the rule that settles on or after theeffective date.  Banks that entered intotransactions before the effective date may elect early adoption of anyprovision of the final rule or may delay application of the rule to thosetransactions until December 31, 2002. Our banking subsidiaries elected early adoption of the residual interestrule effective January 1, 2002.

 

Specifically, thefinal rule amends the current capital standards by:  providing a more consistent risk-based capital treatment forrecourse obligations and direct credit substitutes; applying aratings-based approach that sets capital requirements for positions insecuritized transactions; deducting from Tier 1 capital the amount ofcredit-enhancing interest-only strips that exceeds 25% of Tier 1 capital(concentration limit); and requiring “dollar-for-dollar” risk based capital forcertain residual interests not deducted from Tier 1 capital (dollar-for-dollarcapital requirement).  As of March 31,2002, PNB’s interest-only strips represented 12.6% of its Tier 1 capital, whichis below the 25% concentration limit, and PB had no interest-only strips.

 

*Asset/Liability Risk Management*

 

Our assets andliabilities consist primarily of investments in interest-earning assets (loansreceivable and investment securities) that are primarily funded byinterest-bearing liabilities (deposits and borrowings).  As a result, our earnings are subject torisk resulting from interest rate fluctuations to the extent that there is adifference between the amount of interest-earning assets and the amount ofinterest-bearing liabilities that mature, reprice, prepay or withdraw in aspecific period.

 

Our receivablesaccrue finance charges at rates that are either fixed or float at a spreadabove the prime rate.  While our fixedrate credit card receivables have no stated maturity or repricing period, wegenerally may adjust the rate charged after providing the required notice tothe customer.  Interest rates on ourliabilities are generally indexed to LIBOR or bear a fixed rate untilmaturity.  This asset/liabilitystructure exposes us to two types of interest rate risk:  (a) repricing risk, which results fromdifferences between the timing of rate changes and the timing of cash flows;and (b) basis risk, which arises from changing spread relationshipsbetween yield curves and indexes.

 

The principalobjective of our asset/liability risk management activities is to monitor andcontrol our exposure to adverse effects resulting from movements of interestrates over time.  We 

 

32

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measureand manage interest rate risk individually for each banking subsidiary and on aconsolidated basis, including both reported and managed assets andliabilities.  To measure exposure tointerest rate changes, we use net interest income (NII) and market value ofportfolio equity (MVPE) simulation analysis.

 

The followingtable presents the estimated effects of positive and negative parallel shiftsin interest rates as calculated at March 31, 2002 using our interest rate riskmodel and takes into consideration our current hedging activity:

 

|                                           |   | **Percentage Change In(1)** |   |
|------------------------------------------------|--------|-----------------------------|--------|
| **Change in Interest Rates (in basis points)** |   | **NII(2)**                  |   | **MVPE(3)** |   |
| +200                                           |   | (1.4                        | )%     | (4.0 | )% |
| Flat                                           |   | 0                           | %      | 0 | % |
| -200                                           |   | 1.1                         | %      | 4.0 | % |

 

____________________

| (1) | The information shown is presented on a consolidated  managed asset/liability basis, giving effect to securitizations and related  funding.                                                                                                                                              |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | This column compares NII over twelve months in a  stable interest rate environment to scenarios in which interest rates rise  and fall by 200 basis points.                                                                                                                              |
| (3) | This column compares MVPE in a stable interest rate  environment to scenarios in which interest rates rise and fall by 200 basis  points.  MVPE is defined as the  present value of expected net cash flows from existing assets, liabilities,  and off-balance sheet transactions. |

 

As part of ourinterest rate risk measurement process, we estimate the repricing sensitivityof our fixed rate credit card loans. The actual repricing sensitivity of these loans depends on how ourcustomers and competitors respond to changes in market interest rates.  In addition, the repricing of certaincategories of assets and liabilities is subject to competitive and otherpressures beyond our control.  As aresult, certain assets and liabilities assumed to mature or otherwise repricewithin a certain period may in fact mature or reprice at different times and atdifferent volumes.  As of March 31,2002, we modeled the repricing maturity of our fixed rate credit card loansbased on an average maturity of 15 months. The table above should be viewed as our estimate of the general effectof broad and sustained interest rate movements on our net income and portfoliovalue, calculated as of March 31, 2002.

 

We generally seekto mitigate earnings volatility associated with interest rate movement bymatching the modeled repricing characteristics of reported and managed assetsand liabilities.  When matching therepricing characteristics of assets and liabilities is not possible or efficient,we generally seek to use derivative financial instruments, including interestrate swap and cap agreements, to reduce interest rate risk.  We do not trade derivatives or usederivatives to speculate on interest rates and we believe our use of such instrumentsis prudent and consistent with industry standards.

 

Foreign currencyexchange rate risk refers to the potential changes in current and futureearnings or capital arising from movements in foreign exchange rates.  Our foreign currency exchange rate riskarises from investments in foreign subsidiaries and branches.  We use foreign exchange forward contracts tohedge foreign currency exchange rate risk. At March 31, 2002, our foreign currency exposure included British poundssterling and Argentine pesos.  OurBritish pound sterling exposure was substantially hedged, while the Argentinepeso exposure increased because hedging vehicles were not available at a costor on terms satisfactory to us.

 

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The followingtable presents the notional amounts of interest rate swap and cap agreements inthe periods indicated:

 

|                               |   | **Three months ended March 31,** |      |
|------------------------------------|--------|----------------------------------|-----------|
| **(dollars in thousands)**         |   | **2002**                         |      | **2001** |   |
|                               |   |                             |      |   |   |
| **Interest  Rate Swap Agreements** |   |                             |      |   |   |
| Beginning  balance                 |   | $                                | 1,293,200 |   | $ | 1,375,476 |   |
| Additions                          |   | —                           |      | 1,017,500 |   |
| Maturities                         |   | 65,000                           |      | 225,000 |   |
| Ending balance                     |   | $                                | 1,228,200 |   | $ | 2,167,976 |   |
|                               |   |                             |      |   |   |
| **Interest  Rate Cap Agreements**  |   |                             |      |   |   |
| Beginning  balance                 |   | $                                | 7,883     |   | $ | 13,625 |   |
| Additions                          |   | —                           |      | — |   |
| Maturities                         |   | 1,869                            |      | 1,895 |   |
| Ending balance                     |   | $                                | 6,014     |   | $ | 11,730 |   |

 

Notional amountsof interest rate swaps outstanding have decreased from the prior year,primarily as the need for hedging requirements declined in conjunction with adecrease in fixed rate loans.  As marketconditions or our asset/liability mix change, we may increase or decrease thenotional amount of interest rate swaps and caps outstanding in order to manageour interest rate risk within prudent levels.

 

We manage creditrisk arising from derivative transactions through an ongoing credit review,approval, and monitoring process. “Credit risk” for these derivative transactions is defined as the riskthat a loss will occur as the result of a derivative counterparty defaulting ona contract when the contract is in a favorable economic position to us.  We may enter into master netting, marketsettlement, or collateralization agreements with derivative counterparties tofurther reduce the credit exposure arising from our hedging transactions.

 

*Cautionary Statement Regarding Forward-LookingInformation*

 

This reportcontains certain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, which are subject to the “safe harbor”created by those sections. Forward-looking statements include, without limitation: expressions ofthe “belief,” “anticipation,” or “expectations” of management; statements as toindustry trends or future results of operations of our company and oursubsidiaries; and other statements that are not historical fact.  Forward-looking statements are based oncertain assumptions by management and are subject to risks and uncertaintiesthat could cause actual results to differ materially from those in theforward-looking statements.  These risksand uncertainties include, but are not limited to, competitive pressures;factors that affect delinquency rates, credit loss rates and charge-off rates;general economic

 

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conditions;consumer loan portfolio growth; changes in the cost and/or availability offunding due to changes in the deposit, credit or securitization markets;changes in the way we are perceived in such markets and/or conditions relatingto existing or future financing commitments; the effect of government policyand regulation, whether of general applicability or specific to us, includingrestrictions and/or limitations relating to our minimum capital requirements,deposit taking abilities, reserving methodologies, dividend policies andpayments, growth, and/or underwriting criteria; changes in accounting rules,policies, practices and/or procedures; product development; legal andregulatory proceedings, including the impact of ongoing litigation; interestrates; acquisitions; one-time charges; extraordinary items; the ability toattract and retain key personnel; the impact of existing, modified, or newstrategic initiatives; and international factors.  These and other risks and uncertainties are described in ourannual report to shareholders included in Exhibit 13 of our Annual Report onForm 10-K for the year ended December 31, 2001 under the heading “RiskFactors,” and are also described in other parts of our 2001 annual report, including“Legal Proceedings” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” Readers are cautioned not to place undue reliance on any forward-lookingstatement, which speaks only as of the date thereof.  We undertake no obligation to update any forward-lookingstatements.

 

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**PARTII. OTHER INFORMATION**

 

**Item 1.  Legal Proceedings.**

** **

Following the Company’s third quarter earningsannouncements in October 2001, a number of lawsuits were filed.  These include Rule 10b-5 securities classactions filed in the District Court for the Northern District of Californiaagainst the Company and certain of its executive officers and/or directors.  These actions allege that the Company andcertain of its officers made false and misleading statements concerning theCompany’s operations and prospects for the second and third quarters of 2001,in violation of federal securities laws. The actions generally define the putative class as persons who acquiredthe Company’s stock between June 6 and October 18, 2001, and they seek damages,interest, costs and attorneys’ fees. The actions have been consolidated, and no responsive pleading has beenfiled.

 

In addition, twoshareholder derivative actions dated December 2001 and January 2002 were filedin California state court in San Francisco. These actions generally seek redress against the members of theCompany’s board of directors and certain executive officers and allege breachof fiduciary duty, gross negligence, breach of contract and violation of stateinsider trading law.  The complaintsseek damages (in the name of the Company and to be awarded to the Company),attorneys’ fees and other relief.  Noresponsive pleading has been filed.

 

Beginning inDecember 2001, several class action complaints were filed in the District Courtfor the Northern District of California against the Company and/or certain ofits executive officers and directors regarding the Company’s 401(k) plan (the“Plan”).  The purported class generallycomprises all persons who have participated in the Plan since as early asJanuary 1, 2000.  The complaints allege,among other things, that the defendants breached their fiduciary duties underthe Employee Retirement Income Security Act by encouraging participants toinvest in the Company’s common stock, and restricting sales of the common stockheld under the Plan, at a time when the common stock was an unsuitable Planinvestment.  The complaints seekcompensatory and punitive damages, attorneys’ fees and other relief.  No responsive pleading has been filed.

 

In other matters,in June 2000 the Company reached settlements with the San Francisco DistrictAttorney, the California Attorney General and the Connecticut Attorney General,and Providian National Bank reached a settlement with the Office of theComptroller of the Currency, regarding alleged unfair and deceptive businesspractices.  Under these settlements, theCompany and certain subsidiaries of the Company, including Providian NationalBank, agreed to make certain changes to their business practices and to payrestitution to customers, which resulted in a charge to earnings in 2000.  As part of the settlements, Providian NationalBank stipulated to the issuance by the Comptroller of a Consent Orderobligating Providian National Bank to make such changes, and the Company andcertain of its subsidiaries stipulated to the entry of a judgment and theissuance of a permanent injunction effecting the terms of the settlement.

 

In December 2000,the Company reached an agreement to settle state and federal lawsuits allegingunfair and deceptive business practices that had been filed against the Companyand certain of its subsidiaries, beginning in May 1999, by current and formercustomers of the Company’s banking subsidiaries.  Under the settlement, the Company and certain of its 

 

36

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subsidiaries,including Providian National Bank, agreed to make payments to customers, whichresulted in a charge to the Company’s 2000 earnings, and agreed to injunctiverelief incorporating the same business practice changes included in theCompany’s settlements with the Comptroller, the San Francisco District Attorneyand the California and Connecticut Attorneys General.  The lawsuits covered by the settlement consist of: a consolidatedputative class action lawsuit (In re Providian Credit Card Litigation) (the“Consolidated Action”) that was filed in August 1999 in California state courtin San Francisco against the Company, Providian National Bank, and certainother subsidiaries of the Company; similar actions filed in other Californiacounties that were transferred to San Francisco County and coordinated with theConsolidated Action; and several putative class actions, containingsubstantially the same allegations as those alleged in the Consolidated Action,that were filed in federal courts (the”Multidistrict Action”) and transferredto the Eastern District of Pennsylvania. The settlement received final state court approval in November 2001, andthe Multidistrict Action was dismissed on March 14, 2002.  Approximately 6,400 class members opted outof participation in the settlement.

 

An additionalclass action, which contains substantially similar claims as those alleged inthe Consolidated Action, is proceeding separately in state court in BullockCounty, Alabama.  A class has beencertified, and the Company has noticed its appeal.  The action includes purported class members who are also members ofthe settlement class in the Consolidated Action.  The Company believes that their claims have been releasedpursuant to the final judgment in the Consolidated Action.  Another class action, previously pending instate court in Cook County, Illinois, and containing substantially similarclaims as those alleged in the Consolidated Action, was dismissed in April2002.

 

In February 2002,the Company reached an agreement to settle a putative class action (In reProvidian Securities Litigation), which is a consolidation of complaints filedin the United States District Court for the Eastern District of New York inJune 1999 and transferred to the Eastern District of Pennsylvania, and arisesout of alleged unfair business practices similar to the ones that were at issuein the Multidistrict Action and the Consolidated Action.  The complaints allege, in general, that theCompany and certain of its executive officers made false and misleadingstatements in violation of the federal securities laws concerning its futureprospects and financial results.  Theputative class, which is alleged to have acquired the Company’s stock betweenJanuary 15, 1999 and May 26, 1999, seeks damages in an unspecified amount, inaddition to pre-judgment and post-judgment interest, costs and attorneys’fees.  The settlement, which waspreliminarily approved by the court, totals $38 million and is expected to befunded by the Company’s insurance carriers.

 

Two shareholderderivative actions were filed in June and July 2000 in California state courtin San Francisco and, in December 2000, a shareholder derivative lawsuit wasfiled in Delaware state court.  Theseactions seek redress against the members of the Company’s board of directorsand certain executive officers and allege breach of fiduciary duty andcorporate waste arising out of alleged unfair business practices similar to theones that were at issue in the Multidistrict Action and the ConsolidatedAction.  These actions have also beenconsolidated, and the defendants have a motion to dismiss pending.

 

In February 2001,the Company was named as a defendant in a consumer class action suit entitledRoss v. VISA, U.S.A., Inc., et al., which was filed in the United StatesDistrict Court for the Eastern District of Pennsylvania against VISA,MasterCard and a number of credit card 

 

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issuingbanks.  The suit alleges that uniformforeign currency surcharges allegedly imposed by the defendants are the resultof a conspiracy in restraint of trade and violate the federal antitrust laws,and that the defendant banks failed to separately identify these surcharges totheir customers on their monthly statements in violation of the federalTruth-in-Lending Act.  A number ofsimilar lawsuits have since been filed in California and New York.  In August 2001, the Federal Judicial Panelon Multidistrict Litigation transferred all of these cases to the SouthernDistrict of New York.  In January 2001,the plaintiffs filed an amended consolidated complaint.  On March 21, 2002, the Company moved todismiss the amended consolidated complaint.

 

In addition, theCompany is commonly subject to various other pending and threatened legalactions arising in the ordinary course of business from the conduct of its activities.

 

Due to theuncertainties of litigation, the Company can give no assurance that it willprevail on all claims made against it in the lawsuits that it currently facesor that additional proceedings will not be brought.  While the Company believes that it has substantive defenses inthe actions described above and intends to defend those actions vigorously, wecannot predict the ultimate outcome or the potential future impact on theCompany of such actions.  The Companydoes not presently expect any of these actions to have a material adverseeffect on its financial condition or results of operations, but can give noassurance that they will not have such an effect.

 

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## **Item2.  Exhibits and Reports on Form 8-K.**

 
| (a)    |   | Exhibits Required by Item 601 of Regulation S-K.                                                                                                                                                                                                                                                                                                                  |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | Exhibit 12.1   Computation of Earnings to Fixed Charges and Ratio of Earnings to  Combined Fixed Charges and Preferred Stock Dividend Requirements.                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| (b)    |   | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed the  following reports on Form 8-K during the first quarter of 2002:                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed a  report on Form 8-K on January 15, 2002 with respect to its managed net credit  loss rate for the month ended December 31, 2001 and its 30+ day managed  delinquency rate as of December 31, 2001.                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed a  report on Form 8-K on January 18, 2002 attaching a press release issued by  its subsidiary Providian National Bank on January 16, 2002 announcing that it  had agreed to sell its interests in the Providian Master Trust to a  subsidiary of J.P.  Morgan Chase &  Co.                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed a  report on Form 8-K on February 11, 2002 attaching a press release issued on  February 7, 2002 announcing certain financial results for the fourth quarter  2001 and the fiscal year ended December 31, 2001 and attaching a transcript  of the investors conference call held on February 7, 2002 in connection with  such announcement.     |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed a  report on Form 8-K on February 15, 2002 with respect to its managed net  credit loss rate for the month ended January 31, 2002 and its 30+ day managed  delinquency rate as of January 31, 2002.                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed a  report on Form 8-K on February 20, 2002 announcing that effective February 5,  2002, through its subsidiary Providian National Bank, it had sold its  interests in the credit card receivables and other assets of the Providian  Master Trust, and in the related credit card accounts, to Chase Manhattan  Bank USA, National Association. |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed a  report on Form 8-K on March 18, 2002 with respect to its managed credit loss  rates for the months ended February 28, 2002 and January 31, 2002 and its 30+  day managed delinquency rates as of February 28, 2002 and January 31, 2002.                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
|   |   | The Company filed a  report on Form 8-K on March 26, 2002 stating that Warren Wilcox, its Vice  Chairman, Planning and Marketing, spoke at the Banc of America Securities  financial services conference held in New York, New York, and attaching as an  exhibit to such report a copy of his presentation.                                                      |

 

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(e)           Ratio of Earnings to Fixed Chargesand Ratio of Earnings to Combined Fixed Charges and Preferred Stock DividendRequirements.

 
|                                                           |   | **Three Months Ended   March 31,** |   | **Year Ended December 31,** |   |
|----------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------|--------|
|                                                           |   | **2002**                           |   | **2001**                    |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                                           |   |                               |   |                        |   |   |   |   |   |   |   |   |   |
| **Earning to Fixed Charges**                                   |   |                               |   |                        |   |   |   |   |   |   |   |   |   |
| Excluding interest on deposits                                 |   | 1.64                               |   | 3.68                        |   | 14.91 |   | 10.05 |   | 10.88 |   | 14.20 |   |
| Including interest on deposits                                 |   | 1.05                               |   | 1.24                        |   | 2.27 |   | 3.03 |   | 2.93 |   | 2.66 |   |
|                                                           |   |                               |   |                        |   |   |   |   |   |   |   |   |   |
| **Earnings to Combined Fixed Charges  and Preferred Stock(1)** |   |                               |   |                        |   |   |   |   |   |   |   |   |   |
| Excluding interest on deposits                                 |   | 1.64                               |   | 3.68                        |   | 14.91 |   | 10.05 |   | 10.88 |   | 13.28 |   |
| Including interest on deposits                                 |   | 1.05                               |   | 1.24                        |   | 2.27 |   | 3.03 |   | 2.93 |   | 2.63 |   |

 

____________________

(1) Preferred stock dividend requirements are adjusted to represent apretax earnings equivalent.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                     |   | Providian Financial  Corporation                                                                                           |
|--------------------------|--------|----------------------------------------------------------------------------------------------------------------------------|
|                     |   | (Registrant)                                                                                                               |
|                     |   |                                                                                                                       |
|                     |   |                                                                                                                       |
|                     |   | /s/ Anthony F. Vuoto                                                                                                       |
| Date:  May 15, 2002 |   | Anthony F. Vuoto  Vice Chairman and  Chief Financial Officer  (Principal Financial Officer and Duly  Authorized Signatory) |
|                     |   |                                                                                                                       |
|                     |   |                                                                                                                       |
|                     |   | /s/ Daniel Sanford                                                                                                         |
| Date: May 15, 2002       |   | Daniel Sanford  Senior Vice President and Controller  (Chief Accounting Officer and Duly  Authorized Signatory)            |

 

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