Provident Financial Group Inc. knew that it would face some strong winds in 2000, but a slowing economy hit the Cincinnati banking company like a hurricane.

        The parent of Provident Bank stunned Wall Street last month after it said unexpected problem loans hurt profits in the fourth quarter. It also said 2001 share earnings will be lower than expected, mainly because of concerns about credit quality and economic uncertainty.

COMPANY FILE

• Business: Parent of Provident Bank has assets of almost $14 billion and primarily provides retail and commercial banking regionally and nationally.   • Headquarters: Cincinnati.   • Chief executive: Robert L. Hoverson.   • Branches: 67 in Ohio and Kentucky, 11 in Florida.   • Employees: 3,000.   • Ticker/market: PFGI/Nasdaq.   • Friday's close:   • 52-week high/low: $37.68 (Dec. 28)/$23.81 (June 30).   • Revenues (2000): $642.1 million, up from $609.3 million in 1999.   • Profits (2000): $100.6 million, or $2 a share, down from $153.7 million, or $3.14 a share, in 1999.

        Investors didn't weather the storm well, either: Provident's stock fell $5 two days after the news Jan. 19 to $28.94, almost three weeks after the company's shares hit a 52-week high of $37.68.

        The latest developments — including a fourth-quarter charge of $35.3 million to cover problem loans and boosting reserves to cover such loans going forward — caused analysts to downgrade Provident's stock, though its core businesses are fundamentally strong.

        Concern about credit quality was a key reason Provident lowered its share earnings estimate this year to the $2.75-$2.85 range. Recent consensus estimates had placed Provident's share earnings in the $3.15-$3.20 range.

        The downgrade also came four months after Provident told banking analysts share earnings for 2000 would be lower than expected because of a change in the accounting method the bank uses to loans. Investors adjusted to that news — as well as word in October that credit quality issues were expected to be normalized by year's end.

        Robert Hoverson, Provident's president and chief executive, talked to Enquirer reporter Jeff McKinney about the company's future, some of its biggest challenges and the outlook for the next few years.

        Question: Provident had a pretty difficult year in 2000 even though its fundamental businesses remained sound and the company grew revenues by 5 percent to $642.1 million. Now, what do you see as some of the biggest challenges facing Provident going forward?

Answer: The biggest challenge, by far, for everyone, including us, is what will happen to the economy. We've positioned the bank for a slowdown, with the expectations that the economy will be a little bit bumpy. That's also a reason we lowered our share earnings estimates for 2001 and raised our reserve levels (for the potential of more problem loans). It's going to be tougher than before.

        Q: When does Provident believe credit quality will return to more normal levels after what happened the past two quarters?

A: We originally forecast credit losses at lower levels than what we're projecting for 2001. We believe we've moved most of the issues we had in the third and fourth quarters, but we're still leery. If you ask any bank their position on credit, they'll probably tell you they expect more problems, and we agree. We don't expect credit quality to be extraordinarily bad this year, but it's going to be a rougher year.

        Q: Speaking of the economy, what is Provident hearing from other Cincinnati companies that it does business with about overall activity and signs of a slowing economy?

A: I talk to customers about that daily, and people are definitely starting to see things slow down, you bet. They're seeing it mostly from slower sales. Most people say they are seeing things change from quarter to quarter, particularly the last 60 days. Yes, we have a number of clients, and they're telling us things are slower.

        Q: In terms of loan demand, what is the bank seeing in activity from its customers?

        A: Loan demand was strong throughout 2000. Our folks are now telling us things have slowed the past 30 days. We believe we'll see loan growth in the low double-digit range this year, further evidence of a slowing economy. We're projecting 13 percent growth in commercial lending, down from 15 percent to 16 percent last year. Overall, we think growth for both commercial and consumer loans will be lower than last year.

        Q: What role will Provident's nonconforming mortgage business play in future revenue growth?

A: We're actually transitioning that business this year to be more service-oriented than production-oriented. We only expect to do about $1 billion in loans this year, down from $1.8 billion last year. We have a sub-service unit in that business in Atlanta we're focusing more on growing, giving us a different revenue mix. We're fundamentally altering that business into being more of a servicer than just originating and portfolio-ing loans.

        Q: Where will revenue growth come from, primarily?

A: 2000 was a transitional year in terms of the accounting change. ... The dynamics of eventually bringing those assets back on the balance sheet will give us above-average revenue and earnings growth, setting us apart from most of the other banks nationally. That (accounting change) will make us extremely and uniquely positioned for revenue growth. Once we get this credit issue behind us and the market recognizes the earnings growth potential, we believe the stock will be rewarded for that. For example, the accounting change reduced Provident's revenues by about $40 million last year.

        Q: What areas has Provident identified to grow fee income, including expanding into new lines of business or making acquisitions of nontraditional banks?

A: We just set a goal of increasing the level of fee income in our commercial business by 50 percent by late 2003, up from about 20 percent of commercial revenues we expect coming from fees this year. We bought Capstone in '99 and Red Capital last year (two commercial mortgage originators and servicers), areas we're looking to expand. So, it's kind of corporatewide emphasis on fee-income-generating businesses and less reliance on businesses that shore up capital. We're placing a lot of emphasis on growing fee income, more on the commercial side, instead of retail-oriented, consumer businesses. In addition, where we see more opportunities to make acquisitions (like Capstone), we'll look at them.

        Q: Provident has been extremely aggressive in recent years in beefing up and renovating its branches in the Tristate. How has that helped the company and changed its image?

A: Our brand awareness is improving, increasing to 42 percent from 33 percent in 1997. Seventy percent of our customers are telling us they would consider Provident for investment advice and financial planning, something we think is important in retaining and building future relationships. We've “merchandised” all of our branches, and our marketing deals at Paul Brown Stadium are doing extremely well. We were able to grow our deposits 18 percent in the fourth quarter. We have a solid lock on second place in deposit market share in Hamilton County (21 percent behind Fifth Third), so we feel good about that.

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