Provident Bank to restate some financial results

November 11, 2005|By LAURA SMITHERMAN | LAURA SMITHERMAN,SUN REPORTER

Provident Bankshares Corp., the second-largest independent bank in Maryland, said yesterday that it would restate financial statements after reviewing its accounting for derivatives, complex financial instruments used to hedge risk.

Baltimore-based Provident joins a number of companies that have run afoul of the accounting rules for derivatives, including General Electric Co., the global conglomerate, and American International Group, one of the world's largest insurers. Banks, too, have recently acknowledged mistakes, including South Financial Group of Greenville, S.C.

Provident, which plans to revise several quarters of financial reports, didn't say what time period would be covered.

Such restatements aren't always negative. GE added more than $380 million to its earnings over three years. The impact on Provident's profit is expected to be nil because the changes would cancel each other out.

The bank also delayed the release of its third-quarter financial statement until Monday and warned investors that it might revise previously issued guidance on future earnings. It is working with the accounting firm KPMG LLP on the review.

"There should be zero concern on the part of investors. It's more of a headache for management," said Jeff Davis, an analyst at FTN Midwest Securities who doesn't own stock in Provident. "This is a common issue we're seeing with financial institutions. Wall Street knows about it and has shrugged its shoulders."

Provident shares rose in early-morning trading yesterday after the bank released its announcement. The stock ended trading on the Nasdaq stock market up 3 cents to close at $36.26.

A derivative, a financial contract whose value rises or falls based on some underlying security, is used to smooth exposure to market and interest-rate fluctuations. The accounting profession has changed its interpretation of the rules for how to record derivatives.

Provident used a "short cut" method of accounting when it should have been using a "long haul" approach, thereby altering the timing of the accounting but not the value of the derivative, said Gary N. Geisel, the bank's chairman and chief executive. He said the bank was a victim of circumstance because its accountants from KPMG recently concluded that the method it had used for years was the wrong one.

"From an operating standpoint, it really has no bearing on the bank," Geisel said.

laura.smitherman@baltsun.com

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