The following discussion and analysis should be read in conjunction with the Corporation's Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K.

General

Management's discussion and analysis of financial condition and results of operations are intended to assist in understanding the financial condition and results of operations of the Corporation. The information contained in this section should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in Item 8 of this Form 10-K. Provident Savings Bank, F.S.B., is a wholly owned subsidiary of Provident Financial Holdings, Inc. and as such, comprises substantially all of the activity for Provident Financial Holdings, Inc.

Certain matters in this Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This Form 10-K 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 these risks and uncertainties in mind, 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 charge-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 by the OTS and of our bank subsidiary by the FDIC, the OTS 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 implement our branch expansion strategy; 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; the 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 SEC.

Critical Accounting Policies

The discussion and analysis of the Corporation's financial condition and results of operations are based upon the Corporation's 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 dates and for the periods of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.

The 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. For further details, see "Comparison of Operating Results for the Years Ended June 30, 2009 and 2008 - Provision for Loan Losses" on page 63 and page 67 of this Form 10-K. See also Item 1. "Business - Delinquencies and Classified Assets - Allowance for Loan Losses" on page 25 of this Form 10-K.

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-performing 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, loan sale commitments and option contracts to mitigate the risk of the commitments. 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 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 to be 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,

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 the Corporation intends to improve the community banking business by: (i) decreasing the percentage of investment securities to total assets and increasing the percentage of loans held for investment to total assets; (ii) decreasing the concentration of single-family mortgage loans within loans held for investment; and (iii) 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 an increase in net interest income.

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 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.

As a result of the challenging business environment, the Corporation's current short-term strategy is to preserve capital and maintain the Bank's "well-capitalized" regulatory capital designation; deleverage the balance sheet; reduce credit risk; and augment liquidity. Deleveraging the balance sheet is a significant component of the short-term strategy because doing so improves the Corporation's capital ratio and reduces credit risk at the same time since loans that are prepaying or maturing are not replaced. The Corporation has augmented liquidity by increasing cash on hand. The single most significant matter facing the Corporation remains asset quality and the Corporation has dedicated a significant number of resources to deal with asset quality issues. The Corporation remains committed to quickly identifying any problem loans within the loans held for investment portfolio, to timely record any related losses that the Corporation may experience, and to quickly dispose of the resultant real estate owned properties.

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. 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. See "Risk Factors."

Commitments and Derivative Financial Instruments

The Corporation conducts a portion of its operations in leased facilities under non-cancelable agreements classified as operating leases (see Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for a schedule of minimum rental payments and lease expenses under such operating leases). For information regarding the Corporation's commitments and derivative financial instruments, see Note 15 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.

Off-Balance Sheet Financing Arrangements and Contractual Obligations

The following table summarizes the Corporation's contractual obligations at June
30, 2009 and the effect such obligations are expected to have on the
Corporation's liquidity and cash flows in future periods:

                                         Payments Due by Period
                        1 Year     Over 1 to   Over 3 to     Over
(In Thousands)          or Less     3 Years     5 Years    5 Years       Total
Operating obligations   $    793   $   1,280    $    361   $      -    $    2,434
Time deposits            547,124      56,491      45,569      3,600       652,784
FHLB - San Francisco     127,839     254,510      94,617     18,968       495,934
advances
FHLB - San Francisco       5,000           -           -          -         5,000
letter of credit
FHLB - San Francisco
MPF credit                 3,147           -           -          -         3,147
 enhancement
Total                  $ 683,903   $ 312,281   $ 140,547   $ 22,568   $ 1,159,299

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

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, in the form of originating loans or providing funds under existing lines of credit, loan sale commitments to third parties and commitments to purchase investment securities. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Consolidated Statements of Financial Condition included in Item 8 of this Form 10-K. The Corporation's exposure to credit loss, in the event of non-performance by the other party to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments to extend credit as it does for on-balance sheet instruments. As of June 30, 2009 and 2008, these commitments were $105.7 million and $29.4 million, respectively.

Comparison of Financial Condition at June 30, 2009 and June 30, 2008

Total assets decreased $52.8 million, or 3%, to $1.58 billion at June 30, 2009 from $1.63 billion at June 30, 2008. The decrease was primarily a result of a decrease of $202.6 million in loans held for investment, significantly offset by an increase of $135.5 million in loans held for sale at fair value.

Total investment securities decreased $27.8 million, or 18%, to $125.3 million at June 30, 2009 from $153.1 million at June 30, 2008. A total of $8.1 million of investment securities were purchased in fiscal 2009, while $65,000 of investment securities matured and $37.8 million of principal payments were received on mortgage-backed securities. The principal reduction of mortgage-backed securities was primarily attributable to mortgage prepayments and the scheduled principal payments of the underlying mortgage loans.

Loans held for investment decreased $202.6 million, or 15%, to $1.17 billion at June 30, 2009 from $1.37 billion at June 30, 2008. This decrease was primarily a result of $166.6 million of loan prepayments and $63.4 million of real estate acquired in the settlement of loans, which was partly offset by originating and purchasing $29.3 million of

loans held for investment. The decrease in loans held for investment is consistent with the short-term operating strategy to deleverage the balance sheet, improve capital ratios and mitigate credit and liquidity risk.

The table below describes the geographic dispersion of real estate secured loans held for investment at June 30, 2009, as a percentage of the total dollar amount outstanding (dollars in thousands):

                 Inland        Southern        Other       Other
                 Empire     California (1)   California    States        Total
Loan Category Balance   %     Balance    %  Balance   %  Balance %   Balance    %
Single-family $211,400  30%    $380,227 55%  $94,111 14%  $8,616 1%   $694,354 100%
Multi-family    34,624   9%     264,239 71%   70,079 19%   3,682 1%    372,624 100%
Commercial      62,201  51%      56,489 46%    2,364  2%   1,643 1%    122,697 100%
real estate

(1) Other than the Inland Empire.

During fiscal 2009, the Bank originated $1.35 billion in new loans, primarily through PBM, and purchased $595,000 from other financial institutions. A total of $1.20 billion of loans were sold during fiscal 2009. PBM loan production was sold primarily on a servicing released basis. The total loan origination volume was higher than last year, due primarily to lower interest rates and a less competitive environment, despite more stringent underwriting standards and the general decline in real estate values.

The outstanding balance of loans held for sale at fair value and loans held for sale at lower of cost or market increased to $146.0 million at June 30, 2009 from $28.5 million at June 30, 2008. The Corporation elected the fair value option (SFAS No. 159) for PBM loans originated for sale on May 28, 2009 and thereafter (See "Comparison of Operating Results for the Years Ended June 30, 2009 and 2008 - Non-Interest Income" on page 64 and page 67 of this Form 10-K). The increase was due primarily to higher loan originations and the timing difference between loan originations and loan sale settlements. The increase in loan originations was primarily attributable to relatively low mortgage interest rates and less competition. Actions by the Department of Treasury and Federal Reserve in response to the credit crisis resulted in the ancillary benefit of significantly lower mortgage interest rates.

Total real estate owned was $16.4 million at June 30, 2009, up 74% from $9.4 million at June 30, 2008. As of June 30, 2009, real estate owned was comprised of 80 properties, primarily single-family residences and single-family undeveloped lots located in Southern California. This compares to 45 real estate owned properties at June 30, 2008, primarily single-family residences located in Southern California. The increase in real estate owned was due primarily to foreclosures resulting from weakness in the real estate market, stricter underwriting standards, less liquidity in the secondary market, deterioration of some borrowers' credit capacity, limited refinance opportunity and other related factors. During fiscal 2009, the Bank acquired 157 real estate owned properties in the settlement of loans and sold 122 properties.

Total deposits decreased $23.2 million, or 2%, to $989.2 million at June 30, 2009 from $1.01 billion at June 30, 2008. The decrease in deposits was primarily in time deposits which decreased $26.8 million, or 4%, to $636.9 million at June 30, 2009 from $663.7 million at June 30, 2008. The decrease in deposits, particularly in time deposits, is consistent with the short-term operating strategy of deleveraging the balance sheet. In fiscal 2009, the Bank did not compete aggressively to attract time deposits, but continued to maintain and improve core deposits or transaction accounts. During fiscal 2009, the Bank began providing free ATM access to over 36,000 ATMs nationwide, opened a new retail banking branch in Moreno Valley, California and implemented a number of transaction account acquisition and retention growth strategies such as cross-selling additional products and services to transaction account customers.

Borrowings, primarily FHLB - San Francisco advances, decreased $22.6 million, or 5%, to $456.7 million at June 30, 2009 from $479.3 million at June 30, 2008. FHLB - San Francisco advances were primarily used to supplement the funding needs of the Bank.

Total stockholders' equity decreased $9.1 million, or 7%, to $114.9 million at June 30, 2009 from $124.0 million at June 30, 2008. The decrease in stockholders' equity during fiscal 2009 was primarily attributable to the net loss in fiscal 2009 and cash dividends to shareholders, partly offset by an increase in other comprehensive income. During fiscal 2009, the Corporation declared and distributed cash dividends to its shareholders of $994,000, or $0.16 per share. The Corporation's book value per share decreased to $18.48 at June 30, 2009 from $19.97 at June 30, 2008.

Comparison of Operating Results for the Years Ended June 30, 2009 and 2008

General. The Corporation recorded a net loss of $7.4 million, or a net loss of $1.20 per diluted share, for the fiscal year ended June 30, 2009, as compared to net income of $860,000, or $0.14 per diluted share, for the fiscal year ended June 30, 2008. The $8.3 million decrease in net income in fiscal 2009 was primarily attributable to a $35.6 million increase in the provision for loan losses, partly offset by a $15.0 million increase in non-interest income. The Corporation's efficiency ratio improved to 47% in fiscal 2009 from 65% in fiscal 2008. Return on average assets in fiscal 2009 decreased to negative (0.47)% from 0.05% in fiscal 2008. Return on average equity in fiscal 2009 decreased to negative (6.20)% from 0.68% in fiscal 2008.

Net Interest Income. Net interest income before provision for loan losses increased $2.4 million, or 6%, to $43.8 million in fiscal 2009 from $41.4 million in fiscal 2008. This increase resulted principally from an increase in the net interest margin, partly offset by a decrease in average earning assets. The average net interest margin increased 25 basis points to 2.86% in fiscal 2009 from 2.61% in fiscal 2008. The average balance of earning assets decreased $56.2 million, or 4%, to $1.53 billion in fiscal 2009 from $1.59 billion in fiscal 2008.

Interest Income. Interest income decreased $9.8 million, or 10%, to $85.9 million for fiscal 2009 from $95.7 million for fiscal 2008. The decrease in interest income was primarily a result of decreases in the average balance and the average yield of earning assets. The decrease in average earning assets was primarily attributable to the decrease in loans receivable and investment securities, partly offset by an increase in federal funds. The average yield on earning assets decreased 42 basis points to 5.62% in fiscal 2009 from 6.04% in fiscal 2008. The decrease in the average yield on earning assets was the result of a decrease in the average yield on loans receivable, investment securities and FHLB - San Francisco stock during fiscal 2009. The decline on the average earning assets is consistent with the current short-term strategy of maintaining capital ratios, improving liquidity and reducing credit risk.

Loan interest income decreased $7.5 million, or 9%, to $78.8 million in fiscal 2009 from $86.3 million in fiscal 2008. This decrease was attributable to a lower average loan balance and a lower average loan yield. The average balance of loans receivable decreased $55.3 million, or 4%, to $1.34 billion during fiscal 2009 from $1.40 billion during fiscal 2008. The average loan yield during fiscal 2009 decreased 31 basis points to 5.87% from 6.18% during fiscal 2008. The decrease in the average loan yield was primarily attributable to higher non-performing loans, which required interest income reversals, and adjustable-rate loans repricing to lower interest rates. Total non-performing loans increased to $71.8 million at June 30, 2009 from $23.2 million at June 30, 2008.

Interest income from investment securities decreased $746,000, or 10%, to $6.8 million in fiscal 2009 from $7.6 million in fiscal 2008. This decrease was primarily a result of a decrease in the average yield and a decrease in the average balance. The average yield on the investment securities decreased 15 basis points to 4.72% during fiscal 2009 from 4.87% during fiscal 2008. The decrease in the average yield of investment securities was primarily a result of higher premium amortization, the repricing of adjustable-rate MBS to lower interest rates and the MBS principal payments which had a higher average yield than the average yield of all investment securities. The premium amortization in fiscal 2009 was $160,000, compared to the premium amortization of $16,000 in fiscal 2008. The average balance of investment securities decreased $10.9 million, or 7%, to $144.6 million in fiscal 2009 from $155.5 million in fiscal 2008.

FHLB - San Francisco stock dividends decreased by $1.5 million, or 82%, to $324,000 in fiscal 2009 from $1.8 million in fiscal 2008. This decrease was attributable to the FHLB - San Francisco's decision to reduce dividends in order to preserve its capital in response to the recent economic downturn.