Bank advised to trim results

Provident says accounting change boosted write-down

August 14, 2008|By Lorraine Mirabella | Lorraine Mirabella,Sun reporter

Provident Bankshares Corp. officials yesterday attributed Tuesday's move to restate quarterly profit that was announced only a month ago to unexpected guidance from auditors on how to value certain investment securities.

Gary N. Geisel, chairman and chief executive of Provident, said in an interview that the "unusual" timing of KPMG's advice put the bank in an uncomfortable position. He said the advice came 41 days after the accountants were given updated guidance by the Securities and Exchange Commission.

"The whole thing is a little awkward for us, and we would have preferred to do this in one announcement," Geisel said. "The additional write-downs here are all related to information we received from our accounting firm that says we need to look at our write-down process differently. Nothing has happened to these securities in the last two weeks. The applicable accounting has changed."

Company executives sought to reassure investors yesterday, saying the restatement of net income to $10.2 million from a previously reported $15.1 million for the quarter that ended June 30 has no effect on operating results. Provident, which had come off a six-month streak of losses linked to its real estate-related investment portfolio, said in documents filed with the SEC Tuesday that its earnings per share for the second quarter would be 27 cents, down from the 41 cents reported in July.

Provident shares fell 6.56 percent to close yesterday at $8.41 per share.

When it released second-quarter earnings July 17, the company had said it would take a charge of $4.1 million related to investment securities. Provident shares gained 27 percent after the bank reported the original profit number.

But Provident said it was advised by KPMG two weeks later that it probably needed to take a charge on certain mortgage-backed securities and real estate investment trust securities that had declined in value. That advice was based on discussions the accountants had had with the SEC June 20, Provident said.

It led to the bank taking an additional charge of $16.7 million, which includes a $1.9 million charge to a portfolio that includes mortgage-backed securities and the remaining write-down of a portfolio that includes real estate investment trust securities.

Geisel said the new guidance suggests that companies consider taking charges on certain securities, even if the cash flow from those securities is as expected, and he noted that $15.5 million of the $16.7 million worth of securities being written down are paying interest as required.

A spokesman for KPMG, Dan Ginsburg, said he had no comment due to client confidentiality rules.

Jeff K. Davis, a managing director with FTN MidWest Securities in Nashville, Tenn., said Provident's investments have been affected by the downturn in housing, causing weakness in mortgage-backed securities that are not tied to subprime loans, or loans made to borrowers with weak credit.

"As we get to year end, we will see a lot of institutions take a lot of [charges]," Davis said. "The question to Provident is have they taken all their medicine. I wouldn't be surprised if they have to choke down a little more."

The bank has suffered from a series of multimillion-dollar write-offs since the beginning of the year, partly because of its real estate investment trust securities and some of its mortgage-backed securities, or bundled loans sold to investors.

In a conference call with analysts yesterday morning, Provident's chief financial officer, Dennis A. Starliper, said other banks have also had to take charges on real estate-related portfolios due to accounting procedures.

"The fortunate thing is they were advised prior to releasing their earnings," he said.

One analyst asked about the company's previous warning that about $12 million of its mortgage- backed securities were at risk of being written down, a figure the company said is now at $10 million.

"We would continue to expect that, depending on how these national markets perform, better or worse over the next couple of quarters, there will be some level of write-downs, but at a manageable level," Geisel said.

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