By Jeff McKinney
The Cincinnati Enquirer

A decision to keep some accounting items off Provident Financial Group Inc.'s balance sheet could have stemmed from a desire to make the Cincinnati banking company's returns appear higher than they were, a banking expert said Thursday.

ABOUT PROVIDENT

Business: The parent of Provident Bank operates 78 branches in Ohio, Northern Kentucky and Florida, serving about 600,000 households. It has assets of about $16.7 billion. Headquarters: Cincinnati Chief executive: Robert L. Hoverson Employees: 3,400 Ticker/market: PFGI/Nasdaq Thursday's close: $21.57 52-week high/low: $31.35 (4/18); $21.48 (10/9) Revenues (2002): $755 million, up from $699 million in 2001 Profits (2002): $119.4 million, $2.35 a share, up from $23.3 million, or 46 cents a share, in 2001

PROVIDENT FACTS

• Number of shares outstanding as of Dec. 31: About 50.7 million. • Pays a quarterly dividend of 24 cents. The company said the dividend for 2003 will not be affected by the restatement of earnings. • Has about 11,000 individual shareholders. • About 32 percent of its common stock owned by Carl Lindner and his family. American Financial Group, also controlled by Lindner's family, owns about 13 percent of Provident. • Provident, with a market value of about $1.42 billion Tuesday, saw that amount slip to about $1.14 billion Wednesday, costing investors about $284 million on paper. That would mean that the Lindners and AFG lost about $127.8 million on paper Wednesday.

Doing that could have given the parent of Provident Bank the appearance of having a higher return on assets - a key banking profitability measure - than if the items had been included on the balance sheet, Chicago-based consultant Jay Taparia said.

His theory came a day after Provident said it would restate profits for the last six years. The bank said it overstated profits by $70 million since 1997 when it improperly accounted for nine auto-lease transactions.

The disclosure resulted in the bank's biggest single-day stock drop in 14 years, cost investors about $284 million on paper and raised many questions why the accounting method was initially used and took so long to be discovered. After closing down $5.61 Wednesday, the stock lost another 89 cents Thursday, closing at $21.57.

The mistake was tied to nine auto-leasing transactions that occurred from 1997 to 1999. They were reported as off-balance-sheet transactions, but should been posted as financing leases with all assets and liabilities included on the balance sheet.

The error will force Provident to restate results from 1997 through 2002. It also cut the company's 2003 earnings forecast to between $2.30 and $2.50, down from the bank's earlier $2.50-to-$2.70 estimate.

Christopher Carey, Provident's chief financial officer, called Taparia's theory "one man's assessment." He said the overstatement was caused by a bad internal system that showed the transactions created more revenue than they actually did.

The errors were detected by Provident's finance staff in late February, a month after the bank reported a 2002 profit of $119.4 million.

Carey also said the errors were not initially discovered by Ernst & Young, Provident's auditor. He said Provident asked Ernst & Young to bring in its own leasing expert, after Provident's finance team detected the errors.

Carey said Provident was then told by the leasing expert that none of those transactions should have been accounted for as off-balance-sheet items.

Carey said the bottom line is that a decision was made by management at the time after consultation with Ernst & Young to keep them off the balance sheet. He said the bank's recent internal review determined that they should've remained on.

Efforts to get a comment from Joseph Steger, head of the audit committee for Provident's board, were unsuccessful. Officials from Ernst & Young, Provident's auditor, also declined comment.

Taparia, founder of Sanskar Investments, a Chicago money management consulting firm and professor of finance at the University of Illinois, said Provident essentially decided to use a proprietary model to determine whether to use the pool of auto loans as operating leases or capitalized leases.

"This company took on debt to finance the purchase of a (loan) pool" he said. "The interest expense is what reduced net income over the years."

He said that keeping the leases off the books could make the bank's return on assets appear higher.

"It can make a company look more valuable than its peers, which in turn could help boost the stock valuation," Taparia said.

E-mail jmckinney@enquirer.com.