Providian Financial Corporation announced today the preliminary results of its review of assumptions used to estimate the value of interest-only strips recorded in connection with securitized receivables. The Company had previously announced that the expected impact of the changes under discussion would be $0.20 per diluted share, or $66 million, in 2004. As a result of the review, the estimated impact on 2004 has been lowered to $0.11 per diluted share, or $37 million. The Company will also be revising prior year amounts, which results in a cumulative impact on net income for years 1999 through 2003 estimated to be $29 million.
“Our outlook for 2005, which we believe will be marked by continued growth and improving profitability, is unaffected by this change in accounting treatment,” said Joe Saunders, Providian Financial’s chairman and chief executive officer. “The underlying assets continue to deliver strong performance, and this change in accounting treatment bears no reflection on the quality of those assets — as we noted in our recent earnings call. We look forward to continuing our focus on growing the business in 2005.”
The changes announced today are based on the Company’s recent review with its external auditors of its accounting for securitizations, specifically interest-only strips. The focus has been on a series of changes to the Company’s interest-only strip valuation methodologies that were adopted in 2001 and 2002 as part of a larger effort to refine its forecasting and estimation processes following the credit deterioration experienced at that time. The Company’s accounting for retained interests during that period, including its interest-only strip valuations, was subject to review by two bank regulatory agencies, was an area of focus in the external audits conducted at the time, and was subjected to additional review as part of a consulting study by another major accounting firm engaged by the Company in 2003. The Company believed at all times that its estimation methodologies, and the manner in which they were adopted and applied, fully complied with all applicable accounting principles as well as regulatory expectations.
The accounting review arose out of varying interpretations of Statement of Financial Accounting Standards No. 140 (“SFAS 140″), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” While the Company believed that its accounting was consistent with generally accepted accounting principles (“GAAP”) and regulatory expectations, its auditors at Ernst & Young LLP (“Ernst & Young”) have advised that one of the methodologies currently used by the Company is not the preferable method under SFAS 140. The effect of adopting the revised method is to reduce the size of interest-only strips recognized at the time of a securitization and to increase the excess servicing income recognized in future periods.
The Company is adopting the revised method and applying it in prior periods because of further advice from Ernst & Young, under Accounting Principles Board Opinion No. 20 (“APBO 20″), “Accounting Changes,” that the adoption of the current methodology in January 2002 was an error. In the course of reviewing the Company’s analysis of the correction, Ernst & Young also identified a few errors in related assumptions used in 2000 and 2001, as detailed below, that they believe should be included in the revised results, and the Company has agreed to do so. The effect of applying the changed assumptions to prior periods is mixed, with some increases and some decreases to the recognized value of the interest-only strips. Because income not recognized in the interest-only strip will generally be recorded as excess servicing income in future periods, the impact in any given year is also affected by the forward impact of the adjustments made in prior periods including a carry-over effect into 2005.
