MINNETONKA, Minn. - Metris Companies Inc., which issues credit cards to people with poor credit histories, announced the Securities and Exchange Commission has widened an investigation into its accounting.
Analysts and at least one major investor remained optimistic that Metris will emerge unscathed from the investigation. Metris shares closed up 8 cents to $8.04 on the New York Stock Exchange on Wednesday.
The SEC is exploring the way Metris values its ownership stake in bonds secured by pools of credit card loans, also known as asset-backed securities. Metris was told of the expanded inquiry in December and is cooperating fully, according to an annual report filed Tuesday by Metris Master Trust, a lending subsidiary of Metris.
In August, Metris said the SEC was examining its loan-loss allowance, the cash the company keeps on hand to cover bad loans, and a 2001 program in which Metris increased credit lines to its best borrowers. In November, the company's outside auditor, KPMG LLP, cited a "material weakness" in Metris' financial statements.
But analysts who follow the company said they do not expect any surprises from the investigation, largely because Metris has already taken steps to correct its financial statements.
Beginning in November, the company reviewed every one of its financial statements filed between 1998 and the third quarter of 2003. The company determined that it had overstated profits by $8 million, which represented just 1.5 percent of the total profits earned by the company over that period. Total shareholder equity in the company declined by just 3 percent.
As part of that re-statement, Metris changed the way it accounted for securitized loans. Like most credit-card issuers, Metris sells its credit-card loans to large financial institutions that bundle them into bonds sold to the public. Metris then keeps a small ownership stake in these bonds. On March 2, Metris valued this stake at $830 million, up from $630 million in September.
Many Wall Street analysts expected a bigger restatement, and investors began pouring into the company's stock. They were rewarded in mid-March when the company reported its first quarterly profit in five quarters. Metris earned $35 million in the fourth quarter, partly because of a decline in loan losses related to the strengthening economy.
Shares of Metris hit a 52-week high Tuesday of $7.96 after the announcement, and the company's stock price has more than doubled since the SEC probe began in August.
"This company has spent an immense amount of time and energy restating its numbers and making sure they are accurate," said Scott Link, a portfolio manager at Disciplined Growth Investors of Minneapolis, which owns 2.9 million shares of Metris. "I would be very surprised at this point if the SEC is not satisfied with the steps (Metris) has taken."
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Information from: Star Tribune, http:// WWW.STARTRIBUNE.COM
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