General

Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company of Provident Savings Bank, F.S.B. upon the Bank's conversion from a

The Bank, founded in 1956, is a federally chartered stock savings bank headquartered in Riverside, California. The Bank is regulated by the Office of Thrift Supervision ("OTS"), its primary federal regulator, and the Federal Deposit Insurance Corporation ("FDIC"), the insurer of its deposits. The Bank's deposits are federally insured up to applicable limits by the FDIC. The Bank has been a member of the Federal Home Loan Bank System since 1956.

The Bank's business consists of community banking activities and mortgage banking activities. Community banking activities primarily consist of accepting deposits from customers within the communities surrounding the Bank's full service offices and investing those funds in single-family loans, multi-family loans, commercial real estate loans, construction loans, commercial business loans, consumer loans and other real estate loans. The Bank also offers business checking accounts, other business banking services, and services loans for others. Mortgage banking activities consist of the origination and sale of mortgage and consumer loans secured primarily by single-family residences. The Bank currently operates 14 retail/business banking offices in Riverside County and San Bernardino County (commonly known as the Inland Empire), including the newly opened Iris Plaza office in Moreno Valley, California. Provident Bank Mortgage operates wholesale loan production offices in Pleasanton and Rancho Cucamonga, California and retail loan production offices in Glendora and Riverside, California. The Bank's revenues are derived principally from interest on its loans and investment securities and fees generated through its community banking and mortgage banking activities. There are various risks inherent in the Bank's business including, among others, the general business environment, interest rates, the California real estate market, the demand for loans, the prepayment of loans, the repurchase of loans previously sold to investors, competitive conditions between banks and non-bank financial services providers, legislative and regulatory changes, fraud and other risks.

The Corporation, from time to time, may repurchase its common stock. The Corporation evaluates the repurchase of its common stock when the market price of the stock is lower than its book value and/or the Corporation believes that the current market price is not commensurate with its current and future earnings potential. Consideration is also given to the Corporation's liquidity, regulatory capital requirements and future capital needs based on the Corporation's current business plan. The Corporation's Board of Directors authorizes each stock repurchase program, the duration of which is typically one year. Once the stock repurchase program is authorized, management may repurchase the Corporation's common stock from time to time in the open market or in privately negotiated transactions, depending upon market conditions and the factors described above. On June 26, 2008, the Corporation announced that its Board of Directors authorized the repurchase of up to five percent of its outstanding common stock, or approximately 310,385 shares, over a one-year period. As a result of current economic conditions, the Corporation did not repurchase any of its shares during the quarter ended December 31, 2008. See Part II, Item 2 - "Unregistered Sales of Equity Securities and Use of Proceeds" on page 49.

The Corporation began to distribute quarterly cash dividends in the quarter ended September 30, 2002. On October 30, 2008, the Corporation declared a quarterly cash dividend of $0.05 per share for the Corporation's shareholders of record at the close of business on November 21, 2008, which was paid on December 16, 2008. On January 20, 2009, the Corporation declared a cash dividend of $0.03 per share on the Corporation's outstanding shares of common stock for shareholders of record as of the close of business on February 10, 2009, payable on March 6, 2009. Future declarations or payments of dividends will be subject to the consideration of the Corporation's Board of Directors, which will take into account the Corporation's financial condition, results of operations, tax considerations, capital requirements, industry standards, legal restrictions, economic conditions and other factors, including the regulatory restrictions which affect the payment of dividends by the Bank to the Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the current fiscal year and/or the preceding fiscal year in which the dividend is declared.

Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding the financial condition and results of operations of the Corporation. The

Safe-Harbor Statement

This Form 10-Q contains statements that the Corporation believes are "forward-looking statements." These statements relate to the Corporation's financial condition, results of operations, plans, objectives, future performance or business. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements the Corporation may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to the Corporation. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors which could cause actual results to differ materially include, but are not limited to, the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs; changes in general economic conditions, either nationally or in our market areas; changes in the levels of general interest rates, deposit interest rates, our net interest margin and funding sources; fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas; results of examinations of us by the Office of Thrift Supervision, Federal Deposit Insurance Corporation or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses or to write-down assets; our ability to control operating costs and expenses; our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we have acquired or may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; our ability to manage loan delinquency rates; our ability to retain key members of our senior management team; costs and effects of litigation, including settlements and judgments; increased competitive pressures among financial services companies; changes in consumer spending, borrowing and savings habits; legislative or regulatory changes that adversely affect our business; adverse changes in the securities markets; inability of key third-party providers to perform their obligations to us; changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies or the Financial Accounting Standards Board; war or terrorist activities; other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and other risks detailed in the Corporation's reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

Critical Accounting Policies

The discussion and analysis of the Corporation's financial condition and results of operations are based upon the Corporation's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for loan losses involves significant judgment and assumptions by management, which have a material impact on the carrying value of net loans. Management considers this accounting policy to be a critical accounting policy. The allowance is based on two principles of accounting: (i) SFAS No. 5, "Accounting for Contingencies," which requires that losses be accrued when they are probable of occurring and can be estimated; and (ii) SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures," which require that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The allowance has two components: a formula allowance for groups of homogeneous loans and a specific valuation allowance for identified problem loans. Each of these components is based upon estimates that

can change over time. The formula allowance is based primarily on historical experience and as a result can differ from actual losses incurred in the future. The history is reviewed at least quarterly and adjustments are made as needed. Various techniques are used to arrive at specific loss estimates, including historical loss information, discounted cash flows and the fair market value of collateral. The use of these techniques is inherently subjective and the actual losses could be greater or less than the estimates.

Interest is not accrued on any loan when its contractual payments are more than 90 days delinquent or if the loan is deemed impaired. In addition, interest is not recognized on any loan where management has determined that collection is not reasonably assured. A non-accrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected.

SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," requires that derivatives of the Corporation be recorded in the consolidated financial statements at fair value. Management considers this accounting policy to be a critical accounting policy. The Bank's derivatives are primarily the result of its mortgage banking activities in the form of commitments to extend credit, commitments to sell loans, commitments to purchase MBS and option contracts to mitigate the risk of the commitments to extend credit. Estimates of the percentage of commitments to extend credit on loans to be held for sale that may not fund are based upon historical data and current market trends. The fair value adjustments of the derivatives are recorded in the consolidated statements of operations with offsets to other assets or other liabilities in the consolidated statements of financial condition.

Management accounts for income taxes by estimating future tax effects of temporary differences between the tax and book basis of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in the Corporation's Condensed Consolidated Statements of Financial Condition. Management's judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Therefore, management considers its accounting for income taxes a critical accounting policy.

Executive Summary and Operating Strategy

Provident Savings Bank, F.S.B., established in 1956, is a financial services company committed to serving consumers and small to mid-sized businesses in the Inland Empire region of Southern California. The Bank conducts its business operations as Provident Bank, Provident Bank Mortgage, a division of the Bank, and through its subsidiary, Provident Financial Corp. The business activities of the Corporation, primarily through the Bank and its subsidiary, consist of community banking, mortgage banking, and to a lesser degree, investment services for customers and trustee services on behalf of the Bank.

Community banking operations primarily consist of accepting deposits from customers within the communities surrounding the Bank's full service offices and investing those funds in single-family, multi-family, commercial real estate, construction, commercial business, consumer and other loans. Additionally, certain fees are collected from depositors, such as returned check fees, deposit account service charges, ATM fees, IRA/KEOGH fees, safe deposit box fees, travelers check fees, and wire transfer fees, among others. The primary source of income in community banking is net interest income, which is the difference between the interest income earned on loans and investment securities, and the interest expense paid on interest-bearing deposits and borrowed funds. During the next three years, although not immediately given the uncertain environment, the Corporation intends to improve the community banking business by moderately growing total assets; by decreasing the concentration of single-family mortgage loans within loans held for investment; and by increasing the concentration of higher yielding multi-family, commercial real estate, construction and commercial business loans (which are sometimes referred to in this report as "preferred loans"). In addition, over time, the Corporation intends to decrease the percentage of time deposits in its deposit base and to increase the percentage of lower cost checking and savings accounts. This strategy is intended to improve core revenue through a higher net interest margin and ultimately, coupled with the growth of the Corporation, an increase in net interest income. While the Corporation's long-term strategy described moderate growth, management may determine from time to time that shrinking the balance sheet is the most prudent short-term strategy in response to deteriorating general economic conditions.

Mortgage banking operations primarily consist of the origination and sale of mortgage loans secured by single-family residences. The primary sources of income in mortgage banking are gain on sale of loans and certain fees collected from borrowers in connection with the loan origination process. The Corporation will continue to restructure its operations in response to the rapidly changing mortgage banking environment. Changes may include a different product mix, further tightening of underwriting standards, a further reduction in its operating expenses or a combination of these and other changes.

Investment services operations primarily consist of selling alternative investment products such as annuities and mutual funds to the Bank's depositors. Provident Financial Corp performs trustee services for the Bank's real estate secured loan transactions and has in the past held, and may in the future hold, real estate for investment. Investment services and trustee services contribute a very small percentage of gross revenue.

There are a number of risks associated with the business activities of the Corporation, many of which are beyond the Corporation's control, including:
changes in accounting principles, changes in regulation and changes in the economy, among others. The Corporation attempts to mitigate many of these risks through prudent banking practices such as interest rate risk management, credit risk management, operational risk management, and liquidity management. The current economic environment presents heightened risk for the Corporation primarily with respect to falling real estate values and higher loan delinquencies. Declining real estate values may lead to higher loan losses since the majority of the Corporation's loans are secured by real estate located within California. Significant declines in the value of California real estate may inhibit the Corporation's ability to recover on defaulted loans by selling the underlying real estate. For further details on risk factors, see the Safe-Harbor Statement on page 17 and Item 1A - Risk Factors on page 45.

Off-Balance Sheet Financing Arrangements and Contractual Obligations

The following table summarizes the Corporation's contractual obligations at
December 31, 2008 and the effect these obligations are expected to have on the
Corporation's liquidity and cash flows in future periods (in thousands):

                                      Payments Due by Period
                       1 year      Over      Over 3      Over
                                 1 year     years
                       or less     to 3       to 5      5 years       Total
                                  years     years
Operating             $    795   $   930   $    447    $      -    $    2,172
obligations
Time deposits          559,808    51,350     20,114          75       631,347
FHLB - San Francisco   146,127   229,954    130,918      19,268       526,267
advances
FHLB - San Francisco     2,500         -          -           -         2,500
letter of credit
Total                $ 709,230         $          $    $ 19,343   $ 1,162,286
                                 282,234    151,479

The expected obligation for time deposits and FHLB - San Francisco advances include anticipated interest accruals based on the respective contractual terms.

In addition to the off-balance sheet financing arrangements and contractual obligations mentioned above, the Corporation has derivatives and other financial instruments with off-balance sheet risks as described in Note 5 of the Notes to Unaudited Interim Consolidated Financial Statements on page 11.

Comparison of Financial Condition at December 31, 2008 and June 30, 2008

Total assets decreased $81.3 million, or five percent, to $1.55 billion at December 31, 2008 from $1.63 billion at June 30, 2008. The decrease was primarily attributable to a decrease in loans held for investment.

Loans held for investment decreased $102.7 million, or eight percent, to $1.27 billion at December 31, 2008 from $1.37 billion at June 30, 2008. During the first six months of fiscal 2009, the Bank originated $17.2 million of loans held for investment, of which $7.4 million, or 43 percent, were "preferred loans"

The table below describes the geographic dispersion of real estate secured loans held for investment at December 31, 2008, as a percentage of the total dollar amount outstanding:

                  Inland        Southern         Other         Other
                  Empire     California (1)   California      States          Total
Loan Category   Balance   %     Balance    %   Balance   %   Balance   %   Balance    %
Single-family  $231,011  31%    $413,528 54%  $105,945 14%   $10,605  1%   $761,089 100%
Multi-family     34,928   9%     267,744 70%    72,797 19%     6,119  2%    381,588 100%
Commercial       60,045  47%      63,402 50%     2,387  2%     1,655  1%    127,489 100%
real estate
Construction     11,908  97%         400  3%         -  0%         -  0%     12,308 100%
Other             3,289 100%           -  0%         -  0%         -  0%      3,289 100%
Total          $341,181  27%    $745,074 58%  $181,129 14%   $18,379  1% $1,285,763 100%

(1) Other than the Inland Empire.

Total loans held for sale increased $17.9 million, or 63 percent, to $46.4 million at December 31, 2008 from $28.5 million at June 30, 2008. The increase was due primarily to the timing difference between loan originations and loan sale settlements. See "Loan Volume Activities" on page 36.

Total investment securities decreased $8.2 million, or five percent, to $144.9 million at December 31, 2008 from $153.1 million at June 30, 2008. The decrease was primarily the result of scheduled and accelerated principal payments on mortgage-backed securities. The Bank evaluates individual investment securities quarterly for other-than-temporary declines in market value. The Bank does not believe that there are any other-than-temporary impairments at December 31, 2008; therefore, no impairment losses have been recorded as of December 31, 2008.

Total deposits decreased $77.6 million, or eight percent, to $934.8 million at December 31, 2008 from $1.01 billion at June 30, 2008. This decrease was primarily attributable to the strategic decision to compete less aggressively on time deposit interest rates, partly offset by the Bank's marketing strategy to promote transaction accounts.

Borrowings, consisting of FHLB - San Francisco advances increased slightly to $480.7 million at December 31, 2008 from $479.3 million at June 30, 2008. The increase in borrowings was primarily the result of the decrease in deposits and the increase in loans held for sale, partly offset by the decrease in loans held for investment. The weighted-average maturity of the Bank's FHLB - San Francisco advances was approximately 29 months (27 months, if put options are exercised by the FHLB - San Francisco) at December 31, 2008, as compared to the weighted-average maturity of 23 months (20 months, if put options were exercised by the FHLB - San Francisco) at June 30, 2008.

Total stockholders' equity decreased $6.1 million, or five percent, to $117.9 million at December 31, 2008, from $124.0 million at June 30, 2008, primarily as a result of the net loss and the quarterly cash dividends paid during the first six months of fiscal 2009. No stock options were exercised and no common stock was repurchased during the first six months of fiscal 2009. The total cash dividend paid to the Corporation's shareholders in the first six months of fiscal 2009 was $620,000.

Comparison of Operating Results for the Quarters and Six Months Ended December 31, 2008 and 2007

The Corporation's net loss for the quarter ended December 31, 2008 was $6.5 million, compared to net income of $1.0 million during the same quarter of fiscal 2008. For the six months ended December 31, 2008, the Corporation's net loss was $6.2 million, compared to net income of $1.7 million during the same period of fiscal 2008. The decrease for both periods was primarily a result of the increase in the provision for loan losses, partly offset by the increase in net interest income (before provision for loan losses), the increase in non-interest income and the decrease in operating expenses.

The Corporation's efficiency ratio improved to 58 percent in the second quarter of fiscal 2009 from 64 percent in the same period of fiscal 2008. For the six months ended December 31, 2008, the efficiency ratio improved to 55 percent from 68 percent in the six months ended December 31, 2007. The improvement in the efficiency ratio for both these periods was a result of the increase in net interest income (before provision for loan losses), the increase in non-interest income and the decrease in non-interest expenses.

Return on average assets for the quarter ended December 31, 2008 decreased 193 basis points to (1.67) percent from 0.26 percent in the same period last year. For the six months ended December 31, 2008 and 2007, the return on average assets was (0.78) percent and 0.21 percent, respectively, a decrease of 99 basis points.

Return on average equity for the quarter ended December 31, 2008 decreased to
(21.44) percent from 3.30 percent for the same period last year. For the six months ended December 31, 2008, the return on average equity decreased to
(10.07) percent from 2.60 percent for the same period last year.

Diluted earnings per share for the quarter ended December 31, 2008 were $(1.05), compared to $0.17 for the quarter ended December 31, 2007. For the six months ended December 31, 2008 and 2007, diluted earnings per share were $(1.00) and $0.27, respectively.

Net Interest Income:

For the Quarters Ended December 31, 2008 and 2007. The Corporation's net interest income (before the provision for loan losses) increased by $673,000, or seven percent, to $10.2 million for the quarter ended December 31, 2008 from $9.6 million in the comparable period in fiscal 2008. This increase was the result of a higher net interest margin, partly offset by lower average earning assets. The net interest margin increased to 2.70 percent in the second quarter of fiscal 2009, up 28 basis points from 2.42 percent for the same period of fiscal 2008. The increase in the net interest margin during the second quarter of fiscal 2009 was primarily attributable to a decrease in the average cost of funds which declined more than the average yield on earning assets. The average balance of earning assets decreased $66.3 million to $1.52 billion in the second quarter of fiscal 2009 from $1.58 billion in the comparable period of fiscal 2008.

For the Six Months Ended December 31, 2008 and 2007. Net interest income (before the provision for loan losses) for the first six months of fiscal 2009 was $21.5 million, up $2.6 million or 14 percent from $18.9 million during the same period of fiscal 2008. This increase was the result of a higher net interest margin, partly offset by lower average earning assets. The net interest margin increased to 2.79 percent in the first six months of fiscal 2009, up 38 basis points from 2.41 percent during the same period of fiscal 2008. The increase in the net . . .