Thursday, March 6, 2003

Mistakes on books a drag on Provident

By Jeff McKinney
The Cincinnati Enquirer

Shares of Provident Financial Group Inc. dropped about 20 percent Wednesday after the Cincinnati banking company said it would restate profits for the last six years because of accounting errors.

The stock fell $5.61 to close at $22.46 after the parent of Provident Bank said it overstated earnings by $70 million since 1997 when it incorrectly accounted for nine auto-lease transactions.

It resulted in the bank's biggest single-day stock drop since 1989 and cost investors about $284 million on paper.

About 32 percent of Provident's common stock is owned by Carl Lindner and his family. American Financial Group, also controlled by Lindner's family, owns about 13 percent.

Provident, with a market value of about $1.42 billion Tuesday, saw that amount slip to about $1.14 billion on Wednesday. The Lindners and AFG lost about $127.8 million on paper.

The news was a major blow for Provident, Cincinnati's second-largest locally owned bank behind Fifth Third.

It was beginning to regain momentum on Wall Street after overcoming large losses on bad business loans that had hurt the company in recent years.

"This is a setback for the company, but something we'll deal with and bounce back from," chief financial officer Christopher Carey said. "But it's definitely something that's very disappointing for our shareholders and employees."

The errors have no effect on customer accounts.

Provident said the errors, which the bank calls an isolated problem, will force the $16.7 billion-asset bank to restate results from 1997 to 2002. It also lowered its 2003 share earnings estimate to between $2.30 and $2.50. That compares with the bank's forecast of $2.50 to $2.70. That means that Provident's estimated earnings of $125 million for this year will be cut by $10 million.

"We accept this as a blow to our credibility," Robert Hoverson, Provident's president and chief executive, said in a conference call with banking analysts. "We sincerely apologize for these errors, and we're moving quickly to correct them and set the record straight."

Hoverson said he expects regulators from the Federal Reserve Bank of Cleveland to act "relatively quickly" in reviewing the errors. Provident also is regulated by the Department of Financial Institutions in Ohio and the Federal Deposit Insurance Corp.

Provident's crosstown rival, Fifth Third Bancorp, also is being reviewed by banking regulators for accounting discrepancies in its Treasury operations.

Carey said the earnings adjustment came from errors in accounting for the nine lease-financing transactions in 1997, 1998 and 1999 and were not kept on the bank's balance sheet. He said the overstatement came when a bad internal system showed that the transactions created more revenue than they actually did.

Carey said members of Provident's finance staff discovered the errors in late February. He said the errors were not initially discovered by Provident's auditor, Ernst & Young.

"We're not blaming them or anyone for this," Carey said. "We're taking the blame for this. This was a decision made by management at the time after consultation with our external auditors."

Ernst & Young declined comment other than to say that the firm remained Provident's auditor, Les Zuke, a spokesman for the accountant, told Bloomberg News.

Carey said the accounting mistake began small and got bigger over the years. For instance, the overstatement cut 1997 earnings to $2.36 from $2.38 a share. But by 2002, restated earnings were $1.96 a share, rather than the $2.35 the bank initially reported.

Standard & Poor's cut the credit ratings for the parent of Provident Bank to BB+, below investment grade, from BBB-. Moody's Investor Service said it might lower the bank's rating from Baa3, the lowest-investment grade levelAlthough the problem was a blow for the company, some analysts who follow Provident have not changed their stock recommendations.

Fred Cummings of McDonald Investments in Cleveland said he is retaining his "buy" rating on Provident's stock, saying his main concern is the quality of the bank's loans, not the errors.

James Schutz, an analyst with Stephens Inc. in Chicago, agreed, saying Provident's recent momentum to improve fundamental operations and improve credit quality remains strong.


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