PROVIDIAN FINANCIAL CORPORATION
2001 ANNUAL REPORT

PROVIDIAN FINANCIAL CORPORATION

2001 ANNUAL REPORT

TABLE OF CONTENTS

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

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

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QUESTIONS AND ANSWERS ABOUT OUR COMPANY
AND ITS FINANCIAL POSITION

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DESCRIPTION OF OUR BUSINESS

General

              Providian Financial Corporation, a Delaware corporation based in San Francisco, California, was incorporated as a subsidiary of Providian Corporation in 1984 under the name First Deposit Corporation. Our name was changed from First Deposit Corporation to Providian Bancorp, Inc. in 1994 and to Providian Financial Corporation in 1997. We conducted our operations as a wholly owned subsidiary of Providian Corporation until June 10, 1997, when all of the then outstanding shares of common stock of Providian Financial Corporation were spun off to the shareholders of Providian Corporation. We are listed on the New York Stock Exchange and the Pacific Exchange under the symbol PVN.

              Through our subsidiaries we issue credit cards and provide revolving credit and deposit products to customers throughout the United States. Our lending and deposit taking activities are conducted primarily through Providian National Bank ("PNB") and Providian Bank ("PB"). Providian Bancorp Services ("PBS") performs a variety of servicing activities in support of PNB, PB and other affiliates. At year-end 2001, we had over $38 billion in total assets under management and over 16 million customers, which included our international operations in the United Kingdom and Argentina. Completed, pending and other expected sales of assets related to our strategic initiatives will, however, reduce total assets under management by approximately $8-12 billion during 2002, and will result in a smaller company that is focused on our core business in the United States.

              On October 18, 2001, we announced a five-point plan designed to address underperformance and asset quality problems, focus our business on market segments with the best expected risk-adjusted returns, reduce expenses, and manage our capital, reserves and liquidity. Since that time, we have taken significant actions to rebuild and focus our business, including:

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Hired Joseph Saunders as our President and Chief Executive Officer. From 1997 until he joined us, Mr. Saunders was Chairman and Chief Executive Officer of Fleet Credit Card Services at FleetBoston Financial Corporation. Prior to that, Mr. Saunders spent 12 years at Household Finance, based in Illinois, where he headed the credit card operations and held various other executive positions;



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Strengthened our executive management team by hiring Warren Wilcox as Vice Chairman, Marketing and Strategic Planning and Susan Gleason as Vice Chairman, Operations and Systems, and promoting Jim Jones to Vice Chairman, Credit and Collections;



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Completed over $2.8 billion of securitization transactions that replaced maturing or amortizing transactions totaling $1.98 billion;



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Completed the sale of our interests in the Providian Master Trust to a subsidiary of JPMorgan Chase;



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Entered into agreements to sell our United Kingdom and Argentina credit card businesses;



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Agreed with our banking subsidiaries' regulators on the Capital Plan, described under "Our Capital Plan and Other Regulatory Matters," which provides a comprehensive plan and strategy for establishing and maintaining a strong capital position at our banking subsidiaries;

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Announced that we were exploring the sale of a portfolio of higher risk credit card receivables totaling approximately $3 billion (the receivables currently under consideration, while still a multi-billion dollar portfolio, may total less than $3 billion);



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Discontinued all new account marketing to the standard market segment, tightened credit line increases across all segments and selectively repriced loans that exhibit increased risk levels;



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Shifted our business focus to seek a balanced mix of new business originated from both the middle and the prime market segments in order to achieve a more stable loan portfolio with more predictable earnings and lower, less volatile credit loss rates;



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Closed our Henderson, Nevada operations facility, eliminating approximately 550 positions, and made additional workforce reductions of approximately 800 positions, which are expected to result in annualized cost savings of approximately $60 million;

Business Strategy And Marketing

              Our primary line of business is our credit card business, which generates consumer loans through Visa and MasterCard credit cards. As of December 31, 2001, we had $32.65 billion of managed loans outstanding, of which $12.97 billion were reported on our financial statements as loans and loans held for sale or securitization ("reported loans"), with the difference between managed and reported loans representing securitized loans. However, we expect completed, pending and other planned sales of assets to reduce managed loans outstanding by $8-12 billion during 2002. Please note that when we refer to "managed" loans or other "managed" data, we are using information that includes securitized loan balances, delinquencies and credit losses related to those loans, and related finance charge and fee income, even though those balances, delinquencies, losses, charges and income are not on our financial statements as a result of the way in which we treat securitizations under accounting principles generally accepted in the United States ("GAAP"). We believe that these numbers help facilitate the analysis of our business, but they are not GAAP compliant. For more information regarding managed financial information, please see "—Management's Discussion and Analysis of Financial Condition and Results of Operations—Introduction and Recent Developments—Managed Financial Information."

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

              We previously included the standard segment in our strategic market focus because we believed that it offered substantial profit potential due to the higher rates and fees paid by customers within that segment. However, the standard segment also experienced the highest rates of default and credit losses, particularly in the face of general economic weakness. As a result, we have suspended all new account marketing to customers in the standard market segment. We also included the platinum market segment in our historic marketing focus. Customers within that segment were generally of higher credit quality than our standard and middle market segment customers, and loans originated within that segment experienced lower levels of delinquencies and credit losses.

              Refining our Focus.     As a result of asset quality problems in the standard market segment and the highest risk portions of the middle market segment, we have shifted our business strategy by

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reallocating our marketing efforts away from customers in those segments towards higher credit quality customers, including those in the prime market segment and all but the highest risk segments of the middle market.

              Our new management team brings with it substantial expertise and experience in serving the prime market segment. We plan to leverage this experience and expertise by targeting creditworthy prime customers who may be seeking credit cards with better terms or more attractive borrowing alternatives. These customers typically carry a number of cards and often have access to other loan products, but are seeking lower interest rates, higher credit lines, specific value-added enhancements, or some combination of these features. We will seek to attract prime customers with balance transfer promotions and risk-based pricing, and plan to use active ongoing customer management programs to enhance customer retention and card use. While this market segment is similar in composition to our old platinum market segment, our marketing approach will be more comprehensive than in the past, and will include more attractive products, pricing, and other features, as well as enhanced targeting.

              We will also continue to target creditworthy middle market segment consumers, who are often underserved by large, prime-oriented credit card issuers. In the middle market segment, we will focus on our historical competencies: specialized targeting and underwriting, risk based pricing, prudent and proactive credit line management, and strong collections. Furthermore, as middle market segment customers build their credit, we will be better able to accommodate their upward migration into the prime segment.

Portfolio Risk Management

              One of our core strengths has been, and we expect will continue to be, our use of proprietary targeting and credit scoring models to seek to identify profitable credit card customers across a broad spectrum of potential customers. These models have been effective in identifying the most creditworthy prospects within various market segments. We previously concluded that higher profitability existed in the higher risk market segments, due to lower levels of competition and our ability to adjust pricing upward to compensate for the higher credit risk inherent in these customers. We sought business from these higher risk customers by offering and extending credit line increases. However, as the economic environment deteriorated, the greater volatility of these higher risk segments resulted in high default and credit loss rates, and contributed significantly to our recent earnings problems.

              As a result of our recent experience, we are making the following changes to our portfolio and risk management strategies:

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We have adopted a strategy focused on producing better products, superior customer targeting, dynamic risk-based pricing and active customer management that we anticipate will improve the risk characteristics of our managed loan portfolio;



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We will continue to use internally generated risk technology and scoring models, but we will broaden our analytics to include widely accepted metrics devised by Fair Isaacs & Co. (FICO) and will also utilize other commercially available technologies and software where appropriate;



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We have discontinued all new account marketing to the standard market segment;



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We have tightened credit line increases in all segments, including increasing the period of time before customers are eligible for line increases;

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We are reducing our reliance on fee-based line increases because our experience has shown that these line increase offers tended to attract a disproportionate number of higher risk customers; and



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We are selectively repricing loans, increasing rates on accounts that have exhibited increased risk levels, and decreasing rates on accounts that are overpriced compared to competitive alternatives.

The Credit Process

              In general, the credit process for credit cards offered through direct mail and telemarketing channels generally begins with a "prescreening" review to identify consumers who are likely to be interested in and eligible for an account. Customers who respond are reviewed according to our credit and underwriting criteria. We establish pricing and credit limits based on the customer's credit profile and loan feature preferences and on our profitability and risk guidelines. After an account is opened, we monitor the customer's risk profile regularly and may adjust product features and/or pricing as the relationship evolves, in order to strengthen profitability and reduce loss exposure over time. In cases where the customer fails to comply with the account agreement, we may increase the interest rate. For higher risk customers, we may also reduce the credit line or close the account. We charge late fees, returned check fees and overlimit fees, and may charge other fees when appropriate, in accordance with the terms of the account agreement. Our account agreements reserve the right to change or terminate at any time any terms, conditions, services or features of the account (including increasing or decreasing finance charge rates, other fees and charges, or minimum payment requirements).

Collections

              Our collections methodologies use risk assessment and segmentation to determine when to contact a customer whose account balance has become past due, with an emphasis on early intervention. Arrangements may be made with customers to extend or change payment schedules. Collections activities commence when warranted under the account agreement and may continue after an account is charged off. For a discussion of our charge-off policy, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Asset Quality."

              Given the increases in loss rates during 2001, we are also making significant efforts to enhance our collections platform. These efforts include optimizing the number of accounts per collector, for both early stage and late stage delinquencies, as well as reducing the level of outsourcing for late stage delinquent accounts. We have also optimized our auto dialer strategies in an effort to contact more customers and increase the overall dollars collected. We have refined our collections models by segmenting the early stage work and identifying the highest risk segments earlier in the delinquency cycle. When warranted, we apply a liquidation strategy by demanding full repayment of the total outstanding balance on an account rather than just the delinquent amount. We supplement our recovery efforts by selling charged-off assets as appropriate. We believe that these enhancements to our collections strategies will result in more effective collections.

Customer Satisfaction Program.

              In May 1999, we began an effort to become an industry leader in customer satisfaction. Toward that end, we developed a program that was designed to ensure clarity in product promotion, provide prompt responses to customer inquires, and increase customer satisfaction. The program includes regular independent research by Barry Leeds & Associates. Since initiating our customer satisfaction program, we have made changes in the areas of customer outreach, complaint handling, and direct mail

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practices, and on our website. Our customer satisfaction program was recognized in May 2001, when we received the Rochester Institute of Technology/USA TODAY Quality Cup for 2001, winning in the service category.

Funding And Liquidity

              Ensuring appropriate liquidity is, and will continue to be, at the forefront of our business strategy. Meeting this objective requires focusing on three principal areas:

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Pursuing new securitizations;



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Maintaining access to deposit funding (at reduced levels); and



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Maintaining an appropriate level of cash, cash equivalents and other investments that may be readily converted to cash (we refer to this as our liquidity portfolio) to protect us during any temporary disruptions in liquidity.

              Securitizations are an integral part of our funding strategy and those of our industry competitors. Through securitizations, we have been able to obtain access to funding even though the deterioration of our financial performance and asset quality, and downgrades by credit rating agencies generally, have made our access to funding more difficult and more expensive. During December 2001, we completed securitization transactions totaling $2.83 billion that replaced maturing or amortizing transactions totaling $1.98 billion.

              In addition to securitizations, we have historically utilized deposit funding as one of our primary funding sources. We have typically utilized both dealer and direct certificates of deposit. With the sale of a portion of our portfolio and the discontinuation of new account marketing to the standard market segment, and in keeping with our commitments under the Capital Plan, we expect to reduce our reliance on deposit funding. Nonetheless, we intend to continue to issue both dealer and direct certificates of deposit, as well as money market deposit accounts, subject to the Capital Plan, which includes a planned reduction in insured deposit balances from just over $15 billion as of December 31, 2001 to just over $12 billion as of December 31, 2002. Because PNB was only "adequately capitalized" on a Call Report basis as of December 31, 2001, it was required to obtain a waiver from its banking regulator in order to accept brokered deposits. PNB received the required waiver in January 2002. The waiver allows PNB to continue to accept and renew brokered deposits, provided that it does not increase the level of brokered deposits above the amounts outstanding on January 30, 2002 or use the waiver to increase total deposits above their levels on that date. In addition, as long as PNB remains only "adequately capitalized" on a Call Report basis, it will be restricted from paying interest on deposits at a rate that exceeds the prevailing rate in its market by more than 75 basis points. See "—Our Capital Plan and Other Regulatory Matters," "—Supervision and Regulation Generally—Federal Deposit Insurance Corporation Improvement Act of 1991."

              We continue to maintain a substantial liquidity portfolio, which consists of cash and cash equivalents, federal funds sold and securities purchased under resale agreements, and available-for-sale investment securities. During the periods of volatility that we experienced in the second half of 2001, our liquidity portfolio fell from $5.36 billion on September 30, 2001 to $3.38 billion on December 31, 2001. As of February 28, 2002, our liquidity portfolio was $5.13 billion, which reflected cash proceeds from the sale of our interests in the Providian Master Trust.

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Competition

              We compete against the full spectrum of credit card issuers, including issuers whose core business is credit cards, issuers who are subsidiaries of larger diversified financial services companies, and issuers who are regional and local banks. We expect to face more competition as we focus our marketing efforts on the lower risk portions of the middle market segment and on the prime segment.

Geographic Diversity

              The Company has no significant regional domestic or foreign concentrations of credit risk. Upon completion of the sale of our United Kingdom and Argentina operations, substantially all of our loans will be to customers in the United States.

Employees

              As of December 31, 2001, we had 12,808 employees and a total workforce, including temporaries and contract employees, of 12,870.

Other Products And Services

              In addition to our core credit card business, our E-commerce operations include certificates of deposit, money market accounts, and credit cards, and GetSmart.com, an online marketplace designed to match individual consumers seeking a specific product—such as a credit card, home loan or auto loan—with lenders offering those products. Our First Select business purchases and seeks to collect charged-off credit card accounts. We intend to de-emphasize these operations and may sell or wind them down in connection with our strategic initiatives.

Organizational Structure

              We operate principally through the following wholly owned subsidiaries:

              Providian National Bank. Headquartered in Tilton, New Hampshire, PNB is a national banking association organized under the laws of the United States and is a member of the Federal Deposit Insurance Corporation (the "FDIC"). PNB was originally organized as a state bank in 1853 and converted to a national bank charter in 1865.

              Providian Bank. Headquartered in Salt Lake City, Utah, PB is an industrial loan corporation organized under the laws of Utah and is a member of the FDIC. We expect to merge PB into PNB during the second quarter of 2002, subject to regulatory approval.

              Providian Bancorp Services. Headquartered in San Francisco, California, PBS provides legal and human resources support, accounting and finance services, data processing, loan and deposit processing, customer service, collections, and related services for our affiliates on a cost reimbursement basis. Pursuant to the Capital Plan, we plan to contribute the stock or assets of PBS to PNB.

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OUR CAPITAL PLAN AND OTHER REGULATORY MATTERS

              Following the deterioration in our delinquency and credit loss experience announced last fall, we and our banking subsidiaries entered into certain regulatory agreements. In addition, our banking subsidiaries jointly submitted to their regulators a three-year capital plan, which was subsequently accepted by their regulators, that provides goals and strategies with respect to our banking subsidiaries' capital and liquidity positions (the "Capital Plan"). We and our banking subsidiaries are also subject to extensive banking-related supervision and regulation, as well as to numerous federal and state laws relating to consumer protection and privacy matters.

Our Regulatory Agreements

              On November 21, 2001, our banking subsidiaries entered into agreements with their regulators. Under those agreements, the boards of directors of PNB and PB each created a compliance committee responsible for ensuring, monitoring and coordinating the bank's compliance with and implementation of the agreements. Under the agreements, our banking subsidiaries agreed, among other things, that they would:

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not declare or pay dividends, and not make any capital distributions, without obtaining the prior consent of their regulators;



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develop growth restriction plans providing that they will cease accepting new accounts within the standard market segment, limit credit line increases within the standard market segment, generally impose appropriate limitations on new accounts and credit line increases in their other market segments, and increase total assets by no more than 2.5% in any fiscal quarter until their capital plans were accepted by the regulators;



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review their allowances for credit losses for loans on their books and ensure that the banks maintain allowances consistent with regulatory requirements; and



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prepare and submit the Capital Plan discussed below and enter into the capital assurances and liquidity maintenance agreements discussed below.

              Under the capital assurances and liquidity maintenance agreements that we entered into with each of our banking subsidiaries, we have agreed to provide certain capital and liquidity support. In particular, with respect to capital support, we have agreed to provide such capital to our banking subsidiaries as may be necessary from time to time to ensure that they achieve and maintain the capital ratios set forth in the Capital Plan and described in more detail below under "—Our Capital Plan." Our obligation under the agreements to provide capital and liquidity to our banking subsidiaries is, however, subject to our ability to retain funds to meet certain near-term cash obligations. Our obligations under the agreements will continue in effect unless terminated by mutual agreement between us and our banking subsidiaries, with our banking subsidiaries reserving the right to seek prior regulatory consent before terminating the agreements.

Our Capital Plan

              The Capital Plan provides a comprehensive strategy for maintaining a strong capital position at our banking subsidiaries. The business and operational strategies reflected in the Capital Plan include a focus on maintaining strong levels of liquidity while reducing reliance on insured deposits as a source of funding, maintaining strong credit loss reserves, improving the overall risk profile of our loan portfolio, maintaining an appropriate and measured level of growth, reducing overhead and related

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operating expenses, and achieving a more stable level of long term profitability. This strategy builds upon our pre-existing strategic initiatives, including the refocusing of our business on the middle market and prime market segments.

              Under the Capital Plan, our banking subsidiaries have committed to maintain "well capitalized" status as shown in their Call Reports beginning as of March 31, 2002 and to maintain "adequately capitalized" status on a Call Report basis until that date. In addition, PNB and PB, on a combined basis (and PNB, prior to a merger of PNB and PB), have committed to achieve, by March 31, 2002, a total risk-based capital ratio of at least 8% after applying increased risk weightings consistent with the Expanded Guidance for Subprime Lending Programs ("Subprime Guidance") issued by the federal banking regulators in 2001. Based on current information, we expect PNB and PB to achieve their risk-based capital goals for March 31, 2002 under the Capital Plan, but we cannot assure you that they will do so. PNB and PB, on a combined basis, have further committed to achieve by June 30, 2003 a total risk-based capital ratio of at least 10% after applying the Subprime Guidance risk weightings.

              The Subprime Guidance calls for risk weightings for the purpose of computing capital ratios that exceed those otherwise required by current regulations to be applied to certain loans that fall within the "subprime" category as defined in the Subprime Guidance. Under the Subprime Guidance, these risk weightings are generally expected to fall within a range of 150% to 300% (for example, at a 300% risk weighting, a bank would have to hold three times the amount of capital that it would otherwise be required to hold against those loans). The Capital Plan utilizes a methodology for determining risk weightings that is intended to ensure that capital is maintained in an amount sufficient to reflect the risks associated with subprime loans. Under this methodology, our banking subsidiaries have segmented their standard and middle market loan portfolios into several categories differentiated by the banks' internal credit scores and historical and projected dollar charge-off rates and have applied various risk weightings to these segments. These risk weightings will be reviewed on a periodic basis and updated as necessary to take into consideration changes and expected changes in loan performance.

              Future capital ratios will depend on the level of internally generated capital 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 banks' total risk-based capital ratios, after applying the Subprime Guidance, falling below the 10% level in some future quarters. However, we expect that the recently completed sale of our interests in the Providian Master Trust and the completion of other strategic initiatives that are currently underway, as well as the generation of internal capital through the recognition of net income, will permit our banking subsidiaries, on a combined basis, to achieve a total risk based capital ratio of at least 10% after applying the Subprime Guidance risk weightings reflected in the Capital Plan before the required June 30, 2003 date. The Capital Plan also includes a number of contingency actions (including additional asset sales and equity initiatives) that would be pursued if necessary to meet the capital requirements established under the Plan.

              The Capital Plan identifies a number of strategies designed to meet the goals of the Plan, including:

              Balance Sheet and Liquidity Management.     We are committed to maintaining strong liquidity positions at our banking subsidiaries and reducing their reliance on insured deposit funding. In particular, we have been working aggressively, and will continue to work aggressively, to establish new securitization facilities. During December 2001, we completed securitization transactions totaling $2.83 billion that replaced maturing or amortizing transactions totaling $1.98 billion. We also intend to

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use a significant portion of the cash generated from our asset sales to reduce aggregate levels of deposit funding in a manner consistent with overall funding needs, while building and maintaining a strong liquidity position. As discussed in other parts of this Annual Report, we are continuing to explore the possible sale of a multi-billion dollar portfolio of higher risk credit card receivables as contemplated in our Capital Plan as a means of enhancing our liquidity position and reducing our reliance on insured deposits.

              Refocusing New Business.     We are committed to pursuing an account acquisition strategy appropriate to the current business environment. Our strategy is aimed at achieving a balanced mix of new loans originated from both the middle and prime market segments in order to achieve a more stable loan portfolio with more predictable earnings and lower, less volatile credit loss rates. Consistent with this focus and the requirements of the regulatory agreements, we have curtailed lending to higher risk borrowers, including suspension of account originations in the standard market segment, accelerated credit line decrease programs and cut back on credit line increase programs that carried higher risk.

              Capital Contributions and Related Matters.     Prior to submitting our Capital Plan, we contributed cash of $260 million to increase the regulatory capital of our banking subsidiaries. We also have committed to contributing either the stock or assets of PBS, which performs a variety of servicing activities (such as human resources, legal, accounting, data processing, customer service and collections) for us and our banking subsidiaries. This contribution will place all of the assets and property rights necessary to the ongoing operation of the banks into a bank operating subsidiary.

              Operational Matters.     After discussions with our regulators, we increased our total allowance for credit losses as of December 31, 2001 to $1.93 billion, or 16.76% of total on balance sheet loans, and increased our finance charge and fee valuation allowances to an aggregate amount of $505 million as of that date. For more information regarding our accounting policies, see "Overview of Significant Accounting Policies."

              In furtherance of these goals under the Capital Plan and consistent with our five-point plan, we have taken or are in the process of taking a number of actions, including:

              Sale of Our Interests in the Providian Master Trust to a Subsidiary of JPMorgan Chase.     This sale, completed on February 5, 2002, generated an after-tax gain of over $300 million after adjustments relating to loans held for sale, on cash proceeds of over $2.8 billion, and improved PNB's capital ratios.

              Sale of Our International Operations.     PNB has entered into an agreement to sell its United Kingdom business to a division of Barclays Bank PLC. This sale is expected to generate over $500 million in liquidity. We have also entered into an agreement to sell our Argentina operations to a local investor group in Argentina in a transaction that is expected to result in a modest gain, subject to currency fluctuations, after taking into consideration certain accounting charges discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Earnings Summary."

              Sale of Certain Higher Risk Receivables.     We announced in November 2001 our exploration of alternatives for the sale of a multi-billion dollar portfolio of higher risk credit card receivables. Most of these receivables were originated through marketing programs that have since been discontinued.

              Augmenting our Management Team.     Joseph Saunders joined us as President and Chief Executive Officer in November 2001. Mr. Saunders has more than 25 years of senior management experience in the retail financial services industry, and served most recently as the head of FleetBoston

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Financial Corporation's credit card operations. We also added two highly experienced financial services executives in Susan Gleason (who joined as Vice Chairman, Operations and Systems) and Warren Wilcox (who joined as Vice Chairman, Marketing and Strategic Planning), and we named Jim Jones, formerly the president of our international operations, as Vice Chairman, Credit and Collections. We have also retained an executive search firm to assist us in identifying and recruiting a new chief financial officer.

              The Merger of Our Bank Subsidiaries.     On February 20, 2002, PB and PNB submitted to the Office of the Comptroller of the Currency ("Comptroller") an application for permission to merge PB with and into PNB. We expect the merger of PNB and PB, together with our contribution of PBS, to enhance operational efficiencies.

              Expense Reduction Efforts.     We closed our Henderson, Nevada facility in November 2001, eliminating approximately 550 positions, and we eliminated approximately 800 additional positions throughout our company in early January 2002. The facility closure and workforce reductions resulted in charges of $13 million in the fourth quarter of 2001 and $12.7 million in the first two months of 2002. We expect this aggregate 11% reduction in our work force to result in annualized cost savings of approximately $60 million.

              Suspension of Dividend Payments.     In November 2001 we announced that our board of directors had indefinitely suspended the payment of quarterly cash dividends on our common stock. Our banking subsidiaries have also suspended dividend payments to us pursuant to their regulatory agreements discussed above.

              We are strongly committed to the success of the Capital Plan, and we intend to take appropriate measures to ensure compliance with the commitments, strategies, restrictions and limitations contained in the Capital Plan. We believe that the strategies reflected in the Capital Plan will be significant in improving our financial position and rebuilding shareholder value.

Supervision and Regulation Generally

              Holding Company Status.     We are the holding company of PNB, which is a national banking association, and PB. However, we are not required to register as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Before 1987, PNB was a so-called "nonbank bank"; that is, it was not a "bank" under the BHCA because it did not both accept demand deposits and make commercial loans. The Competitive Equality Banking Act of 1987 ("CEBA") revised the definition of "bank" to include generally all FDIC-insured institutions. However, CEBA grandfathered the rights of companies that owned "nonbank banks" on March 5, 1987, allowing them to retain ownership of such nonbank banks without registering as a bank holding company, subject to certain restrictions. PB is not a "bank" as defined in the BHCA because it qualifies for an exemption under CEBA as an industrial loan corporation organized under the laws of Utah and acquired by us on or before August 10, 1987.

              The restrictions on CEBA-grandfathered banks were liberalized by the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"). The GLB Act, which became law on November 12, 1999, repealed the Glass-Steagall Act of 1933, which separated commercial and investment banking, and eliminated the BHCA's prohibition on insurance underwriting by bank holding companies. Under the GLB Act, PNB is permitted to engage in new activities, which it was not permitted to do under CEBA, so long as it does not both accept demand deposits and make commercial loans. The GLB Act also eased CEBA restrictions on PNB's ability to cross-market its products and services with the products and services of its affiliates. In addition, the GLB Act increased our ability to acquire the assets of additional insured

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depository institutions, effectively eliminating the CEBA restriction that prevented us from acquiring more than 5% of the assets of another insured depository institution. Our ability to take advantage of these opportunities is significantly limited by the written agreements between our banking subsidiaries and their regulators and by the Capital Plan.

              We could be required to register as a bank holding company under the BHCA if PNB ceases to observe the CEBA restrictions, as modified by the GLB Act, or if we or any of our affiliates acquires control of an additional insured depository institution (excluding exempt institutions such as credit card banks). If we were required to register as a bank holding company, we would be subject to the restrictions set forth in the BHCA. These restrictions, if they were to apply to us, would among other things limit our activities to those deemed by the Federal Reserve Board to be closely related to banking and a proper incident thereto, but would not be expected to have a material adverse effect on our business as currently conducted. We could voluntarily elect to become a financial holding company under the GLB Act if we met certain eligibility requirements. If we were to become a financial holding company, we would be permitted to engage in a broader range of activities than would be permitted if we were a bank holding company under the BHCA.

              Investment in Our Company and Our Subsidiary Banks.     Each of PNB and PB is an "insured depository institution" within the meaning of the Change in Bank Control Act of 1978 (the "CIBC Act"). Consequently, an individual or entity must obtain written approval of the applicable primary federal regulator before it may acquire "control" (as defined in the CIBC Act) of us. A change in control of PB would also require approval from the Utah Commissioner of Financial Institutions under the Utah Financial Institutions Act.

              For purposes of the BHCA, an individual or entity may not acquire "control" of us, and a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of our voting shares, without the prior written approval of the Federal Reserve Board. Our CEBA grandfather rights are nontransferable. Thus, if an individual or entity acquired "control" of us or if a bank holding company acquired ownership or control of more than 5% of our voting shares, we would be required to limit our activities and our non-banking subsidiaries' activities to those deemed by the Federal Reserve Board to be closely related to banking and a proper incident thereto. As noted above, however, if we became a financial holding company under the GLB Act, we would be permitted to engage in a more expansive list of activities than are permitted for bank holding companies under the BHCA.

              Dividends and Transfers of Funds.     A primary source of our funds is dividends from our banking subsidiaries. Federal law limits the extent to which PNB or PB can supply funds to us and our affiliates through dividends, loans or otherwise. These limitations include minimum regulatory capital requirements, restrictions concerning the payment of dividends, and Sections 23A and 23B of the Federal Reserve Act of 1913, as amended, governing transactions between a banking organization and its affiliates. In addition, PNB and PB are subject to federal regulatory oversight to assure safety and soundness. In general, federal banking laws prohibit an insured depository institution from making dividend distributions if such distributions are not paid out of available earnings or would cause the institution to fail to meet applicable capital adequacy standards. PB is subject to similar Utah laws governing industrial loan corporations. See "—Capital Requirements." Under the agreements entered into by PNB and PB with their regulators and the terms of the Capital Plan, they may not declare or pay dividends without first receiving the consent of their regulators. See "—Our Regulatory Agreements" and "—Our Capital Plan."

              Capital Requirements.     PNB is subject to risk-based capital guidelines contained in regulations adopted by the Comptroller. PB is subject to risk-based capital guidelines contained in regulations

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adopted by the FDIC. Risk-based capital ratios are determined by allocating assets and specified off-balance sheet commitments to several risk weighted categories. Higher levels of capital are required for the categories defined as representing greater risk.

              Under current banking regulations, institutions generally are required to maintain a minimum total risk-based capital ratio (total Tier 1 and Tier 2 capital to risk-weighted assets) of 8%, and a Tier 1 risk-based capital ratio (Tier 1 capital to risk-weighted assets) of 4%, which correspond to the minimum levels needed to be adequately capitalized. See "—Federal Deposit Insurance Corporation Improvement Act of 1991." These risk-based capital guidelines are subject to change by the applicable regulators and may be increased from time to time, generally or with respect to specific types of assets. The Comptroller and the FDIC have established guidelines prescribing a minimum "leverage ratio" (Tier 1 capital to adjusted total assets as specified in the guidelines) of 3% for institutions that meet certain criteria, including the requirement that they have the highest regulatory rating, and prescribing a minimum leverage ratio of 4% for institutions that do not meet the criteria. Institutions experiencing or anticipating significant growth are expected to maintain capital ratios well above the minimum.

              The Comptroller and the FDIC may, however, set higher capital requirements when an institution's particular circumstances warrant. As described in detail under "—Our Capital Plan," our banking subsidiaries have committed to apply risk weightings consistent with the Subprime Guidance on applicable segments of their loan portfolios and to achieve and maintain capital ratios exceeding the regulatory minimums otherwise applicable. For information regarding our capital ratios as of December 31, 2001, please see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Adequacy."

              In January 2001, the Basel Committee on Bank Supervision proposed revisions to the global risk-based capital rules set forth in the 1988 Basel Accord. The proposal modifies the Basel Committee's June 1999 proposal for a new capital adequacy framework for banks. If implemented, the new rules, among other changes, would replace the current risk weightings for most credit risks with a system based on external and internal ratings, and expose banks that securitize assets to a capital system also based on external and internal ratings. Changes in U.S. capital standards resulting from the Basel Committee's proposal are not expected before 2004. We are unable at this time to assess what impact, if any, this proposal may have on our business.

              Federal Deposit Insurance Corporation Improvement Act of 1991.     The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") expanded the powers of federal bank regulatory authorities to take corrective action with respect to banks that do not meet minimum capital requirements. For these purposes, FDICIA established five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Under regulations adopted by the Comptroller and the FDIC, an institution is generally considered to be "well capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater; "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a Tier 1 risk-based capital ratio of 4% or greater and, generally, a leverage ratio of 4% or greater; and "undercapitalized" if it does not meet any of the "adequately capitalized" tests. An institution is deemed to be "significantly undercapitalized" if it has a total risk-based capital ratio under 3% and "critically undercapitalized" if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%.

              As of December 31, 2001, PNB met the regulatory requirements to be considered an "adequately capitalized" institution and PB met the requirements to be considered a "well capitalized" institution, each on a Call Report basis. An "adequately capitalized" institution is permitted to accept brokered deposits only if it receives a waiver from the FDIC and must limit the interest it pays on

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deposits to a rate that is not more than 75 basis points higher than the prevailing rate in its market for so long as it remains only "adequately capitalized." PNB applied for and received the required waiver, subject to limitations consistent with the Capital Plan. For additional information regarding limitations on PNB's ability to accept brokered deposits, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Funding and Liquidity." Under FDICIA, "undercapitalized" institutions cannot accept brokered deposits, are subject to growth limitations and must submit a capital restoration plan. "Significantly undercapitalized" institutions may be subject to a number of additional requirements and restrictions. "Critically undercapitalized" institutions are subject to appointment of a receiver or conservator and, beginning 60 days after becoming "critically undercapitalized," may not make any payment of principal or interest on their subordinated debt (subject to certain exceptions).

              FDICIA also required federal banking agencies to revise their risk-based capital standards to adequately address concentration of credit risk, interest rate risk and risk arising from non-traditional activities. The Comptroller and the FDIC have identified these risks and an institution's ability to manage them as important factors in assessing overall capital adequacy, but have not quantified them for use in formula-based capital calculations. The Comptroller and the FDIC have further revised their risk-based capital rules to address market risk. Financial institutions with 10% or more of total assets in trading activity or $1 billion or more in trading activity are required to use internal risk measurement models to calculate their capital exposure for market risk and to hold capital in support of that exposure. The level of our banking subsidiaries' trading activity is currently below these thresholds.

              Deposit Insurance Assessments.     Under the FDIC's risk-based insurance assessment system, each insured institution is placed in one of nine risk categories, based on its level of capital, supervisory evaluations, and other relevant information. The assessment rate applicable to PNB and PB depends in part on the risk assessment classification assigned to them by the FDIC and in part on the BIF assessment schedule adopted by the FDIC. BIF-insured institutions such as PNB and PB are currently assessed premiums at an annual rate between 0% and 0.27% of eligible deposits. PNB and PB are also subject to assessments for payment of FICO bonds issued in the 1980s as part of the resolution of the problems of the savings and loan industry. The FICO assessment rate applicable to BIF-insured deposits is 0.0182% per annum for the first quarter of 2002 and may be adjusted quarterly to reflect a change in the assessment base for the BIF.

              Consumer Protection Laws.     The relationship of our lending subsidiaries and their customers is extensively regulated by federal and state consumer protection laws. The most significant laws include the Truth-in-Lending Act of 1968, Equal Credit Opportunity Act of 1974, Fair Credit Reporting Act of 1970, Truth-in-Savings Act of 1991, Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, unfair and deceptive practices acts of the various states in which we do business, Electronic Funds Transfer Act of 1978, the GLB Act, and Federal Trade Commission Act. These statutes, among other things, impose disclosure requirements when a consumer credit loan is advertised, when the account is opened and when monthly billing statements are sent. These statutes also limit the liability of credit card holders for unauthorized use, prohibit discriminatory practices in extending credit, impose limitations on the types of charges that may be assessed and on the use of consumer credit reports, regulate the privacy of consumer information, require disclosure of privacy policies, impose restrictions on the sharing of customer information among companies, and prohibit unfair and deceptive practices. Federal banking regulators have also issued guidance seeking to define and impose limitations on consumer lending practices, particularly at banks determined to have subprime lending programs.

              The National Bank Act of 1864 authorizes national banks to charge customers interest at the rates allowed by the laws of the state in which the bank is located, regardless of an inconsistent law of a state in which the bank's customers are located. PNB relies on this ability to "export" rates to

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facilitate its nationwide credit card business. State institutions such as PB enjoy a similar right under the Depository Institutions Deregulation and Monetary Control Act of 1980. In 1996, the United States Supreme Court held that late payment fees are "interest" and therefore can be "exported" under the National Bank Act, deferring to the Comptroller's interpretation that interest includes late payment fees, insufficient funds fees, overlimit fees and certain other fees and charges associated with consumer credit loans . This decision does not directly apply to state institutions such as PB. Although several courts have upheld the ability of state institutions to export certain types of fees, a number of lawsuits have been filed alleging that the laws of certain states prohibit the imposition of late fees. We are unable to predict the outcome of these cases or the effect of such outcome on PB's ability to impose certain fees.

              Legislative Developments.     The GLB Act repealed the Glass-Steagall Act of 1933, which separated commercial and investment banking, and eliminated the BHCA's prohibition on insurance underwriting by bank holding companies. As a result, the GLB Act permits the affiliation of commercial banks, securities firms and insurance companies. See "—Holding Company Status" and "—Investment in Our Company and Our Subsidiary Banks."

              Regulations adopted by the federal banking agencies to implement the privacy provisions of the GLB Act took effect for all financial institutions on July 1, 2001. They require financial institutions to issue privacy policies and provide consumers with the opportunity to opt out of certain types of information sharing with unaffiliated third parties. The GLB Act also expressly permits the states to adopt more stringent privacy requirements. Some states have since adopted regulations imposing stricter limitations on information sharing and we are complying with them. Various states are continuing to consider enacting enhanced privacy requirements. At this still early stage, the nature and extent of any such additional privacy requirements, as they might be adopted, cannot be predicted. At the Federal level, consideration has been given to various proposals to limit the use of social security numbers by government and business. Neither the outcome of these proposals nor their impact on us, should they become law, can be predicted with any certainty.

              Over the last several years, legislation has been proposed in Congress to substantially revise the laws governing consumer bankruptcy. The U.S. House of Representatives and the U.S. Senate approved separate versions of new bankruptcy reform legislation in 2001, but the two versions were not reconciled in conference committee and the reform legislation was not enacted into law. In general, the bankruptcy reform legislation contains provisions intended to curb abuse in the current bankruptcy system, including a means test for consumer bankruptcy filings, and includes new requirements for consumer lending disclosures. We are not able to predict with any uncertainty whether the proposed bankruptcy reform legislation will be enacted.

              From time to time, members of Congress have introduced proposals for the regulatory restructuring of the financial services industry and the reform of the federal deposit insurance system, as well as legislation to impose a statutory cap on credit card interest rates and fees, legislation to require additional disclosures and prohibit certain practices with respect to open-ended credit plans and legislation designed to address abuses related to "predatory" lending. In recent years state legislatures have entertained similar proposals as well as others to expand consumer protection laws. Neither the outcome of these proposals nor their impact on us, should they become law, can be predicted with any certainty.

              See "Risk Factors—Changes in Government Policy and Regulation Can Negatively Affect our Results," "—We are Required to Act in Accordance with Our Capital Plan," "—We Could Be Required to Provide Support to Our Banking Subsidiaries" and "—Our Banking Subsidiaries' Regulators Can Impose Restrictions on Our Operations."

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OVERVIEW OF SIGNIFICANT ACCOUNTING POLICIES

              Our financial statements are prepared in accordance with GAAP, which in some instances require complex judgments regarding the valuation of certain of our assets and liabilities. Additionally, these judgments include the use of estimates about the effect of matters that are inherently uncertain. Our accounting policies are described in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 2 to our Consolidated Financial Statements, "Summary of Significant Accounting Policies." The following is an overview of our accounting policies that require significant judgment and estimation and which may materially impact earnings:

Finance Charge and Fee Revenue Recognition

              Loans receivable are comprised of customer purchase activities, cash advances and finance charges and fees receivable. We have historically recognized finance charges and fees receivable during the period when earned on an accrual basis rather than when collected. Those finance charges and fees receivable that were earned but subsequently written off due to bankruptcy, failure of the customer to meet the customer's payment obligations, or other factors were reversed against finance charge and fee income in the period written off. During 2000 and 2001, as a result of the deterioration in the underlying characteristics of our loan portfolio and increased loss experience, we adopted policies to minimize the difference in timing between accrual and subsequent reversal by accelerating the recognition of the estimated uncollectible portion of accrued finance charges and fees. These policies utilize projected credit loss rates applied to the loans outstanding by delinquency segment (current, 1-29 days past due, etc.) to calculate the amount of accrued finance charges and fees receivable that would not be paid. These estimated uncollectible amounts are recorded as valuation allowances and are deducted from loans receivable on our financial statements.

              In the fourth quarter of 2001, we increased our valuation allowances for the estimated uncollectible portion of finance charges and fees posted on customers' accounts in the total managed portfolio to an aggregate amount of $505 million. In connection with these increases, we recorded a charge of $303 million. This charge reflects the addition of valuation allowances for finance charges and fees associated with loans that are less than 90 days delinquent.

              Beginning in January 2002, we instituted a change to accrue only the estimated collectible portion of finance charges and fees posted to customer account balances. Accordingly, finance charge and fee income that we estimate will not be collected is not recognized as revenue or as an increase to loans receivable on our financial statements. We continue to utilize projected credit loss rates to estimate the uncollectible revenue as we did previously; therefore, the change is not expected to materially impact earnings or loans receivable. Also, as a result of this change, previously established valuation allowances for finance charge and fee income will be depleted during 2002 as credit losses we previously estimated are realized.

              We believe that our revised revenue recognition policies represent a conservative position in relation to the credit card industry as a whole. However, we believe that these policies are financially prudent in light of the deterioration in the underlying characteristics of our loan portfolio and increased loss experience.

Securitization Accounting and Related Estimates

              Securitization is the process of creating a pool of loans in a structured transaction and selling securities backed by the related cash flows. We securitize consumer loans in order to diversify funding sources and to manage our all-in cost of funds. We record our securitizations as sales for GAAP and

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for regulatory accounting purposes. At the time of sale, we receive the cash proceeds of the sale, and the securitized loans and related credit loss allowances are removed from our balance sheet. Various credit enhancements are employed in connection with securitizations (for example, subordinated interests, insurance, spread accounts and cash collateral accounts) so that the more senior classes of the securities will receive credit ratings that will allow them to be sold to third party investors. We continue to service the securitized loans and we receive servicing fees during the term of the transaction.

              At the time of sale, we record any retained interests at fair value. Retained interests include retained subordinated interests and interest-only strips receivable. Retained subordinated interests represent an interest subordinate to senior, investment-grade classes, but the right to receive any interest payable on a retained subordinated class remains senior to the right to receive excess servicing income. Excess servicing is the net positive cash flow from finance charges and fees generated by the securitized loans after deducting interest paid to investors, related credit losses, servicing fees and other transaction expenses. Interest-only strips receivable represent the present value of estimated excess servicing income during the period the securitized loans are projected to be outstanding.

              The valuation of a retained subordinated interest uses a bond discount valuation methodology that incorporates the repayment of the outstanding subordinated interest over time, market rates of expected interest income, and the credit risk of the underlying loans. The valuation of interest-only strips receivable requires projections of credit losses and repayment trends on the underlying assets. These factors are included in a discounted cash flow analysis to project the amount of excess servicing to be collected from the loans currently outstanding. If excess servicing falls below specified levels, securitization structures may require a portion of the cash flow to be used to fund cash reserve accounts (commonly referred to as "spread accounts") as an additional credit enhancement. The spread account balances are maintained until excess servicing improves or the securitization transaction terminates. We recognize the fair value of spread accounts through a discounted cash flow analysis based on projected amounts to be released from spread account balances.

              During the fourth quarter of 2001, we recorded a mark-to-market charge of $134 million related to the retained subordinated interests we recognized in connection with the securitization transactions we completed during that period. Had we not completed those securitizations in that quarter, a similar amount would have been established in the allowance for credit losses (which covers only our reported loans). As a result of changes in economic and performance expectations affecting the valuation of our retained interests in securitizations, we recorded an additional $164 million charge in the fourth quarter of 2001 related to retained subordinated interests for securitizations completed in prior periods.

Reserving and Charge-off Methodology

              With respect to principal balances on loans, our policy is to recognize losses on loans no later than 180 days after they become contractually past due. Also, we receive notifications of customers who have declared bankruptcy or have died and we batch and charge off those accounts once per month. Prior to June 2001, bankruptcy notifications were processed continually throughout the month. We maintain an allowance for credit losses to provide for the estimated probable net principal credit losses inherent in the loans receivable on our balance sheet. The calculation of the amount of the allowance requires an assessment of known and inherent risks in our portfolios.

              We establish our allowances for credit losses by analyzing historical credit loss trends including bankruptcy, delinquency and charge-off rates. We also consider factors such as general economic conditions, trends in loan portfolio volume and seasoning, and recent changes to loan review and underwriting procedures. We compare prior estimates of loss rates and amounts to actual performance,

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and we compare our lagged loss rates and loan coverage ratios (the allowance as a percentage of loans outstanding) to those of other credit card lenders. As a result of the allowance review process, we establish an allowance for credit losses that represents an estimate of the amount necessary to absorb future principal charge offs related to credit losses inherent in those loans currently outstanding.

              In the fourth quarter of 2001, the allowance for credit losses increased by $252 million to $1.93 billion as of year end. The change to the allowance during the quarter reflects the change in estimated losses inherent in loans outstanding, which increased from 10.47% in the third quarter to 12.23% in the fourth quarter, as well as continued uncertainty in the economic conditions that may impact our portfolios. The trend in our current credit loss rates is generally consistent with the Capital Plan, but we cannot assure you that we will not experience losses greater than those projected in the Capital Plan.

              We address credit losses related to finance charges and fees through the policies discussed under "—Finance Charge and Fee Revenue Recognition."

Accounting for Interest Rate Derivatives

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

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

              We do not trade our derivative positions or use derivatives to speculate on interest rate movements. As required by Statement of Financial Accounting Standards ("SFAS") No. 133, we record the fair value of an interest rate derivative as an asset or liability (as appropriate) and offset that amount with a change in the fair value of the item being hedged. Derivative interest rate contracts resulted in an after-tax increase of less than $2 million to net income during 2001, including the gain on adoption of SFAS No. 133.

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RISK FACTORS

We Have Recently Experienced and May Continue to Experience Increased Delinquencies and Credit Losses.

              The delinquency rate on our consumer loans and the rate at which our consumer loans are charged off as uncollectible (referred to as the credit loss rate) have both increased significantly in recent periods and are likely to continue to increase in future periods. Projected increases have been taken into consideration in our Capital Plan and in certain of the reserves and charges that we took in the fourth quarter of 2001, although actual increases could exceed projected increases. The factors contributing to these increases, and which may contribute to continued increases, are discussed below.

              Current economic conditions, which have been characterized by decreased growth, higher unemployment and general economic uncertainty, have contributed substantially to our credit loss rates as borrowers fail to make payments and, in some instances, seek protection under the bankruptcy laws. The impact of the current economic environment has been exacerbated by our lending to higher risk market segments, which include borrowers most significantly impacted by economic downturns and a sustained weak economy.

              The sale of our interests in the Providian Master Trust, which experienced lower loss rates than many of the loans in our remaining loan portfolio, will also result in a significant increase in our managed net credit loss rate going forward as the higher loss rate portfolios make up a greater percentage of our remaining managed loan portfolio.

              Due to our rapid growth in recent years, as of February 28, 2002, approximately 65.2% of our accounts (and 41.2% of our account balances) were less than twenty-four months old. As the average age of loan portfolios increase (referred to as "seasoning"), losses typically increase, but it is difficult at this time to predict our on-going level of losses likely to result from the seasoning of our loan portfolio. In addition, because growth of our total loan portfolio has slowed, both generally and as a result of our recent strategic initiatives, the more seasoned loans will constitute a greater percentage of our overall portfolio, and our overall managed net credit loss rates will rise.

              Although we have suspended new account marketing to customers in our highest risk standard market segment, and we are currently refocusing our business on the middle and prime market segments, any impact of these changes will be realized only over time, and we cannot assure you that these changes will reduce our credit loss and delinquency rates. Likewise, although we believe that expected increases in credit losses are appropriately considered in our reserves, actual credit losses may exceed our expectations.

We Face Reduced Funding Availability and Increased Funding Costs.

              We rely heavily on the securitization of credit card receivables and other external funding sources to fund our business. Recent downgrades in our credit ratings and the deterioration in our asset quality have reduced our access to funding and have resulted in higher funding costs and less favorable terms than were previously available to us. Future downgrades in our debt ratings or those of our banking subsidiaries, as well as further deterioration in our asset quality, could continue to negatively impact our funding capabilities. Economic, legal, regulatory, accounting and tax changes can also make future securitization and other sources of funding more difficult, less efficient, more expensive or unavailable.

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              In addition to funding from securitizations, retail deposits have been a major source of funding for us. Our ability to attract retail deposits through the broker channel substantially diminished after our third quarter earnings announcement and the credit rating downgrades that followed. Our ability to attract deposits could be further diminished if we experience further rating downgrades or performance problems. Moreover, under our Capital Plan we have committed to reduce our reliance on insured deposits, and regulatory requirements could prohibit us from taking any deposits if our banking subsidiaries fail to meet regulatory capital requirements. In addition, our regulators could prohibit us from taking deposits even under circumstances where current regulations would not otherwise prohibit deposit taking. Our ability to raise funds through deposit taking could be further diminished if rates that we have to pay on deposits in order to attract deposit customers increase (for example, as a result of competition in the deposit market, or increased relative returns from potential alternative investments such as treasury securities).

              Although we intend to establish new securitization facilities and sell non-essential assets to generate cash to run our business, we cannot assure you that we will be able to do so. Competition for funding sources comes from a wide variety of institutions, many of which have more capital and other resources and higher credit ratings than we do. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Funding and Liquidity."

We Face Intense Competition.

              We face intense and increasingly aggressive competition from other consumer lenders in all of our product lines, particularly as lenders who have traditionally not competed in markets such as our middle market segment enter that market and as we refocus our business away from the highest risk market segments, which had less competition. Many of our competitors are substantially larger and have greater financial resources than we do, and customer loyalty is often limited. In addition, the GLB Act, which permits the affiliation of commercial banks, securities firms and insurance companies, may increase the number of competitors in the banking industry and the level of competition for banking products, including credit cards. We also compete to a lesser extent with products other than credit cards, such as smart cards and debit cards.

              Our competitors may take competitive actions such as offering lower interest rates and fees, larger credit lines, and incentives to customers to use our competitors' credit cards and other products and/or transfer existing balances to our competitors' credit cards. These and other competitive practices could result in decreases in account and balance growth, the loss of existing customers and/or reductions in account balances, increased customer acquisition costs, and reductions in the finance charges and fees that we charge.

Interest Rate Fluctuations Can Hurt Our Profitability.

              We borrow money from institutions and depositors in order to lend money to our customers. The difference between the rates we pay to borrow money and the rates we earn on the loans we make to our customers (the "spread") affects our earnings and the value of our assets and liabilities. Accordingly, our business is highly sensitive to interest rate movements that affect this spread. If the interest rates we pay on our deposits and borrowings increase to a greater extent than the rates our customers pay to us, or if the interest rates that we charge customers are reduced (as a result of competition or otherwise) to a greater extent than the interest rates we pay on our deposits and borrowings, our profits could be negatively affected.

              We may seek to reprice the rates that we charge our customers in order to limit changes in the spread between the rates at which we borrow and lend money. However, these actions could result in

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customers using our credit cards less frequently, carrying smaller balances or looking to other credit sources, which could negatively impact our earnings as accounts and account balances decrease. See "—Fluctuations in Our Accounts and Account Balances Will Affect Our Financial Results."

              We also seek to manage the risk of interest rate fluctuations through financial instruments and other techniques. However, these instruments and techniques may not be successful, and we might not be able to protect against certain risks. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Asset/Liability Risk Management."

Our Financial Results Could Be Hurt by Fluctuations in Our Interests in Securitizations.

              In connection with our securitizations, we retain certain interests in the assets included in the securitization, including retained subordinated interests, spread accounts and other residual interests (these interests are described in greater detail under "Management's Discussion And Analysis of Financial Condition and Results of Operations—Managed Consumer Loan Portfolio and the Impact of Securitization"). The income earned from these interests depends on many factors not within our control, including the performance of the securitized loans, interest paid to the holders of securitization securities, credit losses, and transaction expenses. The value of our interests in the securitizations will vary over time as the amount of receivables in the securitized pool and the performance of those loans fluctuate. The performance of the loans included in our securitizations is subject to the same risks and uncertainties that affect the loans that we have not securitized, including, among others, increased delinquencies and credit losses, economic downturns and social factors, interest rate fluctuations, changes in government policies and regulations, competition, expenses, dependence upon third party vendors, fluctuations in accounts and account balances, and industry risks.

Our Growth Rate Will Change.

              Our credit card portfolios have grown rapidly over the last few years, and that growth has been a major contributor to our growth in earnings. However, in accordance with our five-point plan announced in October 2001, as well as the Capital Plan and the written agreements entered into with our banking subsidiaries' regulators, we have suspended new account marketing to our standard market segment, tightened credit line increases across all segments, and selectively repriced loans that exhibited increased risk levels. In addition, under our Capital Plan, we have committed to reduce lending to the highest risk customers within the middle market segment. We are also exiting our international operations.

              We cannot assure you that we will be able to retain existing customers or attract new customers, or that we will be able to increase account balances for new and existing customers. Many factors could adversely affect our ability to retain existing customers and attract new customers, and to grow account balances for new and existing customers. These factors include general economic factors, competition, higher unemployment, our marketing initiatives, negative press reports regarding our company, the general interest rate environment, our ability to retain and recruit experienced management and operations personnel, the availability of funding, and delinquency and credit loss rates.

              Another important contributor to our growth and earnings has been the development and expansion of cardholder service products. If we are unable to implement new products and features, our ability to grow will be negatively impacted. In addition, aggregate sales of cardholder service products cannot continue at historical levels as growth in accounts and account balances decline, and sales of these products on a per customer basis is not expected to continue at historical levels.

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Fluctuations in Our Accounts and Account Balances Will Affect Our Financial Results.

              Our accounts and account balances fluctuate from time to time. Fluctuations can be caused by, among other things, our marketing initiatives, competition, the economy, consumer payment and spending patterns, delinquencies and charge-offs, and the rate at which our business grows.

              All other factors being equal, reduced loan balances will reduce earnings because the finance charges that accrue on the loans we make to our customers are based on a percentage of the applicable outstanding loan balance. In addition, lower loan balances may result in fewer customers who use our cardholder service products and thereby generate income for us. Accordingly, lower loan balances will result in reduced aggregate income from finance charges, fees and other charges.

Our Strategic Initiatives Could Adversely Affect Our Financial Results.

              We have been very active in executing on our strategic initiatives, including the five-point plan announced last October, the initiatives undertaken in connection with our Capital Plan, and other efforts to refocus our business. These activities, including the sale of our interests in the Providian Master Trust, the pending sales of our international businesses, reductions in marketing activities, tightening of credit line increases, the closing of the Henderson, Nevada operations facility, workforce reductions, and increased reserves, as well as certain extraordinary charges associated with those actions, have substantially changed the scope of our business and operations, have significantly impacted our financial results, and may continue to adversely affect certain of our financial results. For example, the sale of our interests in the Providian Master Trust, which contained loans with lower credit loss rates relative to our remaining portfolio, will cause our overall managed credit loss rates to increase. In addition, by focusing on the middle market and prime segments, we will be focusing on a market that is more competitive and generates lower returns on assets because of lower interest rates, late fees, sales of cardholder service products, and other fees and charges within those segments.

We May Not be Able to Successfully Complete our Strategic Initiatives.

              Although we are proud of the success we have had to date in implementing our strategic initiatives, we may not be able to complete our efforts to refocus the business and maintain our capital and liquidity positions. Among other things, we may not be able to complete the asset sales contemplated by our strategic initiatives, including the sale of our international businesses, and the sale of a multi-billion dollar portfolio of higher risk receivables. The failure to successfully execute these strategic initiatives could have a material adverse effect on our financial results. Among other things, the failure to successfully complete our strategic initiatives could result in our inability to achieve our goals under the Capital Plan (see "—We are Required to Operate in Accordance with Our Capital Plan") and could result in continued performance and asset quality problems.

Changes in Government Policy and Regulation Can Negatively Affect our Results.

              Federal and state laws significantly limit the types of activities in which we may engage through our banking subsidiaries and the manner and terms on which we may offer, extend, manage and collect loans. Congress, the states and other governmental bodies in the jurisdictions in which we operate may enact new laws and regulations, or amend existing laws and regulations, relating to consumer protection, debtor relief, collection activities, and consumer privacy. Such laws and regulations could make it more difficult or expensive for us to make or collect our loans and could also limit the finance charges and fees that we may charge our customers or impose new disclosure requirements relating to pricing and other terms. In addition, failure to comply with laws and regulations could result in lawsuits, public relations problems and increased regulatory scrutiny, and might require us to pay

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substantial settlement costs, damages or penalties. As a result, new laws or regulations or changes in existing laws or regulations could hurt our financial results. Changes in government fiscal or monetary policies, including changes in capital requirements and our rate of taxation, could also hurt our financial results.

We Are Required to Operate in Accordance with Our Capital Plan.

              We have entered into the regulatory agreements and the Capital Plan described under "Our Capital Plan and Other Regulatory Matters," and our banking subsidiaries are generally under close scrutiny by their regulators.

              Among other things, the Capital Plan requires our banking subsidiaries to maintain well-capitalized status as shown in their Call Reports beginning with the Call Report for the first quarter of 2002. In addition, it requires PNB and PB, on a combined basis (and PNB, prior to a merger of PNB and PB), to achieve and maintain total risk-based capital ratios, after applying the Subprime Guidance risk weightings, of at least 8% by March 31, 2002 and at least 10% by June 30, 2003. The Capital Plan reflects certain actions that we will need to take in order to meet the requirements of the Capital Plan, including the sale or restructuring of certain lines of business. Our capital ratios could fall below the levels required under the Plan if our assets grow faster than projected, if we are unable to complete certain of the strategic actions contemplated by the Plan, or as a result of other factors beyond our control, such as greater than expected credit losses.

              If we fail to adhere to the Capital Plan, our banking subsidiaries will face significant restrictions on growth and operating activities. Ultimately, if we fail to adhere to our regulatory agreements or the requirements of the Capital Plan, the regulators could order our banking subsidiaries to cease deposit taking and lending activities, and they could also assess civil money penalties, initiate proceedings to terminate deposit insurance, and assume control of our banking subsidiaries.

We Could be Required to Provide Support to Our Banking Subsidiaries.

              Under our regulatory agreements and the Capital Plan, we could be required to contribute capital or otherwise provide support to our banking subsidiaries in order to maintain or meet their capital and liquidity needs. Providing support to our banking subsidiaries would limit our ability to expend funds at the holding company level. We provided support to our banking subsidiaries in the fourth quarter of 2001, prior to acceptance of the Capital Plan, by contributing cash of $260 million to them. In addition, we may determine to undertake capital raising strategies, such as equity offerings, in order to raise capital to contribute to our banking subsidiaries or otherwise to support our operations. These strategies could adversely affect our financial results and/or stock price for a variety of reasons, including dilution to existing equity holders.

Our Banking Subsidiaries' Regulators Can Impose Restrictions on Our Operations.

              Our banking subsidiaries' regulators have broad discretion to issue or revise regulations, or to issue guidance, that may significantly affect us, our banking subsidiaries or the way we conduct our business. For example, the banking regulators have issued guidelines governing subprime lending activities that require financial institutions engaged in subprime lending (including our banking subsidiaries) to carry higher levels of capital and/or credit loss reserves. In addition, our banking subsidiaries' regulators have imposed on us the restrictions discussed under "Our Capital Plan and Other Regulatory Matters," and could impose further restrictions on our business, or increase existing restrictions. Any new or more restrictive requirements could include, among others, restrictions relating to: minimum regulatory capital levels; deposit taking and rates; extensions of credit; strategic

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acquisitions and asset growth; underwriting criteria and accounting policies and practices (including increases in allowances for credit losses, acceleration of loss recognition for finance charges and fees, and modifications to securitization accounting practices); enhanced scrutiny and consent requirements relating to our business plans and liquidity management; submission of special periodic regulatory reports; and additional supervisory actions or sanctions under applicable Prompt Corrective Action guidelines and other applicable laws and regulations.

              Any new or more restrictive requirements could hurt our financial results, limit our growth prospects, reduce our returns on capital and/or require us to raise additional capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Adequacy."

We Could Experience a Change in the Status of Our Securitizations.

              When we securitize our consumer loans, we record the securitizations as sales for GAAP and for regulatory accounting purposes. At the time of sale, we receive the cash proceeds of the sale and the securitized loans and related credit loss allowances are removed from our balance sheet. Under certain circumstances, this accounting treatment could be reversed, resulting in the return of the securitized loans and related credit loss allowances to our balance sheet, which would have a negative impact on our regulatory capital and ability to fund ongoing operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Managed Consumer Loan Portfolio and Impact of Securitization."

              During the revolving period of a securitization, no principal payments are made to the investors. Instead, monthly principal payments received on the securitized loans are used to purchase replacement loans receivable. However, certain events, such as a deterioration in the performance of our securitized receivables, deterioration in our financial condition, downgrades in credit ratings, or certain breaches of representations, warranties or covenants that we make in the documentation relating to our securitizations, could each result in early amortization of our securitization transactions. If an early amortization event occurs, the seller's interest with respect to the affected series will increase. As the seller's interest increases, we would be required to increase our provisions for credit losses and may be required to maintain additional regulatory capital, each of which could negatively impact our financial results and liquidity. Our recently completed securitization transactions contain terms that are less favorable than those contained in our past securitization transactions, including increased subordination levels and early amortization events relating to credit ratings, regulatory capital, and early amortization of our other securitization transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Managed Consumer Loan Portfolio and Impact of Securitization."

              In addition, banks that securitize assets, including our banking subsidiaries, are required to hold risk-based capital for assets sold with recourse, even if those assets have been removed from the bank's balance sheet. For regulatory purposes, "recourse" is an arrangement in which a bank sells assets but retains a risk of credit loss that exceeds a pro rata share of the bank's interest in the sold assets. Recourse can be either contractual or implicit. Implicit recourse can exist when, for example, a bank takes actions to improve the credit quality or market value of an asset-backed security subsequent to the sale of the related assets. Although our banking subsidiaries' regulators have not asserted that implicit recourse exists with respect to our securitization transactions, there could be negative consequences if our regulators were to determine that any of our securitization transactions involved implicit recourse. For example, we could be required to maintain additional regulatory capital and establish credit loss reserves for the previously securitized receivables which would return to our balance sheet. This in turn could lead to a breach of our commitments under the Capital Plan.

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Economic Downturns and Consumer Behavior Could Negatively Affect Our Financial Results.

              In addition to increases in delinquencies and credit losses, economic downturns and recessions could cause a reduction in consumer demand and spending. Numerous social factors also affect credit card use, payment patterns and the rate of defaults by accountholders. These social factors include changes in consumer confidence levels, the public's perception of the use of credit cards, and changing attitudes about incurring debt and the stigma of personal bankruptcy. If accountholders carry reduced balances because of economic downturns or recessions, finance charge and fee income could decline, and our financial performance could be negatively affected.

We Are Dependent Upon Our Management and Operations Personnel.

              Our growth and profitability depend in part on our key management and operations personnel. If we are not able to retain our key personnel or attract new key personnel, or if we are unable to attract and retain capable employees generally, our operations and financial results will be negatively affected.

We Face Potential Fluctuations in Expenses that Could Hurt Our Profitability.

              Our profitability depends in part on our ability to maintain and develop the systems necessary to operate our business and control the rate of growth of our expenses. As part of our strategic initiatives, we have taken actions, such as workforce reductions, to reduce expenses and streamline operations. However, as our business develops or changes, additional expenses can arise, including expenses from structural reorganizations, reevaluation of business strategies, product development, and increased funding costs. Expenses related to defending against legal proceedings and other legal and administrative costs could also increase. In addition, some of our expenses are fixed costs and cannot be reduced. These fixed costs will represent a larger portion of our total expenses as our size decreases as a result of asset sales and changes to our business focus. This relative increase, all else being equal, will hurt our profit margins.

Legal Proceedings and Related Costs Could Negatively Affect Our Financial Results.

              Since the announcement of our third quarter 2001 results, a number of new lawsuits have been filed against us alleging that we and/or certain of our directors and executive officers have made false and misleading statements or engaged in improper insider trading. Other cases have been filed against us claiming damages arising out of our alleged failure to diversify our 401(k) Plan's stock holdings. We face the risk of other governmental proceedings and litigation, including class action lawsuits, challenging our product terms, rates, disclosures, collections or other practices, under state and federal consumer protection statutes and other laws, as well as actions relating to federal securities laws. In particular, state attorneys general and other government prosecutors have shown an increased interest in the enforcement of consumer protection laws, including laws relating to subprime lending and predatory lending practices, and privacy. We face the potential of litigation and compliance costs and may from time to time be required to change specific business practices, depending on the outcome of such litigation and other legal proceedings. Litigation and other proceedings, including litigation and other proceedings currently affecting us, may result in changes to specific business practices or the adoption of business practices different from our competitors', as well as payment of settlement costs, damages, and in some cases penalties, which will affect our financial results. See "Legal Proceedings."

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The Dispute between MasterCard, Visa and the U.S. Justice Department Could Have an Adverse Impact on Our Operations and Financial Results.

              In October 1998, the U.S. Justice Department filed a complaint against MasterCard International Incorporated, Visa U.S.A. Inc. and Visa International, Inc., asserting that duality (the overlapping ownership and control of both the MasterCard and Visa associations by the same group of banks) restrains competition between Visa and MasterCard, in violation of the antitrust laws, in the market for general purpose credit card products and networks. The government sought relief that only member banks "dedicated" to one association be permitted to participate in the governance of that association. In addition, the complaint challenged the rules adopted by both MasterCard and Visa that restrict member banks from joining American Express, Discover/Novus or other competing networks. The case was tried in the summer of 2000 and the trial court announced its decision in October 2001. The trial judge ruled in the associations' favor on the duality claim, but against the associations on the competing networks claim. Enforcement of the competing networks claim has been stayed pending appeal, a process that is expected to take two years or more.

              Neither the ultimate outcome of this litigation nor its effect on the competitive environment in the credit card industry if the associations' appeal is unsuccessful can be predicted with any certainty. However, it is possible that the outcome of this litigation could negatively impact our operations and financial results in ways that we cannot currently predict.

We Rely on a Number of Third Party Vendors and Service Providers in the Operation of Our Business.

              Our business depends on a number of third parties, including telemarketing and data processing providers, independent rating agencies (such as Standard & Poor's and Moody's Investors Service) who rate our securitizations, providers of credit enhancement, insurance, and liquidity in connection with our securitizations, nationwide credit bureaus, postal and telephone service providers, public utilities, bankcard associations, cardholder service providers and transaction processing service providers. Problems with any of these relationships or disruption in one or more of these services could hurt our operations.

Other Industry Risks Could Affect our Financial Performance.

              We face many industry risks that could negatively affect our financial performance. For example, we face the risk of fraud by accountholders and third parties, as well as the risk that increased criticism from consumer advocates and the media could hurt consumer acceptance of our products. In addition, the financial services industry as a whole is characterized by rapidly changing technologies, and system disruptions and failures may interrupt or delay our ability to provide services to our customers. In particular, we face technological challenges in the developing online credit card and financial services market. We also face potential claims relating to the proprietary nature of widely used technology, such as smart cards and call center technology. The secure transmission of confidential information over the Internet is essential to maintain consumer confidence in certain of our products and services. Security breaches, acts of vandalism, and developments in computer capabilities could result in a compromise or breach of the technology we use to protect customer transaction data. Consumers generally are concerned with security breaches and privacy on the Internet, and Congress or individual states could enact new laws regulating the electronic commerce market that could adversely affect us.

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PROPERTIES

              We lease our executive offices at 201 Mission Street, San Francisco, California, currently totaling approximately 63,000 square feet. The current lease term expires on November 30, 2006. We own our processing centers at 4900, 4920, 4940, 5020 and 5040 Johnson Drive, Pleasanton, California, totaling approximately 282,000 square feet. PNB owns its headquarters office which is located at 295 Main Street, Tilton, New Hampshire, has branches located at 44 Main Street, Belmont, New Hampshire and 16-18 Monument, London, England, which are leased. PB's offices, which are leased, are located at 5215 Wiley Post Way, Salt Lake City, Utah. GetSmart.com, Inc.'s offices are located at 123 Mission Street, San Francisco, California. In Argentina, Providian Financial S.A. leases office space in Buenos Aires at Hipolito Irigoyen 900 and at Florida 200.

              Significant operations centers and other properties are located at the following leased premises: 150 Spear Street, San Francisco, California (80,000 square feet); 123 Mission Street, San Francisco, California (90,000 square feet); 2700 Gateway Oaks Drive, Sacramento, California (91,000 square feet); 1333 Broadway, Oakland, California (144,000 square feet); 425, 427, 431 and 435 Executive Court North, Fairfield, California (58,000 square feet); 324 Campus Lane, Fairfield, California (15,000 square feet); 4460 Rosewood Drive, Pleasanton, California (108,000 square feet); 3801 South Collins Boulevard, Arlington, Texas (239,000 square feet); 4300 Centerview, San Antonio, Texas (94,000 square feet); 6500 Tracor Lane, Austin, Texas (66,000 square feet); 1440 Goodyear Drive, El Paso, Texas (126,0000 square feet); 53 and 54 Regional Drive, Concord, New Hampshire (28,000 square feet); 1531 and 1600 Ormsby Road, Louisville, Kentucky 90,000 square feet); and 25 High Street, Crawley, England (42,000 square feet).

              For information regarding rental payments, see Note 9 to Consolidated Financial Statements.

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LEGAL PROCEEDINGS