|**(Mark one)** | **FORM 10-K**
|-------------- | -------------

**[  ]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES               EXCHANGE
ACT OF 1934**

Commission File Number: 000-28304

PROVIDENT FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

|Delaware                                                             | 33-0704889            
|-------------------------------------------------------------------- | ----------------------
|(State
    or other jurisdiction of incorporation                    | (I.R.S. Employer      
|or
    organization)                                                 | Identification Number)
|                                                                     |                       
|3756 Central Avenue, Riverside, California                           | 92506                 
|(Address of principal executive offices)                             | (Zip Code)            
|                                                                     |                       
|Registrant's telephone number, including area code:   (951) 686-6060

Securities registered pursuant to Section 12(b) of the Act:

|Common Stock, par value $.01 per share | The Nasdaq Stock Market LLC                    
|-------------------------------------- | -----------------------------------------------
|(Title of Each Class)                  | (Name of Each Exchange
    on Which Registered)

Securities registered pursuant to Section 12(g) of the Act:   None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YES__       NO X.

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.YES
__NO X.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
YES X         NO
__.

Indicate by check mark whether disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or other information
statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [  ]



Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check One):

Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2).

YES
__
NO X.



As of September 5, 2007, there were 6,297,318 shares of the Registrant's common stock issued and outstanding.  The
Registrant's common stock is listed on the Nasdaq Global Market of The Nasdaq Stock Market LLC under the symbol
"PROV."  The aggregate market value of the common stock held by nonaffiliates of the Registrant, based on the
closing sales price of the Registrant's common stock as quoted on The Nasdaq Stock Market LLC on December 29,
2006, was $203.7 million.

DOCUMENTS INCORPORATED BY REFERENCE

2.   Portions of the definitive Proxy Statement for the fiscal 2007 Annual Meeting of Shareholders ("Proxy Statement")
     
are incorporated by reference into Part III.

<PAGE>

PROVIDENT FINANCIAL HOLDINGS, INC.

Table of Contents

Page

|**PART I**   |                                                                                                              |                                                                                           
|------------ | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------
|             | Item  1.                                                                                                     | Business:                                                                                 
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|             | Item 1A.      Risk Factors                                                                                   | 41                                                                                        
|             | Item 1B.      Unresolved Staff Comments                                                                      | 45                                                                                        
|             | Item  2.         Properties                                                                                  | 45                                                                                        
|             | Item 3.         Legal
    Proceedings                                                                        | 46                                                                                        
|             | Item  4.         Submission of Matters to a Vote of Security Holders                                         | 46                                                                                        
|**PART II**  |                                                                                                             
|             | Item  5.         Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of |                                                                                           
|             | Equity Securities                                                                                            | 46                                                                                        
|             | Item  6.         Selected Financial Data                                                                     | 48                                                                                        
|             | Item  7.         Management's Discussion and Analysis of Financial Condition and Results of Operations:      |                                                                                           
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|             | Item 7A.                                                                                                     | Quantitative and Qualitative Disclosures about Market Risk                                
|             | Item 8.                                                                                                      | Financial Statements and Supplementary Data                                               
|             | Item 9.                                                                                                      | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure  
|             | Item 9A.                                                                                                     | Controls and Procedures                                                                   
|             | Item 9B.                                                                                                     | Other Information                                                                         
|**PART III** |                                                                                                             
|             | Item 10.                                                                                                     | Directors and Executive Officers and Corporate Governance                                 
|             | Item 11.                                                                                                     | Executive Compensation                                                                    
|             | Item 12.                                                                                                     | Security Ownership of Certain Beneficial Owners and Management
    and Related Stockholder
|             |                                                                                                              | Matters                                                                                   
|             | Item 13.                                                                                                     | Certain Relationships and Related Transactions, and Director
    Independence             
|             | Item 14.                                                                                                     | Principal Accountant Fees and Services                                                    
|**PART IV**  |                                                                                                             
|             | Item 15.                                                                                                     | Exhibits and Financial Statement Schedules                                                
|             |                                                                                                             
|Signatures   | 70                                                                                                          

<PAGE>

PART I

**General**

Provident Financial Holdings, Inc. (the "Corporation"), a Delaware corporation, was organized in January 1996 for the
purpose of becoming the holding company for Provident Savings Bank, F.S.B. (the "Bank") upon the Bank's conversion
from a federal mutual to a federal stock savings bank ("Conversion").  The Conversion was completed on June 27, 1996.
At June 30, 2007, the Corporation had total assets of $1.6 billion, total deposits of $998.6 million and stockholders'
equity of $128.9 million.  The Corporation has not engaged in any significant activity other than holding the stock of
the Bank.  Accordingly, the information set forth in this Annual Report on Form 10-K ("Form 10-K"), including
financial statements and related data, relates primarily to the Bank and its subsidiaries.

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 ("FHLB") - San Francisco since
1956.

The Bank 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 ("PBM"), a division of the Bank, and through its subsidiary, Provident Financial Corp.  The business
activities of the Bank consist of community banking, mortgage banking, investment services and trustee services.
Financial information regarding the Corporation's two operating segments, Provident Bank and PBM, is contained in
Note 17 to the Corporation's audited consolidated financial statements included in Item 8 of this Form 10-K.

The Bank's community banking operations primarily consist of accepting deposits from customers within the
communities surrounding its full service offices and investing those funds in single-family, multi-family,
commercial real estate, construction, commercial business, consumer and other loans.  Mortgage banking activities
consist of the origination of single-family mortgage loans (including second mortgages and equity lines of credit)
for sale and for investment.  Through its subsidiary, Provident Financial Corp, the Bank conducts trustee services
for the Bank's real estate transactions and has in the past held, and may in the future hold, real estate for investment.
The Bank now offers investment and insurance services directly, rather than through its subsidiary.  See "Subsidiary
Activities" on page 31 of this Form 10-K.  The Bank's revenues are derived principally from interest earned on its
loan and investment portfolios, and fees generated through its community banking and mortgage banking activities.

On June
22, 2006, the Bank established the Provident Savings Bank Charitable Foundation
("Foundation") in order to further its commitment to the local community. The
specific purpose of the Foundation is to promote and provide for the betterment
of youth, education, housing and the arts in the Bank's primary market areas of
Riverside and San Bernardino Counties. The Foundation was funded with a $500,000
charitable contribution made by the Bank in the fourth quarter of fiscal 2006.
No additional funds were contributed by the Bank to the Foundation during fiscal
2007.

**Subsequent Events:**

**Cash dividend**
On July 26, 2007, the Corporation announced a cash dividend of $0.18 per share on the Corporation's
outstanding shares of common stock for shareholders of record at the close of business on August 20, 2007, which
was paid on September 10, 2007.

1

<PAGE>

**Market Area**

The Bank is headquartered in Riverside, California and operates 12 full-service banking offices in Riverside County
and one full-service banking office in San Bernardino County.  Management considers Riverside and Western San
Bernardino Counties to be the Bank's primary market for deposits.  Through the operations of PBM, the Bank has
expanded its retail lending market to include a large portion of Southern California and a small portion of Northern
California.  As of June 30, 2007, there were nine PBM loan production offices located in southern California (primarily
in Los Angeles, Riverside, San Bernardino and San Diego Counties) and one PBM loan production office in northern
California.  PBM's loan production offices include three wholesale loan offices through which the Bank maintains a
network of loan correspondents.  Most of the Bank's business is conducted in the communities surrounding its full-service branches and loan production offices.

The large geographic area encompassing Riverside and San Bernardino Counties is referred to as the "Inland Empire."
According to 2000 Census Bureau population statistics, Riverside and San Bernardino Counties have the sixth and fifth
largest county populations in California, respectively.  The Bank's market area consists primarily of suburban and urban
communities.  Western Riverside and San Bernardino Counties are relatively densely populated and are within the
greater Los Angeles metropolitan area.  The Inland Empire has enjoyed economic strength over the past several years.
Many corporations are moving their offices and warehouses to the Inland Empire, which offers more affordable sites
and more affordable housing for their employees.  This trend has resulted in a significant improvement in real estate
property values over the past several years.  However, recent slowdowns in the real estate market have effected property
values nationwide, including the Inland Empire.  The unemployment rate in the Inland Empire in June 2007 was 5.6%,
compared to 5.2% in California and 4.5% nationwide, according to U.S. Department of Labor, Bureau of Labor
Statistics.

**Competition**

The Bank faces significant competition in its market area in originating real estate loans and attracting deposits.  The
rapid population growth in the Inland Empire has attracted numerous financial institutions to the Bank's market area.
The Bank's primary competitors are large regional and super-regional commercial banks as well as other community-oriented banks and savings institutions.  The Bank also faces competition from credit unions and a large number of
mortgage companies that operate within its market area.  Many of these institutions are significantly larger than the Bank
and therefore have greater financial and marketing resources than the Bank.  The Bank's mortgage banking operations
also face strong competition from mortgage bankers, brokers and other financial institutions.  This competition may limit
the Bank's growth and profitability in the future.

**Personnel**

As of June 30, 2007, the Bank had 315 full-time equivalent employees, which consisted of 256 full-time, 59 prime-time
and 31 part-time employees.  The employees are not represented by a collective bargaining unit and the Bank believes
that its relationship with employees is good.

**Segment Reporting**

Financial information regarding the Corporation's operating segments is contained in Note 17 to the audited
consolidated financial statements included in Item 8 of this report.

The Corporation maintains a website at www.myprovident.com. The information contained on that website is not
included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. Other than an investor's own
internet access charges, the Corporation makes available free of charge through that website the Corporation's Annual
Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these
reports, as soon as reasonably practicable after these materials have been electronically filed with, or furnished to, the
Securities and Exchange Commission.

2

<PAGE>

**General.**  The lending activity of the Bank is predominately comprised of the origination of conventional mortgage
loans secured by single-family residential properties for investment (predominantly adjustable rate) and sale
(predominantly fixed rate).  The Bank also originates multi-family, commercial real estate, construction, commercial
business, consumer and other loans to be held for investment.  The Bank's net loans held for investment were $1.35
billion at June 30, 2007, representing approximately 81.9% of consolidated total assets.  This compares to $1.26 billion,
or 77.8% of consolidated total assets, at June 30, 2006.

3

<PAGE>

**Loans Held For Investment Analysis**.  The following table sets forth the composition of the Bank's loans held for investment at the dates indicated.

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

|                                         |  | **At June 30,** | 
|---------------------------------------- |  | --------------- | 
|                                         |  | **2007**        | 
|                                         |  | **Amount**      | 
|(Dollars In Thousands)                   |  |                 | 
|Mortgage loans:                          |  |                 | 
|Single-family                            |  | $    826,249    | 
|Multi-family                             |  | 330,231         | 
|Commercial real estate                   |  | 147,545         | 
|Construction                             |  | 60,571          | 
|Total mortgage loans                     |  | 1,364,596       | 
|Commercial business loans                |  | 10,054          | 
|Consumer loans                           |  | 509             | 
|Other loans                              |  | 9,307           | 
|Total loans held for
         investment |  | 1,384,466       | 
|Undisbursed loan
  funds                 |  | (25,484)        | 
|Deferred loan costs                      |  | 5,152           | 
|Allowance for loan
  losses              |  | (14,845)        | 
|Total loans held for                     |  |                 | 
|investment, net                          |  | $ 1,349,289     | 
|Loans held for sale, at lower of         |  |                 | 
|cost or market                           |  | $        1,337  | 

4

<PAGE>

**Maturity of Loans Held for Investment**.  The following table sets forth information at June 30, 2007 regarding the
dollar amount of principal payments becoming contractually due during the periods indicated for loans held for
investment.  Demand loans, loans having no stated schedule of principal payments, loans having no stated maturity, and
overdrafts are reported as becoming due within one year.  The table does not include any estimate of prepayments, which
can significantly shorten the average life of loans held for investment and may cause the Bank's actual principal payment
experience to differ materially from that shown below.

| |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  | 

| |                           |  |              |  | After       |  | **After**   |  | **After**       |  |                |  |               
| | ------------------------- |  | ------------ |  | ----------- |  | ----------- |  | --------------- |  | -------------- |  | --------------
| |                           |  |              |  | One Year    |  | **3 Years** |  | **5 Years**     |  |                |  |               
| |                           |  | Within       |  | **Through** |  | **Through** |  | **Through**     |  | **Beyond**     |  |               
| |                           |  | **One Year** |  | **3 Years** |  | **5 Years** |  | **10 Years**    |  | **10 Years**   |  | **Total**     
| | (In Thousands)            |  |              |  |             |  |             |  |                 |  |                |  |               
| |                           |  |              |  |             |  |             |  |                 |  |                |  |               
| | Mortgage loans:           |  |              |  |             |  |             |  |                 |  |                |  |               
| | Single-family             |  | $     1,720  |  | $       526 |  | $  1,988    |  | $         5,665 |  | $      816,350 |  | $      826,249
| | Multi-family              |  | 1,446        |  | 2,292       |  | 3,068       |  | 103,643         |  | 219,782        |  | 330,231       
| | Commercial real estate    |  | 4,718        |  | 1,767       |  | 10,726      |  | 119,851         |  | 10,483         |  | 147,545       
| | Construction              |  | 54,590       |  | -           |  | -           |  | -               |  | 5,981          |  | 60,571        
| | Commercial business loans |  | 3,420        |  | 3,784       |  | 2,025       |  | 825             |  | -              |  | 10,054        
| | Consumer loans            |  | 503          |  | 6           |  | -           |  | -               |  | -              |  | 509           
| | Other loans               |  | 8,755        |  | 552         |  | -           |  | -               |  | -              |  | 9,307         
| | Total loans held for      |  |              |  |             |  |             |  |                 |  |                |  |               
| | investment                |  | $ 75,152     |  | $ 8,927     |  | $ 17,807    |  | $ 229,984       |  | $ 1,052,596    |  | $ 1,384,466   

The following table sets forth the dollar amount of all loans held for investment due after June 30, 2008
which have fixed and floating or adjustable interest rates.

| |  |  |  | 
| |  |  |  | 

| |                                 |  |                |  |             
| | ------------------------------- |  | -------------- |  | ------------
| |                                 |  |                |  | Floating or 
| |                                 |  |                |  | Adjustable  
| |                                 |  | **Fixed-Rate** |  | **Rate**    
| | (In Thousands)                  |  |                |  |             
| |                                 |  |                |  |             
| | Mortgage loans:                 |  |                |  |             
| | Single-family                   |  | $ 11,714       |  | $    812,815
| | Multi-family                    |  | 15,546         |  | 313,239     
| | Commercial real estate          |  | 17,529         |  | 125,298     
| | Construction                    |  | -              |  | 5,981       
| | Commercial business loans       |  | 2,932          |  | 3,702       
| | Consumer loans                  |  | 6              |  | -           
| | Other loans                     |  | 552            |  | -           
| | Total loans held for investment |  | $ 48,279       |  | $ 1,261,035 

Scheduled contractual principal payments of loans do not reflect the actual life of such assets.  The average life of loans
is substantially less than their contractual terms because of prepayments.  In addition, due-on-sale clauses generally give
the Bank the right to declare loans immediately due and payable in the event, among other things, the borrower sells the
real property subject to the mortgage.  The average life of mortgage loans tends to increase, however, when current
market interest rates are substantially higher than the interest rates on existing loans held for investment and, conversely,
decrease when the interest rates on existing loans held for investment are substantially higher than current market
interest rates.

**Single-Family Mortgage Loans**.  The Bank's predominant lending activity is the origination by PBM
of loans secured by first mortgages on owner-occupied, single-family (one to
four units) residences in the communities where the Bank has established full
service branches and loan production offices. At June 30, 2007, total
single-family loans held for investment decreased to $826.2 million, or 59.7% of
the total loans held for investment from

5

<PAGE>

$828.1 million, or 61.2% of the total loans
held for investment at June 30, 2006. The decrease in the single-family loans in
fiscal 2007 was primarily attributable to loan prepayments, partly offset by
$204.4 million of new loan originations.

The Bank's residential mortgage loans are generally underwritten and documented in accordance with guidelines
established by major Wall Street firms, institutional loan buyers, Freddie Mac and Fannie Mae (collectively, "the
secondary market").  All government insured loans are generally underwritten and documented in accordance with the
guidelines established by the Department of Housing and Urban Development ("HUD") and the Veterans'
Administration ("VA"). Loans are normally classified as either conforming (meeting agency criteria) or non-conforming
(meeting an investor's criteria).  These non-conforming loans are additionally classified as "A" or "Alt-A".  The "A"
loans are typically those that exceed agency loan limits but closely mirror agency underwriting criteria. The "Alt-A"
loans are underwritten to expanded guidelines allowing a borrower with good credit a broader range of product choices.
The "Alt-A" criteria includes interest-only loans, stated-income loans and greater than 30-year amortization loans.
Given the current market environment, the production of these non-conforming loans is expected to decrease.

The Bank offers closed-end, fixed-rate home equity loans that are secured by the borrower's primary residence.  These
loans do not exceed 100% of the appraised value of the residence and have terms of up to 15 years requiring monthly
payments of principal and interest.  At June 30, 2007, home equity loans amounted to $6.6 million, or 0.8% of single-family loans as compared to $2.0 million, or 0.2% of single-family loans at June 30, 2006.  The Bank also offers secured
lines of credit, which are generally secured by a second mortgage on the borrower's primary residence.  Secured lines
of credit have an interest rate that is typically one to two percentage points above the prime lending rate.  As of June
30, 2007 and 2006, the outstanding secured lines of credit were $886,000 and $1.3 million, respectively.

The Bank offers adjustable rate mortgage ("ARM") loans at rates and terms competitive with market conditions.
Substantially all of the ARM loans originated by the Bank meet the underwriting standards of the secondary market.
The Bank offers several ARM products, which adjust monthly, semi-annually, or annually after an initial fixed period
ranging from one month to five years subject to a limitation on the annual increase of one to two percentage points and
an overall limitation of three to six percentage points.  The ARM loans in the Bank's loans held for investment utilize
the London Interbank Offered Rate index ("LIBOR"), the FHLB Eleventh District cost of funds index ("COFI"), the
12-month average Treasury index ("12 MAT") or the weekly average yield on one year U.S. Treasury securities adjusted
to a constant maturity of one year index ("CMT"), plus a margin of 2.00% to 3.25%.  Loans based on the LIBOR index
constitute a majority of the Bank's loans held for investment.  The majority of the ARM loans held for investment have
three- or five-year fixed periods prior to the first adjustment ("3/1 or 5/1 hybrids"), and do not require principal
amortization for up to 120 months.  Loans of this type have embedded interest rate risk if interest rates should rise
during the initial fixed rate period.  To coincide with the Bank's 50th Anniversary, the Bank began offering 50-year
single-family mortgage loans in fiscal 2006.  The Bank had a total of 51 loans for $20.7 million with a 50-year term at
June 30, 2007, compared to a total of 27 loans for $11.0 million at June 30, 2006.

As of June 30, 2007, the Bank had $87.4 million in mortgage loans that are subject to negative amortization, $12.6
million of which were single-family loans.  This compares to $95.4 million at June 30, 2006, with $20.7 million of
single-family loans.  Negative amortization involves a greater risk to the Bank.  During a period of high interest rates,
the loan principal balance may increase by up to 115% of the original loan amount.  Borrower demand for ARM loans
versus fixed-rate mortgage loans is a function of the level of interest rates, the expectations of changes in the level of
interest rates and the difference between the initial interest rates and fees charged for each type of loan.  The relative
amount of fixed-rate mortgage loans and ARM loans that can be originated at any time is largely determined by the
demand for each in a given interest rate and competitive environment.

The retention of ARM loans, rather than fixed-rate loans, helps to reduce exposure to changes in interest rates.  There
are, however, unquantifiable credit risks resulting from the potential of
increased interest charges to be paid by the borrower as a result of increases
in interest rates or the expiration of interest-only periods. It is possible
that, during periods of rising interest rates, the risk of default on ARM loans
may increase as a result of the increase in the required payment from the
borrower. Furthermore, the risk of default may increase because ARM loans
originated

6

<PAGE>

by the Bank occasionally provide, as a
marketing incentive, for initial rates of interest below those rates that would
apply if the adjustment index plus the applicable margin were initially used for
pricing. Such loans are subject to increased risks of default or delinquency.
Additionally, while ARM loans allow the Bank to decrease the sensitivity of its
assets as a result of changes in interest rates, the extent of this interest
sensitivity is limited by the periodic and lifetime interest rate adjustment
limits. In addition to fully amortizing ARM loans, the Bank has interest-only
ARM loans, which typically have a fixed interest rate for the first three to
five years, followed by a periodic adjustable interest rate, coupled with an
interest only payment of three to ten years, followed by a fully amortizing loan
payment for the remaining term. As of June 30, 2007 and 2006, interest-only,
first trust deed, ARM loans were $616.5 million and $638.5 million, or 45.2% and
50.1%, respectively, of the loans held for investment. Furthermore, because loan
indexes may not respond perfectly to market interest rates, upward adjustments
on loans may occur more slowly than increases in the Bank's cost of
interest-bearing liabilities, especially during periods of rapidly increasing
interest rates. Because of these characteristics, the Bank has no assurance that
yields on ARM loans will be sufficient to offset increases in the Bank's cost of
funds.

The following table describes certain credit risk characteristics of the Corporation's single-family, first trust deed,
mortgage loans held for investment as of June 30, 2007:

|                             | **Outstanding** | **Weighted-Average** | **Weighted-Average** | **Weighted-Average**
|---------------------------- | --------------- | -------------------- | -------------------- | --------------------
|(Dollars in Thousands)       | **Balance (1)** | **FICO (2)**         | **LTV (3)**          | **Seasoning (4)**   
|Interest only                | $ 616,486       | 733                  | 74%                  | 1.78 years          
|Stated income (5)            | $ 444,077       | 730                  | 73%                  | 1.89 years          
|FICOless than or equal to660 | $     26,843    | 641                  | 72%                  | 2.42 years          
|Over 30-year amortization    | $   30,289      | 737                  | 69%                  | 2.16 years          

The Bank's lending policy generally limits loan amounts for conventional first trust deed loans to 97% of the appraised
value or purchase price of a property, whichever is lower.  Higher loan-to-value ratios are available on certain
government-insured or investor programs.  The Bank generally requires private mortgage insurance on first trust deed
residential loans with loan-to-value ratios exceeding 80% at the time of origination.

**Multi-Family and Commercial Real Estate Mortgage Loans**.  At June 30, 2007, multi-family mortgage loans were
$330.2 million and commercial real estate loans were $147.5 million, or 23.9% and 10.7%, respectively, of loans held
for investment.  Consistent with its strategy to diversify the composition of loans held for investment, the Bank has made
the origination and purchase of multi-family and commercial real estate loans a priority.  At June 30, 2007, the Bank
had 408 multi-family and 181 commercial real estate loans in loans held for investment.

Multi-family mortgage loans originated by the
Bank are predominately adjustable rate loans, including 3/1, 5/1 and 10/1
hybrids, with a term to maturity of 10 to 30 years based on a 25- to 30-year
amortization schedule. Commercial real estate loans originated by the Bank are
also predominately adjustable rate loans, including 3/1 and 5/1 hybrids, with a
term to maturity of 10 years and a 25-year amortization schedule. Rates on
multi-family and commercial real estate ARM loans generally adjust monthly,
quarterly, semi-annually or annually at a specific margin over the respective
interest rate index, subject to annual payment caps and life-of-loan interest
rate caps. At June 30, 2007, $208.9 million, or 63.3%, of the Bank's
multi-family loans were secured by five to 36 unit projects and were primarily
located in Los Angeles, Orange, Riverside, San Bernardino and San Diego
Counties. The Bank's commercial real estate loan portfolio generally consists of
loans secured by small office buildings, light industrial centers, mini
warehouses and small retail centers, primarily located in Southern California.
The Bank originates multi-family and commercial real estate loans in amounts
typically ranging from $350,000 to $4.0 million. At June 30, 2007, the Bank had
69 commercial real estate and multi-family loans with principal balances

7

<PAGE>

greater than $1.5 million totaling $176.4
million, all of which were performing in accordance with their terms as of June
30, 2007. Independent appraisers, engaged by the Bank, perform appraisals on
properties that secure multi-family and commercial real estate loans.
Underwriting of multi-family and commercial real estate loans includes, among
other considerations, a thorough analysis of the cash flows generated by the
property to support the debt service and the financial resources, experience and
income level of the borrowers.

Multi-family and commercial real estate loans afford the Bank an opportunity to receive higher interest rates than those
generally available from single-family mortgage loans.  However, loans secured by such properties are generally greater
in amount, more difficult to evaluate and monitor and are more susceptible to default as a result of general economic
conditions and, therefore, involve a greater degree of risk than single-family residential mortgage loans.  Because
payments on loans secured by multi-family and commercial properties are often dependent on the successful operation
and management of the properties, repayment of such loans may be impacted by adverse conditions in the real estate
market or the economy.  The multi-family and commercial real estate loans are primarily located in Los Angeles,
Orange, Riverside, San Bernardino and San Diego Counties.  At June 30, 2007, the Bank did not have any non-accrual
multi-family or commercial real estate loans or any multi-family or commercial real estate loans that were 60 days or
more past due.

**Construction Mortgage Loans.**The Bank originates two types of residential construction loans: short-term
construction loans and construction/permanent loans.  At June 30, 2007, the Bank's construction loans (gross of
undisbursed loan funds) were $60.6 million, or 4.4% of loans held for investment, a decrease of $88.9 million, or 59.5%,
during fiscal 2007.  Undisbursed loan funds at June 30, 2007 and 2006 were $23.1 million and $75.3 million,
respectively.  The decrease in construction loans was primarily attributable to the management decision to reduce tract
construction loan originations (given recent unfavorable real estate market conditions).  Also, the decrease was
attributable to loan payoff, construction completion and lower demand.  Total loan payoff during fiscal 2007 was $76.8
million, gross of undisbursed loan funds and total construction completion (converted to permanent loans) during fiscal
2007 were $24.5 million.  Total loan originations declined $105.6 million (gross, including undisbursed loan funds),
or 88%, to $14.3 million in fiscal 2007 from $119.9 million in fiscal 2006.

The composition of the Bank's construction loan portfolio is as follows:

**At June 30,****2007**

**2006****Amount**
**Percent**

**Amount**
**Percent**(Dollars In Thousands)Short-term construction
$ 54,251
89.57%

$ 110,726
74.06%Construction/permanent
6,320
10.43

38,791
25.94$ 60,571
100.00%

$ 149,517
100.00%


Short-term construction loans include three types of loans: custom construction, tract construction, and speculative
construction.  Additionally, the Bank makes short-term (18 to 36 month) lot loans to facilitate land acquisition prior to
the start of construction. The Bank also provides construction financing for multi-family and commercial real estate
properties.  As of June 30, 2007 total multi-family construction loans were $4.4 million with undisbursed loan funds
of $341,000; while total commercial real estate construction loans were $3.8 million with undisbursed loan funds of $2.6
million.

Custom construction loans are made to individuals who, at the time of application, have a contract executed with a
builder to construct their residence.  Custom construction loans are generally originated for a term of 12 months, with
adjustable interest rates at the prime lending rate plus a margin and with loan-to-value ratios of up to 80% of the
appraised value of the completed property.  The owner secures long-term permanent financing at the completion of
construction.  At June 30, 2007, custom construction loans were $18.7 million, with undisbursed
loan funds of $6.6 million. The custom construction loans include 23 individual
construction loans in a single-family construction project located in Coachella,
California. These 23 loans, with a disbursed total of $5.0 million, were placed
on non-

8

<PAGE>

accrual status in December 2006 and have a
specific loan loss reserve of $2.6 million. The reserve was established because
financial viability of the project is uncertain. The Bank believes that the
loans were fraudulently obtained and has filed lawsuits alleging loan fraud by
the 23 individual borrowers, misrepresentation fraud by the mortgage loan broker
and misuse of funds fraud by the contractor. Given the number of parties
involved, the complexity of the transaction and probable fraud, this matter may
not be resolved quickly. Additionally, it is far from certain the amount, if
any, that the Bank may recover.

The Bank makes tract construction loans to subdivision builders.  These subdivisions are usually financed and built in
phases.  A thorough analysis of market trends and demand within the area are reviewed for feasibility.  Generally,
significant presales are required prior to commencement of construction.  Tract construction may include the building
and financing of model homes under a separate loan.  The terms for tract construction loans range from 12 to 18 months
with interest rates floating from 1.0% to 2.0% above the prime lending rate.  At June 30, 2007, tract construction loans
were $18.9 million, with undisbursed loan funds of $8.5 million.

Speculative construction loans are made to home builders and are termed "speculative" because the home builder does
not have, at the time of loan origination, a signed contract with a home buyer who has a commitment for permanent
financing with either the Bank or another lender for the finished home.  The home buyer may be identified during or
after the construction period.  The builder may be required to debt service the speculative construction loan for a
significant period of time after the completion of construction until the homebuyer is identified.  At June 30, 2007,
speculative construction loans were $14.8 million, with undisbursed loan funds of $5.0 million.

Construction/permanent loans automatically roll from the construction to the permanent phase.  The construction phase
of a construction/permanent loan generally lasts nine to 12 months and the interest rate charged is generally floating at
prime or above and with a loan-to-value ratio of up to 80% of the appraised value of the completed property.

Construction loans under $1.0 million are approved by Bank personnel specifically designated to approve construction
loans.  The Bank's Loan Committee, comprised of the Chief Executive Officer, Chief Lending Officer, Chief Financial
Officer, Senior Vice President - PBM, and Vice President - Loan Administration, approves all construction loans over
$1.0 million.  Prior to approval of any construction loan, an independent fee appraiser inspects the site and the Bank
reviews the existing or proposed improvements, identifies the market for the proposed project, and analyzes the pro
forma data and assumptions on the project.  In the case of a tract or speculative construction loan, the Bank reviews the
experience and expertise of the builder.  After the Bank expresses an interest in the project, the application is processed,
which includes obtaining credit reports, financial statements and tax returns on the borrowers and guarantors, an
independent appraisal of the project, and any other expert report necessary to evaluate the proposed project.  In the event
of cost overruns, the Bank requires the borrower to deposit their own funds into a loan-in-process account, which the
Bank disburses consistent with the completion of the subject property pursuant to a revised disbursement schedule.

The construction loan documents require that construction loan proceeds be disbursed in increments as construction
progresses.  Disbursements are based on periodic on-site inspections by independent fee inspectors and Bank personnel.
At inception, the Bank also requires borrowers to deposit funds into the loan-in-process account covering the difference
between the actual cost of construction and the loan amount.  The Bank regularly monitors the construction loan
portfolio, economic conditions and housing inventory.  The Bank's property inspectors perform periodic property
inspections.  The Bank believes that the internal monitoring system helps reduce many of the risks inherent in its
construction loans.

Construction loans afford the Bank the
opportunity to achieve higher interest rates and fees with shorter terms to
maturity than its single-family mortgage loans. Construction loans, however, are
generally considered to involve a higher degree of risk than single-family
mortgage loans because of the inherent difficulty in estimating both a
property's value at completion of the project and the cost of the project. The
nature of these loans is such that they are generally more difficult to evaluate
and monitor. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the project. If the estimate of value upon completion
proves to be inaccurate, the Bank may be confronted with a

9

<PAGE>

project whose value is insufficient to assure
full repayment. Projects may also be jeopardized by disagreements between
borrowers and builders and by the failure of builders to pay subcontractors.
Loans to builders to construct homes for which no purchaser has been identified
carry additional risk because the payoff for the loan depends on the builder's
ability to sell the property prior to the time that the construction loan
matures. The Bank has sought to address these risks by adhering to strict
underwriting policies, disbursement procedures and monitoring practices. In
addition, because the Bank's construction lending is in its primary market area,
changes in the local or regional economy and real estate market could adversely
affect the Bank's construction loans held for investment.

**Participation Loan Purchases and Sales.**  In an effort to expand production and diversify risk, the Bank purchases
loan participations, which allows for greater geographic distribution of the Bank's loans and increases loan production
volume.  The Bank is aggressively networking with other lenders to purchase participating interests in multi-family and
commercial real estate loans.  The Bank generally purchases between 50% and 100% of the total loan amount. When
the Bank purchases a participation loan, the lead lender will usually retain a servicing fee, thereby decreasing the loan
yield.  This servicing fee is primarily offset by a reduction in operating expenses to the Bank.  As of June 30, 2007, total
loans serviced by other financial institutions were $159.8 million, of which $111.0 million was serviced by a single
financial institution.  All properties serving as collateral for loan participations are inspected by a representative of the
Bank or a third party inspection service prior to being approved by the Loan Committee and the Bank relies upon the
same underwriting criteria required for those loans originated by the Bank.

The Bank also sells participating interests in loans when it has been determined that it is beneficial to diversify the
Bank's risk.  Participation sales enable the Bank to maintain acceptable loan concentrations and comply with the
Bank's loans to one borrower policy.  Generally, selling a participating interest in a loan increases the yield to the
Bank on the portion of the loan that is retained.

**Commercial Business Loans**.  The Bank has a Business Banking Department that primarily serves businesses located
within the Inland Empire.  Commercial business loans allow the Bank to diversify its lending and increase the average
loan yield.  As of June 30, 2007, commercial business loans were $10.1 million, or 0.7% of loans held for investment.
These loans represent unsecured lines of credit and term loans secured by business assets.

Commercial business loans are generally made to customers who are well known to the Bank and are generally secured
by accounts receivable, inventory, business equipment and/or other assets.  The Bank's commercial business loans may
be structured as term loans or as lines of credit.  Lines of credit are made at variable rates of interest equal to a
negotiated margin above the prime rate and term loans are at a fixed or variable rate.  The Bank may also obtain personal
guarantees from financially capable parties based on a review of personal financial statements.  Commercial business
term loans are generally made to finance the purchase of assets and have maturities of five years or less.  Commercial
lines of credit are typically made for the purpose of providing working capital and are usually approved with a term of
one year or less.

Commercial business loans involve greater risk than residential mortgage loans and involve risks that are different from
those associated with residential and commercial real estate loans.  Real estate loans are generally considered to be
collateral based lending with loan amounts based on predetermined loan to collateral values and liquidation of the
underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default.  Although
commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets
including real estate, the liquidation of collateral in the event of a borrower default is often an insufficient source of
repayment because accounts receivable may not be collectable and inventories and equipment may be obsolete or of
limited use, among other things.  Accordingly, the repayment of a commercial business loan depends primarily on the
creditworthiness of the borrower (and any guarantors), while liquidation of collateral is secondary and oftentimes an
insufficient source of repayment.  During fiscal 2007, the Bank did not have any charge-offs on commercial business
loans.

**Consumer and Other Loans.**  At June 30, 2007, the Bank's consumer loans were $509,000, or less than 0.1%, of the
Bank's loans held for investment, a decrease of $225,000, or 30.7%, during fiscal 2007.  The Bank offers open-ended
lines of credit on either a secured or unsecured basis.  The Bank offers secured savings lines of credit which have an
interest rate that is four percentage points above the FHLB Eleventh District COFI,
which adjusts monthly.

10

<PAGE>

Secured savings lines of credit at June 30,
2007 and 2006 were $302,000 and $523,000, respectively, and are included in
consumer loans.

Consumer loans potentially have a greater risk than residential mortgage loans, particularly in the case of loans that are
unsecured.  Consumer loan collections are dependent on the borrower's ongoing financial stability, and thus are more
likely to be adversely affected by job loss, illness or personal bankruptcy.  Furthermore, the application of various
federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be
recovered on such loans.  At June 30, 2007, the Bank had no consumer loans accounted for on a non-accrual basis.

Other loans, which primarily consist of land loans, were $9.3 million, or 0.7%, of the Bank's loans held for investment,
a decrease of $6.9 million, or 42.6%, during fiscal 2007.  The Bank makes land loans, primarily lot loans, to
accommodate borrowers who intend to build on the land within a specified period of time.  The majority of these land
loans are for the construction of single-family residences; however, the Bank may make short-term loans on a limited
basis for the construction of commercial properties.  The terms generally require a fixed rate with maturity between 18
to 36 months.

**Mortgage Banking Activities**

**General.**  Mortgage banking involves the origination and sale of single-family mortgage and consumer loans (second
mortgages and equity lines of credit) by PBM for the purpose of generating gains on sale of loans and fee income on
the origination of loans.  PBM also originates single-family and consumer loans for investment.  Given current pricing
in the mortgage markets, the Bank generally sells the majority of its loans on a servicing-released basis.  Generally, the
level of loan sale activity and, therefore, its contribution to the Bank's profitability depends on maintaining a sufficient
volume of loan originations.  Changes in the level of interest rates and the local economy affect the number of loans
originated by the Bank and, thus, the amount of loan sales, net interest income and loan fees earned.  Originations of
loans during fiscal 2007, 2006 and 2005 were $1.31 billion, $1.53 billion and $1.77 billion, respectively.  PBM
originated $205.6 million, $326.9 million and $513.6 million in fiscal 2007, 2006 and 2005, respectively, of loans held
for investment.

**Loan Solicitation and Processing.**  The Bank's mortgage banking operations consist of both wholesale and retail loan
originations.  The Bank's wholesale loan production utilizes a network of approximately 1,465 loan brokers approved
by the Bank who originate and submit loans at a markup over the Bank's daily published price.  Wholesale loans
originated for sale in fiscal 2007, 2006 and 2005 were $816.9 million, $840.5 million and $872.2 million, respectively.
The Bank maintains regional wholesale lending offices in Pleasanton, Rancho Cucamonga and San Diego, California.

PBM's retail loan production utilizes loan officers, underwriters and processors.  PBM's loan officers generate retail
loan originations primarily through referrals from realtors, builders, employees and customers.  As of June 30, 2007,
PBM operated retail offices within the Bank's facilities in Temecula and stand-alone retail loan production offices in
Diamond Bar, Glendora, La Quinta, Riverside, Torrance and Vista, all in Southern California.  During fiscal 2007, the
Bank closed three stand-alone retail loan production offices in Carlsbad, Corona and Huntington Beach and consolidated
other facilities.  Generally, the cost of retail operations exceeds the cost of wholesale operations as a result of the
additional employees needed for retail operations.  However, the revenue per mortgage for retail originations is generally
higher since the origination fees are retained by the Bank.  Retail loans originated for sale in fiscal 2007, 2006 and 2005
were $290.2 million, $363.6 million and $391.8 million, respectively. The decrease in retail loan originations during
fiscal 2007 was primarily attributable to a decline in purchase transactions.

The Bank requires evidence of marketable title, lien position, loan-to-value, title insurance and appraisals on all
properties.  The Bank also requires evidence of fire and casualty insurance on the value of improvements.  As stipulated
by federal regulations, the Bank requires flood insurance to protect the property securing its interest if such property
is located in a designated flood area.

**Loan Commitments and Rate Locks.**  The Bank issues commitments for residential mortgage loans conditioned upon
the occurrence of certain events.  Such commitments are made with specified terms and conditions.  Interest

11

<PAGE>

rate locks
are generally offered to prospective borrowers for up to a 60-day period.  The borrower may lock in the rate at any time
from application until the time they wish to close the loan.  Occasionally, borrowers obtaining financing on new home
developments are offered rate locks for up to 120 days from application.  The Bank's outstanding commitments to
originate loans to be held for sale were $35.1 million at June 30, 2007 (see Note 15 of the Notes to Consolidated
Financial Statements contained in Item 8 of this Form 10-K).  When the Bank issues a commitment to a borrower, there
is a risk to the Bank that a rise in interest rates will reduce the value of the mortgage before it can be closed and sold.
To control the interest rate risk caused by mortgage banking activities, the Bank uses forward loan sale agreements,
forward commitments to purchase MBS and over-the-counter put and call option contracts related to mortgage-backed
securities (see "Derivative Activities" on page 14 of this Form 10-K).

**Loan Origination and Other Fees.**  The Bank may receive origination points and loan fees.  Origination points are
a percentage of the principal amount of the mortgage loan, which is charged to a borrower for funding a loan.  The
amount of points charged by the Bank ranges from 0% to 2%.  Current accounting standards require points and fees
received for originating loans held for investment (net of certain loan origination costs) to be deferred and amortized
into interest income over the contractual life of the loan.  Origination fees and costs for loans originated for sale are
deferred until the related loans are sold.  Net deferred fees or costs associated with loans that are prepaid or sold are
recognized as income or expense at the time of prepayment or sale.  At June 30, 2007, the Bank had $5.2 million of
unamortized deferred loan origination costs (net) in loans held for investment.

**Loan Originations, Sales and Purchases.**   The Bank's mortgage originations include conventional loans as well as
loans insured by the FHA and VA.  Except for loans originated as held for investment, loans originated through
mortgage banking activities are intended for eventual sale into the secondary market.  As such, these loans must meet
the origination and underwriting criteria established by the final investors.  The Bank sells a large percentage of the
mortgage loans that it originates as whole loans to institutional investors.  The Bank also sells conventional whole loans
to Fannie Mae and the FHLB - San Francisco through their purchase programs (see "Derivative Activities" on page 14
of this Form 10-K).

12

<PAGE>The following table shows the Bank's loan originations, purchases, sales and principal repayments during the periods
indicated.

| |  |  |  |  |  |  | 
| |  |  |  |  |  |  | 

| |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  |  | 
| |  |  |  |  |  |  | 

|                                              |  |                     |   |               |   |              |  
|--------------------------------------------- |  | ------------------- | - | ------------- | - | ------------ | -
|                                              |  | Year Ended June 30, |  
|                                              |  | **2007**            |   | **2006**      |   | **2005**     |  
|(In Thousands)                                |  |                     |   |               |   |              |  
|Loans originated for sale:                    |  |                     |   |               |   |              |  
|Retail originations                           |  | $
296,356           |   | $     380,409 |   | $    397,057 |  
|Wholesale originations                        |  | 830,260             |   | 857,397       |   | 888,780      |  
|Total loans originated for sale (1)           |  | 1,126,616           |   | 1,237,806     |   | 1,285,837    |  
|                                              |  |                     |   |               |   |              |  
|Loans sold:                                   |  |                     |   |               |   |              |  
|Servicing
  released                          |  | (1,119,330          | ) | (1,242,093    | ) | (1,232,682   | )
|Servicing retained                            |  | (4,108              | ) | (19,348       | ) | (81,711      | )
|Total loans sold (2)                          |  | (1,123,438          | ) | (1,261,441    | ) | (1,314,393   | )
|                                              |  |                     |   |               |   |              |  
|Loans originated for investment:              |  |                     |   |               |   |              |  
|Mortgage
  loans:                             |  |                     |   |               |   |              |  
|Single-family                                 |  | 204,376             |   | 330,092       |   | 513,588      |  
|Multi-family                                  |  | 23,633              |   | 28,868        |   | 26,332       |  
|Commercial real estate                        |  | 48,558              |   | 32,630        |   | 41,605       |  
|Construction                                  |  | 14,328              |   | 104,923       |   | 127,472      |  
|Commercial business
  loans                   |  | 3,818               |   | 1,930         |   | 7,370        |  
|Consumer loans                                |  | 7                   |   | -             |   | 8            |  
|Other loans                                   |  | 2,084               |   | 14,324        |   | 6,750        |  
|Total loans originated for investment (3)     |  | 296,804             |   | 512,767       |   | 723,125      |  
|                                              |  |                     |   |               |   |              |  
|Loans purchased for investment:               |  |                     |   |               |   |              |  
|Mortgage loans:                               |  |                     |   |               |   |              |  
|Multi-family                                  |  | 119,625             |   | 93,605        |   | 34,092       |  
|Commercial real estate                        |  | -                   |   | -             |   | 1,768        |  
|Construction                                  |  | -                   |   | 14,964        |   | 24,113       |  
|Commercial business
  loans                   |  | -                   |   | 900           |   | -            |  
|Other loans                                   |  | -                   |   | 2,250         |   | 1,250        |  
|Total loans purchased for investment          |  | 119,625             |   | 111,719       |   | 61,223       |  
|                                              |  |                     |   |               |   |              |  
|Mortgage loan principal
  repayments          |  | (379,420            | ) | (476,228      | ) | (482,869     | )
|Real estate acquired in settlement of loans   |  | (5,902              | ) | (411          | ) | -            |  
|Increase (decrease) in other items,
  net (4) |  | 48,631              |   | 5,902         |   | (17,989      | )
|Net increase in loans held for investment     |  |                     |   |               |   |              |  
|and loans held for sale                       |  | $
82,916            |   | $     130,114 |   | $    254,934 |  

Mortgage loans sold to institutional investors generally are sold without recourse other than standard
representations and warranties.  Most mortgage loans sold to Fannie Mae are sold on a non-recourse basis and
foreclosure losses are generally the responsibility of the purchaser and not the Bank, except in the case of VA loans
used to form

13

<PAGE>

Government National Mortgage Association ("GNMA") pools, which are subject to limitations on the
VA's loan guarantees.  The amount subject to this limitation is immaterial.



Loans sold by the Bank to the FHLB - San Francisco under its Mortgage Partnership Finance ("MPF") program also
have a recourse provision.  The FHLB - San Francisco absorbs the first four basis points of loss, and a credit scoring
process is used to calculate the recourse amount to the Bank.  All losses above this calculated recourse amount are
the responsibility of the FHLB - San Francisco.  In consideration of the obligation of the Bank to accept the recourse
liability, the FHLB - San Francisco pays the Bank a credit enhancement fee on a monthly basis.  As of June 30,
2007, the Bank serviced $173.2 million of loans under this program and has established a recourse reserve of
$191,000.  To date, no losses have been experienced.

Occasionally, the Bank is required to repurchase loans sold to Fannie Mae, FHLB - San Francisco or institutional
investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties
involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 30 days past due within 120
days of the loan funding date.  During the year ended June 30, 2007, the Bank repurchased $14.6 million of single-family mortgage loans as compared to $2.0 million in fiscal 2006 and $962,000 in fiscal 2005.

**Derivative Activities**.  Mortgage banking involves the risk that a rise in interest rates will reduce the value of a
mortgage before it can be sold.  This type of risk occurs when the Bank commits to an interest rate lock on a borrower's
application during the origination process and interest rates increase before the loan can be sold.  Such interest rate risk
also arises when mortgages are placed in the warehouse (i.e*.*, held for sale) without locking in an interest rate for their
eventual sale in the secondary market.  The Bank seeks to control or limit the interest rate risk caused by mortgage
banking activities.  The two methods used by the Bank to help reduce interest rate risk from its mortgage banking
activities are forward loan sale agreements and the purchase of over-the-counter put option contracts related to
mortgage-backed securities.  At various times, depending on loan origination volume and management's assessment
of projected loan fallout, the Bank may reduce or increase its derivative positions.

Under forward loan sale agreements, usually with Fannie Mae, FHLB - San Francisco or institutional investors, the
Bank is obligated to sell certain dollar amounts of mortgage loans that meet specific underwriting and legal criteria
before the expiration of the commitment period.  These terms include the maturity of the individual loans, the yield to
the purchaser, the servicing spread to the Bank (if servicing is retained) and the maximum principal amount of the
individual loans.  Forward loan sales protect loan sale prices from interest rate fluctuations that may occur from the time
the interest rate of the loan is established to the time of its sale.  The amount of and delivery date of the forward loan
sale commitments are based upon management's estimates as to the volume of loans that will close and the length of
the origination commitment.  Forward loan sales do not provide complete interest-rate protection, however, because of
the possibility of fallout (i.e., the failure to fund) during the origination process.  Differences between the estimated
volume and timing of loan originations and the actual volume and timing of loan originations can expose the Bank to
significant losses.  If the Bank is not able to deliver the mortgage loans during the appropriate delivery period, the Bank
may be required to pay a non-delivery fee or repurchase the delivery commitments at current market prices.  Similarly,
if the Bank has too many loans to deliver, the Bank must execute additional forward loan sale commitments at current
market prices, which may be unfavorable to the Bank.  Generally, the Bank seeks to maintain forward loan sale
agreements equal to the closed loans held for sale plus those applications that the Bank has rate locked and/or committed
to close, adjusted by the projected fallout.  The ultimate accuracy of such projections will directly bear upon the amount
of interest rate risk incurred by the Bank.  For the year ended June 30, 2007, the Bank had a net gain of $212,000
attributable to the underlying derivative financial instruments.  At June 30, 2007, the Bank had outstanding commitments
to sell loans of $27.0 million and commitments to originate loans to be held for sale of $35.1 million (see Note 15 of
the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K).

In order to reduce the interest rate risk associated with commitments to originate loans that are in excess of forward loan
sale commitments, the Bank purchases over-the-counter put or call option contracts on government sponsored enterprise
mortgage-backed securities.  At June 30, 2007, the Bank had $11.5 million in put option contracts outstanding, which
provided $8.5 million of coverage, and $1.0 million in call option contracts, which offset $420,000 of coverage.  In
addition, the Bank entered into commitments to purchase MBS(commonly referred to as

14

<PAGE>

a "synthetic call") to lock in
profits (losses) from its put option contracts.  As of June 30, 2007, total forward commitments to purchase MBS were
$6.5 million.

The activities described above are managed continually as markets change; however, there can be no assurance that the
Bank will be successful in its effort to eliminate the risk of interest rate fluctuations between the time origination
commitments are issued and the ultimate sale of the loan.  The Bank employs a risk management firm to conduct daily
analysis, report the Bank's interest rate risk position with respect to its loan origination and sale activities, and to advise
the Bank on interest rate movements and interest rate risk management strategies.  The Bank's interest rate risk
management activities are conducted in accordance with a written policy that has been approved by the Bank's Board
of Directors which covers objectives, functions, instruments to be used, monitoring and internal controls.  The Bank
does not enter into option positions for trading or speculative purposes and does not enter into option contracts that
could generate a financial obligation beyond the initial premium paid.  The Bank does not apply hedge accounting to
its derivative financial instruments; therefore, all changes in fair value are recorded in earnings.

**Loan Servicing**

The Bank receives fees from a variety of institutional investors in return for performing the traditional services of
collecting individual loan payments.  At June 30, 2007, the Bank was servicing $205.8 million of loans for others, a
decline from $239.7 million at June 30, 2006.  The decrease was primarily attributable to loan prepayments, which were
larger than new loans sold on a servicing-retained basis.  To the extent loans were sold on a servicing-retained basis,
the majority were sold to the FHLB - San Francisco under the MPF program.  Loan servicing includes processing
payments, accounting for loan funds and collecting and paying real estate taxes, hazard insurance and other loan-related
items such as private mortgage insurance. When the Bank receives the gross mortgage payment from individual
borrowers, it remits to the investor a predetermined net amount based on the loan sale agreement for that mortgage.

Servicing assets are amortized in proportion to and over the period of the estimated net servicing income and are
carried at the lower of cost or fair value.  The fair value of servicing assets is determined by calculating the present
value of the estimated net future cash flows consistent with contractually specified servicing fees.  The Corporation
periodically evaluates servicing assets for impairment, which is measured as the excess of cost over fair value.  This
review is performed on a disaggregated basis, based on loan type and interest rate.  Generally, loan servicing
becomes more valuable when interest rates rise (as prepayments typically decrease) and less valuable when interest
rates decline (as prepayments typically increase).  In estimating fair values at June 30, 2007 and 2006, the
Corporation used a Constant Prepayment Rate ("CPR") of 3.53% and 5.19%, respectively, and a weighted-average
discount rate of 9.00% and 9.01%, respectively.  At June 30, 2007 and 2006, there were no required valuation
reserves against the servicing assets.  In aggregate, servicing assets had a carrying value of $991,000 and a fair value
of $2.2 million at June 30, 2007, compared to a carrying value of $1.4 million and a fair value of $2.2 million at June
30, 2006.

Rights to future income from serviced loans that exceed contractually specified servicing fees are recorded as interest-only strips.  Interest-only strips are carried at fair value, utilizing the same assumptions used to calculate the value of
the underlying servicing assets, with any unrealized gain or loss, net of tax, recorded as a component of accumulated
other comprehensive income (loss).  Interest-only strips had a fair value of $603,000, gross unrealized gains of $378,000
and an amortized cost of $225,000 at June 30, 2007, compared to a fair value of $584,000, gross unrealized gains of
$259,000 and an amortized cost of $325,000 at June 30, 2006.

**Delinquent Loans**.  When a mortgage loan borrower fails to make a required payment when due, the Bank initiates
collection procedures.  At management's discretion, a property inspection is performed when foreclosure proceeding
are initiated or when there is an indication of a problem with a particular property.  In most cases, delinquencies are
cured promptly; however, if by the 90th day of delinquency, or sooner if the borrower is chronically delinquent, and
all reasonable means of obtaining the payment have been exhausted, foreclosure proceedings, according to the terms
of the security instrument and applicable law, are initiated.  Interest income is reduced by the full amount of accrued
and uncollected interest on such loans.

15

<PAGE>

A loan is generally placed on non-accrual status when its contractual payments are more than 90 days delinquent or if
the loan is deemed impaired.  In addition, interest income 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.

16

<PAGE>

The following table sets forth delinquencies in the Bank's loans held for investment as of the dates indicated.

At June 30,2007

2006

200560 - 89 Days

90 Days or More

60 - 89 Days

90 Days or More

60 - 89 Days

90 Days or MoreNumberofLoans
PrincipalBalanceof Loans


NumberofLoans

PrincipalBalanceof Loans


NumberofLoans

Principal
Balanceof Loans



Number
ofLoans

Principal
Balanceof Loans


NumberofLoans

PrincipalBalanceof Loans


NumberofLoans

PrincipalBalanceof Loans(Dollars in Thousands)Mortgage loans:Single-family
5
$ 1,431

47
$ 14,076

-
$  -

5
$ 1,320

-
$  -

5
$ 655Construction
-
-

23
4,981

-
-

1
1,313

-
-

-
-Commercial 
    
  business loans
-
-

3
252

-
-

-
-

-
-

4
41Other loans
-
-

1
108

-
-

-
-

-
-

-
-Total
5
$ 1,431

74
$ 19,417

-
$  -

6
$ 2,633

-
$  -

9
$ 696


17

<PAGE>The following table sets forth information with respect to the Bank's non-performing assets and restructured loans, net
of specific loan loss reserves, within the meaning of Statement of Financial Accounting Standards ("SFAS" or
"Statement") No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings," at the dates indicated.

|                                                                   | At June 30,
|------------------------------------------------------------------ | -----------
|                                                                   | **2007**   
|(Dollars In Thousands)                                             |            
|                                                                   |            
|Loans accounted for on a non-accrual basis:                        |            
|Mortgage loans:                                                    |            
|Single-family                                                      | $ 13,271   
|Construction                                                       | 2,357      
|Commercial business loans                                          | 171        
|Consumer loans                                                     | -          
|Other loans                                                        | 108        
|Total                                                              | 15,907     
|                                                                   |            
|Accruing loans which are contractually    past due 90 days or more | -          
|                                                                   |            
|Total of non-accrual and 90 days past                              |            
|due loans                                                          | 15,907     
|                                                                   |            
|Real estate owned, net                                             | 3,804      
|Total non-performing assets                                        | $ 19,711   
|Restructured loans                                                 | $      -   
|                                                                   |            
|Non-accrual and 90 days or more                                    |            
|past due loans as a percentage of                                  |            
|loans held for investment, net                                     | 1.18%      
|                                                                   |            
|Non-accrual and 90 days or more                                    |            
|past due loans as a percentage of                                  |            
|total assets                                                       | 0.97%      
|                                                                   |            
|Non-performing assets as a percentage                              |            
|of total
  assets                                                  | 1.20%      

The Bank assesses loans individually and identifies impairment when the accrual of interest has been discontinued, loans
have been restructured or management has serious doubts about the future collectibility of principal and interest, even
though the loans are currently performing.  Factors considered in determining impairment include, but are not limited
to, expected future cash flows, the financial condition of the borrower and current economic conditions. The Bank
measures each impaired loan based on the fair value of its collateral and charges off those loans or portions of loans
deemed uncollectable.

As of June 30, 2007, total non-performing assets were $19.7 million which was comprised of 47 single-family loans,
23 construction loans, three commercial business loans, one other loan and 10 real estate owned properties.  Compared
to June 30, 2006, total non-performing assets increased $17.2 million, or 688%, primarily due to the weakness in the
California real estate market and increases in interest rates on mortgages.

18

<PAGE>Foregone interest income, which would have been recorded for the year ended June 30, 2007 had the impaired loans
been current in accordance with their original terms, amounted to $989,000 and was not included in the results of
operations for the year ended June 30, 2007.

**Foreclosed Real Estate.**  Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure
is classified as real estate owned until it is sold.  When property is acquired, it is recorded at the lower of its cost, which
is the unpaid principal balance of the related loan plus foreclosure costs, or market value less the cost of sale.
Subsequent declines in value are charged to operations.  At June 30, 2007, the Bank had $3.8 million in real estate
owned, all of which were single-family residential homes.

**Asset Classification.**  The OTS has adopted various regulations regarding problem assets of savings institutions.  The
regulations require that each institution review and classify its assets on a regular basis.  In addition, in connection with
examinations of institutions, OTS examiners have the authority to identify problem assets and, if appropriate, require
them to be classified.  There are three classifications for problem assets: substandard, doubtful and loss.  Substandard
assets have one or more defined weaknesses and are characterized by the distinct possibility that the institution will
sustain some loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses of substandard assets with
the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing
facts, conditions and values questionable, and there is a high possibility of loss.  An asset classified as a loss is
considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.  If an
asset or portion thereof is classified as loss, the institution establishes a specific loss allowance for the full amount or
for the portion of the asset classified as loss.  All or a portion of allowances for loan losses established to cover probable
losses related to assets classified substandard or doubtful may be included in determining an institution's regulatory
capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital.  Assets that
do not currently expose the institution to sufficient risk to warrant classification in one of the aforementioned categories
but possess weaknesses are designated as special mention and are monitored by the Bank.

The aggregate amounts of the Bank's classified assets, including assets designated as special mention, were as follows
at the dates indicated:

| |  |  |  | 
| |  |  |  | 

|                             |  |             |  |         
|---------------------------- |  | ----------- |  | --------
|                             |  | At June 30,
|                             |  | **2007**    |  | **2006**
|(Dollars In Thousands)       |  |             |  |         
|                             |  |             |  |         
|Special mention assets       |  | $ 13,299    |  | $ 3,663 
|Substandard assets           |  | 18,990      |  | 5,661   
|Total                        |  | $ 32,289    |  | $ 9,324 
|                             |  |             |  |         
|Total classified assets as a |  |             |  |         
|percentage of total
  assets |  | 1.96%       |  | 0.57%   

The Bank's classified assets increased $23.0 million, or 247%, to $32.3 million at June 30, 2007 from $9.3 million at
June 30, 2006.  This increase was primarily attributable to the recent decline in real estate market values and increases
in short-term interest rates.  As of June 30, 2007, special mention assets were comprised of 12 single-family loans ($5.6
million), three multi-family loans ($3.3 million), five construction loans ($2.6 million), two commercial real estate loans
($1.5 million) and two commercial business loans ($263,000); substandard assets were comprised of 52 single-family
loans ($15.0 million), 23 construction loans ($2.4 million), three commercial real estate loans ($745,000), five
commercial business loans ($296,000), one multi-family loan ($444,000) and one other loan ($108,000).

19

<PAGE>As set forth below, assets classified as special mention and substandard as of June 30, 2007 were comprised of 109
loans totaling approximately $32.3 million.

Number ofLoans


**Special Mention**

**Substandard**

**Total**(Dollars In Thousands)Mortgage loans:Single-family
64


$   5,594

$ 15,040

$ 20,634Multi-family
4


3,326

444

3,770Commercial real estate
5


1,544

745

2,289Construction
28


2,572

2,357

4,929Commercial business loans
7


263

296

559Other
  loans
1


-

108

108Total
109


$ 13,299

$ 18,990

$ 32,289


Not all of the Bank's classified assets are delinquent or non-performing.  In determining whether the Bank's assets
expose the Bank to sufficient risk to warrant classification, the Bank may consider various factors, including the
payment history of the borrower, the loan-to-value ratio, and the debt coverage ratio of the property securing the loan.
After consideration of these factors, the Bank may determine that the asset in question, though not currently delinquent,
presents a risk of loss that requires it to be classified or designated as special mention.  In addition, the Bank's loans
held for investment may include commercial and multi-family real estate loans with a balance exceeding the current
market value of the collateral which are not classified because they are performing and have borrowers who have
sufficient resources to support the repayment of the loan.

**Allowance for Loan Losses.**The allowance for loan losses is maintained to cover losses inherent in the loans held for
investment.  In originating loans, the Bank recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of the collateral securing the loan. The
responsibility for the review of the Bank's assets and the determination of the adequacy of the allowance lies with the
Internal Asset Review Committee ("IAR Committee").  The Bank adjusts its allowance for loan losses by charging or
crediting its provision for loan losses against the Bank's operations.

The Bank has established a methodology for the determination of the provision for loan losses.  The methodology is
set forth in a formal policy and takes into consideration the need for an overall allowance for loan losses as well as
specific allowances that are tied to individual loans.  The Bank's methodology for assessing the appropriateness of the
allowance consists of several key elements, which include the formula allowance and specific allowance for identified
problem loans.

The formula allowance is calculated by applying loss factors to the loans held for investment. The loss factors are
applied according to loan program type and loan classification.  The loss factors for each program type and loan
classification are established based on an evaluation of the historical loss experience, prevailing market conditions,
concentration in loan types and other relevant factors.  Homogeneous loans, such as residential mortgage, home equity
and consumer installment loans are considered on a pooled loan basis.  A factor is assigned to each pool based upon
expected charge-offs for one year.   The factors for larger, less homogeneous loans, such as construction, multi-family
and commercial real estate loans, are based upon loss experience tracked over business cycles considered appropriate
for the loan type.

Specific valuation allowances are established to absorb losses on loans for which full collectibility may not be
reasonably assured as prescribed in SFAS No. 114, "Accounting by Creditors for Impairment of A Loan," (as amended
by SFAS No. 118).  The amount of the specific allowance is based on the estimated value of the collateral securing the
loan and other analyses pertinent to each situation.  Estimates of identifiable losses are reviewed continually and,
generally, a provision for losses is charged against operations on a monthly basis as necessary to

20

<PAGE>

maintain the allowance
at an appropriate level.  Management presents the minutes of the IAR Committee to the Bank's Board of Directors on
a quarterly basis, which summarizes the actions of the Committee.

The IAR Committee meets quarterly to review and monitor conditions in the portfolio and to determine the appropriate
allowance for loan losses.  To the extent that any of these conditions are apparent by identifiable problem credits or
portfolio segments as of the evaluation date, the IAR Committee's estimate of the effect of such conditions may be
reflected as a specific allowance applicable to such credits or portfolio segments.  Where any of these conditions is not
apparent by specifically identifiable problem credits or portfolio segments as of the evaluation date, the IAR
Committee's evaluation of the probable loss related to such condition is reflected in the unallocated allowance.  The
intent of the Committee is to reduce the differences between estimated and actual losses.  Pooled loan factors are
adjusted to reflect current estimates of charge-offs for the subsequent 12 months.  Loss activity is reviewed for non-pooled loans and the loss factors adjusted, if necessary.   By assessing the probable estimated losses inherent in the loans
held for investment on a quarterly basis, the Bank is able to adjust specific and inherent loss estimates based upon the
most recent information that has become available.

At June 30, 2007, the Bank had an allowance for loan losses of $14.8 million, or 1.09% of gross loans held for
investment, compared to an allowance for loan losses at June 30, 2006 of $10.3 million, or 0.81% of gross loans held
for investment.  A $5.1 million provision for loan losses was recorded in fiscal 2007, compared to $1.1 million in fiscal
2006.  The Bank's intent to expand its investment in multi-family, commercial real estate, construction and commercial
business loans, as well as rising delinquencies and defaults in single-family mortgage loans, may lead to increased levels
of charge-offs.  Although management believes the best information available is used to make such determinations,
future adjustments to the allowance for loan losses may be necessary and results of operations could be significantly
and adversely affected if circumstances differ substantially from the assumptions used in making the determinations.

As a result of the decline in real estate values and the significant losses experienced by many financial institutions, there
has been a higher level of scrutiny by regulatory authorities of the loan portfolio of financial institutions undertaken as
a part of the examinations of such institutions.  While the Bank believes that it has established its existing allowance
for loan losses in accordance with accounting principles generally accepted in the United States of America, there can
be no assurance that regulators, in reviewing the Bank's loan portfolio, will not recommend that the Bank significantly
increase its allowance for loan losses.  In addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that
substantial increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed
above.  Any material increase in the allowance for loan losses may adversely affect the Bank's financial condition and
results of operations.

21

<PAGE>

The following table sets forth an analysis of the Bank's allowance for loan losses for the periods indicated.  Where
specific loan loss reserves have been established, any differences between the loss allowances and the amount of loss
realized has been charged or credited to current operations.

|                                                | **Year Ended June 30,** |  
|----------------------------------------------- | ----------------------- | -
|                                                | **2007**                |  
|(Dollars In Thousands)                          |                         |  
|                                                |                         |  
|Allowance at beginning of period                | $ 10,307                |  
|Provision for loan losses                       | 5,078                   |  
|Recoveries:                                     |                         |  
|Consumer loans                                  | 1                       |  
|Total recoveries                                | 1                       |  
|                                                |                         |  
|Charge-offs:                                    |                         |  
|Mortgage loans:                                 |                         |  
|Single-family                                   | (535                    | )
|Commercial business loans                       | -                       |  
|Consumer loans                                  | (6                      | )
|Total charge-offs                               | (541                    | )
|                                                |                         |  
|Net charge-offs                                 | (540                    | )
|Allowance at end of period                      | $ 14,845                |  
|                                                |                         |  
|Allowance for loan losses as a percentage of    |                         |  
|gross loans held for
  investment               | 1.09%                   |  
|                                                |                         |  
|Net charge-offs as a percentage of average      |                         |  
|loans receivable, net,
  during the period      | 0.04%                   |  
|                                                |                         |  
|Allowance for loan losses as a percentage of    |                         |  
|non-performing loans
  at the end of the period | 93.32%                  |  

22

<PAGE>





The following table sets forth the breakdown of the allowance for loan losses by loan category at the periods indicated.  Management believes that the allowance
can be allocated by category only on an approximate basis.  The allocation of the allowance is based upon an asset classification matrix. The allocation of the
allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any other categories.

|                                | At June 30, |                                                               
|------------------------------- | ----------- | --------------------------------------------------------------
|                                | 2007        |                                                               
|                                | Amount      | % of
   
Loans in
   
Each
   
Category
   
to Total
   
Loans
|(Dollars In Thousands)          |             |                                                               
|Mortgage loans:                 |             |                                                               
|Single-family                   | $   2,893   | 59.68                                                         
|Multi-family                    | 4,255       | 23.85                                                         
|Commercial real estate          | 4,000       | 10.66                                                         
|Construction                    | 2,973       | 4.37                                                          
|Commercial business loans       | 449         | 0.73                                                          
|Consumer loans                  | 14          | 0.04                                                          
|Other loans                     | 261         | 0.67                                                          
|Unallocated                     | -           | N/A                                                           
|Total allowance for
loan losses | $ 14,845    | 100.00                                                        

23

<PAGE>

**Investment Real Estate**

Investment real estate is carried at the lower of cost or fair market value.  All costs associated with disposition are
considered in the determination of fair value.  In July 2006, the Corporation sold the last property held by a wholly
owned subsidiary, approximately six acres of land located in Riverside, California, for a pre-tax gain of $2.3 million
(approximately $1.3 million net of taxes).

**Investment Securities Activities**

Federally chartered savings institutions are permitted under federal and state laws to invest in various types of liquid
assets, including U.S. Treasury obligations, securities of various federal agencies and government sponsored enterprises
and of state and municipal governments, deposits at the FHLB, certificates of deposit of federally insured institutions,
certain bankers' acceptances, mortgage-backed securities and federal funds.  Subject to various restrictions, federally
chartered savings institutions may also invest a portion of their assets in commercial paper and corporate debt securities.
Savings institutions such as the Bank are also required to maintain an investment in FHLB - San Francisco stock.

The investment policy of the Bank, established by the Board of Directors and implemented by the Bank's Asset-Liability
Committee ("ALCO"), seeks to provide and maintain adequate liquidity, complement the Bank's lending activities, and
generate a favorable return on investments without incurring undue interest rate risk and credit risk.  Investments are
made based on certain considerations, such as yield, credit quality, maturity, liquidity and marketability. The Bank also
considers the effect that the proposed investment would have on the Bank's risk-based capital requirements and interest
rate risk sensitivity.

At June 30, 2007, the Corporation's
investment securities portfolio was $150.8 million, which primarily consisted of
federal agency and government sponsored enterprise obligations. A total of
$131.8 million (estimated fair value) of the Corporation's investment securities
portfolio was classified as available for sale. All other securities were
classified as held to maturity.

24

<PAGE>

The following table sets forth the composition of the Bank's investment portfolio at the dates indicated.

At June 30,2007

2006

2005**Estimated**





**Estimated**





**Estimated****Amortized**

**Fair**



**Amortized**

**Fair**



**Amortized**

**Fair****Cost**

**Value**

**Percent**

**Cost**

**Value**

**Percent**

**Cost**

**Value**

**Percent**(Dollars In Thousands)Held to maturity securities:U.S. government sponsored
enterprise debt securities
$   19,000

$     18,836

12.50%

$     51,028

$     49,911

28.35%

$   51,028

$     50,117

21.65%U.S. government agency MBS (1)
1

1

-

3

3

-

4

4

-Corporate bonds
-

-

-

-

-

-

996

1,006

0.43Certificates of deposit
-

-

-

-

-

-

200

200

0.09Total held to maturity
19,001

18,837

12.50

51,031

49,914

28.35

52,228

51,327

22.17Available for sale securities:U.S. government sponsored

enterprise debt securities
9,849

9,683

6.43

21,846

21,264

12.08

24,838

24,399

10.54U.S. government agency MBS
57,555

57,539

38.18

38,143

37,365

21.22

56,517

56,377

24.35U.S. government sponsoredenterprise MBS
58,861

59,066

39.20

61,455

61,249

34.79

91,144

91,748

39.62Private issue CMO (2)
4,627

4,641

3.08

5,557

5,412

3.07

7,312

7,266

3.14Freddie Mac common stock
6

364

0.24

6

342

0.19

6

391

0.17Fannie Mae common stock
1

26

0.02

1

19

0.01

1

23

0.01Other common stock
118

523

0.35

118

507

0.29

-

-

-Total available for sale
131,017

131,842

87.50

127,126

126,158

71.65

179,818

180,204

77.83Total investment securities
$ 150,018

$ 150,679

100.00%

$ 178,157

$ 176,072

100.00%

$ 232,046

$ 231,531

100.00%


25

<PAGE>

As of June 30, 2007, the Corporation held investments in a continuous unrealized loss position totaling $505,000,
consisting of the following:



| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 

|
|

| |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  | 

|
|

|                                                       | **Unrealized Holding
Losses** |                | **Unrealized Holding
Losses** |               | **Unrealized Holding
Losses**
|------------------------------------------------------ | ----------------------------- | -------------- | ----------------------------- | ------------- | -----------------------------
|(In Thousands)                                         | **Less Than 12 Months**       |                | **12 Months or More**         |               | **Total**                    
|                                                       | **Estimated**                 |                |                               | **Estimated** |                              
|                                                       | **Fair**                      | **Unrealized** |                               | **Fair**      | **Unrealized**               
|**Description  of Securities**                         | **Value**                     | **Losses**     |                               | **Value**     | **Losses**                   
|U.S. government sponsored

enterprise debt securities: |                               |                |                               |               |                              
|Freddie Mac                                            | $                     -       | $          -   |                               | $ 10,869      | $ 130                        
|FHLB                                                   | -                             | -              |                               | 17,650        | 200                          
|U.S. government agency MBS:                            |                               |                |                               |               |                              
|GNMA                                                   | 27,769                        | 32             |                               | 4,762         | 3                            
|U.S. government sponsored

 enterprise MBS:            |                               |                |                               |               |                              
|Fannie Mae                                             | -                             | -              |                               | 2,988         | 54                           
|Freddie Mae                                            | 14,821                        | 78             |                               | -             | -                            
|Private issue CMO:                                     |                               |                |                               |               |                              
|Washington Mutual, Inc                                 | -                             | -              |                               | 1,222         | 8                            
|Total                                                  | $ 42,590                      | $ 110          |                               | $ 37,491      | $ 395                        



As of June 30, 2007, the unrealized holding losses relate to a total of 14 investment securities, which consist of two
adjustable rate MBS, one adjustable rate CMO and 11 fixed rate government sponsored enterprise debt obligations,
which have been in an unrealized loss position (ranging froma de minimus percentage to 2.4% of cost) for more
than 12 months.  Such unrealized holding losses are the result of an increase in market interest rates during fiscal
2006 and fiscal 2007 and are not the result of credit or principal risk.  Based on the nature of the investments and
other considerations discussed above, management concluded that such unrealized losses were not other than
temporary as of June 30, 2007.

26

<PAGE>



The following table sets forth the outstanding balance, maturity and weighted average yield of the investment securities at June 30, 2007:

|                                                    |  | Due in     |  | **Due**          |  | **Due**           | **Due**       | **No**       |           |            | 
|--------------------------------------------------- |  | ---------- |  | ---------------- |  | ----------------- | ------------- | ------------ | --------- | ---------- | 
|                                                    |  | One Year   |  | **After One to** |  | **After Five to** | **After**     | **Stated**   |           |            | 
|                                                    |  | or Less    |  | **Five Years**   |  | **Ten Years**     | **Ten Years** | **Maturity** | **Total**
|(Dollars in Thousands)                              |  | **Amount** |  | **Yield**        |  | **Amount**        |               | **Yield**    |           | **Amount** | 
|                                                    |  |            |  |                  |  |                   |               |              |           |            | 
|Held to maturity securities:                        |  |            |  |                  |  |                   |               |              |           |            | 
|U.S. government sponsoredenterprise debt securities |  | $ 19,000   |  | 3.15%            |  | $      -          |               | - %          |           | $ -        | 
|U.S. government agency    MBS                       |  | -          |  | -                |  | 1                 |               | 8.81%        |           | -          | 
|Total held to maturity                              |  | 19,000     |  | 3.15%            |  | 1                 |               | 8.81%        |           | -          | 
|                                                    |  |            |  |                  |  |                   |               |              |           |            | 
|Available for sale securities:                      |  |            |  |                  |  |                   |               |              |           |            | 
|U.S. government sponsoredenterprise debt securities |  | 7,870      |  | 3.01%            |  | 1,813             |               | 4.04%        |           | -          | 
|U.S. government agency    MBS                       |  | -          |  | -                |  | -                 |               | -            |           | -          | 
|U.S. government sponsored

    enterprise MBS       |  | 95         |  | 5.50%            |  | -                 |               | -            |           | -          | 
|Private issue CMO                                   |  | -          |  | -                |  | -                 |               | -            |           | -          | 
|Freddie Mac common
  stock                          |  | -          |  | -                |  | -                 |               | -            |           | -          | 
|Fannie Mae common
  stock                           |  | -          |  | -                |  | -                 |               | -            |           | -          | 
|Other common stock                                  |  | -          |  | -                |  | -                 |               | -            |           | -          | 
|Total available for sale                            |  | 7,965      |  | 3.04%            |  | 1,813             |               | 4.04%        |           | -          | 
|Total investment securities                         |  | $ 26,965   |  | 3.12%            |  | $ 1,814           |               | 4.04%        |           | $ -        | 

27

<PAGE>

**Deposit Activities and Other Sources of Funds**

**General.**  Deposits, the proceeds from loan sales and loan repayments are the major sources of the Bank's funds for
lending and other investment purposes.  Scheduled loan repayments are a relatively stable source of funds, while deposit
inflows and outflows are influenced significantly by general interest rates and money market conditions.  Loan sales
are also influenced significantly by general interest rates. Borrowings through the FHLB-San Francisco and repurchase
agreements may be used to compensate for declines in the availability of funds from other sources.

**Deposit Accounts.**  Substantially all of the Bank's depositors are residents of the State of California. Deposits are
attracted from within the Bank's market area by offering a broad selection of deposit instruments, including checking,
savings, money market and time deposits.  Deposit account terms vary, differentiated by the minimum balance required,
the time periods that the funds must remain on deposit and the interest rate, among other factors. In determining the
terms of its deposit accounts, the Bank considers current interest rates, profitability to the Bank, interest rate risk
characteristics, competition and its customer's preferences and concerns.  Generally, the Bank's deposit rates are
commensurate with the median rates of its competitors within a given market.  The Bank may occasionally pay above-market interest rates to attract or retain deposits when less expensive sources of funds are not available.  The Bank may
also pay above-market interest rates in specific markets in order to increase the deposit base of a particular office or
group of offices.  Currently, the Bank does not accept brokered deposits.  The Bank reviews its deposit composition and
pricing on a weekly basis.

The Bank currently offers time deposits for terms not exceeding five years.  As illustrated in the following table, time
deposits represented 65.0% of the Bank's deposit portfolio at June 30, 2007, compared to 57.4% at June 30, 2006.  At
June 30, 2007, the Bank has a single depositor with an aggregate balance of $100.0 million in time deposits.  The Bank
attempts to reduce the overall cost of its deposit portfolio and to increase its franchise value by emphasizing transaction
accounts which are subject to a heightened degree of competition (see Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on page 48 of this Form 10-K).

The following table sets forth information concerning the Bank's weighted-average interest rate of deposits at June 30,
2007.

|**Weighted**      |  |                   |                                          |             |  |                    | Percentage  
|----------------- |  | ----------------- | ---------------------------------------- | ----------- |  | ------------------ | ------------
|**Average**       |  |                   |                                          | **Minimum** |  | **Balance**        | **of Total**
|**Interest Rate** |  | **Term**          | **Deposit  Account Type**                | **Amount**  |  | **(In Thousands)** | **Deposits**
|                  |  |                   | Transaction accounts:                    |             |  |                    |             
|0.00%             |  | N/A               | Checking accounts - non interest-bearing | $       
-  |  | $    43,694        | 4.38%       
|0.76              |  | N/A               | Checking accounts - interest-bearing .   | -           |  | 122,588            | 12.28       
|2.04              |  | N/A               | Savings accounts                         | 10          |  | 153,036            | 15.32       
|2.45              |  | N/A               | Money market accounts                    | -           |  | 30,647             | 3.07        
|                  |  |                   |                                          |             |  |                    |             
|                  |  |                   | Time deposits:                           |             |  |                    |             
|4.35              |  | 12 to 36 months   | Fixed-term, variable rate                | 1,000       |  | 1,367              | 0.14        
|0.84              |  | 30 days or less   | Fixed-term, fixed rate                   | 1,000       |  | 25                 | -           
|3.58              |  | 31 to 90 days     | Fixed-term, fixed rate                   | 1,000       |  | 7,060              | 0.71        
|5.00              |  | 91 to 180 days    | Fixed-term, fixed rate                   | 1,000       |  | 192,008            | 19.23       
|4.75              |  | 181 to 365 days   | Fixed-term, fixed rate                   | 1,000       |  | 121,784            | 12.19       
|4.99              |  | Over 1 to 2 years | Fixed-term, fixed rate                   | 1,000       |  | 176,150            | 17.64       
|4.78              |  | Over 2 to 3 years | Fixed-term, fixed rate                   | 1,000       |  | 110,146            | 11.03       
|4.13              |  | Over 3 to 5 years | Fixed-term, fixed rate                   | 1,000       |  | 40,067             | 4.01        
|3.63%             |  |                   |                                          |             |  | $ 998,572          | 100.00%     

28

<PAGE>The following table indicates the aggregate dollar amount of the Bank's time deposits with balances of $100,000 or
more differentiated by time remaining until maturity as of June 30, 2007.

| |  | 
| |  | 

|**Maturity Period**       |       | **Amount**
|------------------------- | ----- | ----------
|(In Thousands)            |       |           
|                          |       |           
|Three months or less      |       | $ 151,946 
|Over three to six months  |       | 47,446    
|Over six to twelve months |       | 22,725    
|Over twelve months        |       | 123,752   
|                          | Total |           

**Deposit Flows.** The following table sets forth the balances (inclusive of interest credited) and changes in dollar amount
of deposits in the various types of accounts offered by the Bank at and between the dates indicated.

| |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  | 

| |                                          |  | At June 30, | 
| | ---------------------------------------- |  | ----------- | 
| |                                          |  | **2007**    | 
| |                                          |  |             | 
| |                                          |  |             | 
| | (Dollars In Thousands)                   |  | **Amount**  | 
| | Checking accounts - non interest-bearing |  | $   43,694  | 
| | Checking accounts - interest-bearing     |  | 122,588     | 
| | Savings accounts                         |  | 153,036     | 
| | Money market accounts                    |  | 30,647      | 
| | Time deposits:                           |  |             | 
| | Fixed-term, fixed rate which mature:     |  |             | 
| | Within one year                          |  | 433,292     | 
| | Over one to two
years                    |  | 162,565     | 
| | Over two to five years                   |  | 51,383      | 
| | Fixed-term, variable rate                |  | 1,367       | 
| | Total                                    |  | $ 998,572   | 

**Time Deposits by Rates**.  The following table sets forth the aggregate balance of time deposits categorized by interest
rates at the dates indicated.

|               |  | At June 30,  
|-------------- |  | -------------
|               |  | 2007         
|(In Thousands) |  |              
|Below 1.00%    |  | $          49
|1.00 to 1.99%  |  | -            
|2.00 to 2.99%  |  | 8,808        
|3.00 to 3.99%  |  | 81,052       
|4.00 to 4.99%  |  | 119,862      
|5.00 to 5.99%  |  | 438,836      
|6.00 to 6.99%  |  | -            
|Total          |  | $ 648,607    

29

<PAGE>

**Time Deposits by Maturities.**The following table sets forth the aggregate dollar amount of time deposits at June 30,
2007 differentiated by interest rates and maturity.

| |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  | 

|               |  |               |  | Over One      |  | **Over Two**           |  | **Over
Three**     |  | **After**          |  |              
|-------------- |  | ------------- |  | ------------- |  | ---------------------- |  | ------------------ |  | ------------------ |  | -------------
|               |  | One Year      |  | **to**        |  | **to**                 |  | **to**             |  | **Four**           |  |              
|               |  | **or Less**   |  | **Two Years** |  | **Three Years**        |  | **Four Years**     |  | **Years**          |  | **Total**    
|(In Thousands) |  |               |  |               |  |                        |  |                    |  |                    |  |              
|               |  |               |  |               |  |                        |  |                    |  |                    |  |              
|Below 1.00%    |  | $          36 |  | $           3 |  | $                    8 |  | $                - |  | $                2 |  | $          49
|1.00 to 1.99%  |  | -             |  | -             |  | -                      |  | -                  |  | -                  |  | -            
|2.00 to 2.99%  |  | 8,735         |  | 73            |  | -                      |  | -                  |  | -                  |  | 8,808        
|3.00 to 3.99%  |  | 59,711        |  | 16,034        |  | 3,876                  |  | 969                |  | 462                |  | 81,052       
|4.00 to 4.99%  |  | 81,927        |  | 30,438        |  | 4,603                  |  | 943                |  | 1,951              |  | 119,862      
|5.00 to 5.99%  |  | 284,054       |  | 116,174       |  | 38,498                 |  | -                  |  | 110                |  | 438,836      
|               |  |               |  |               |  |                        |  |                    |  |                    |  |              
|Total          |  | $ 434,463     |  | $ 162,722     |  | $ 46,985               |  | $ 1,912            |  | $ 2,525            |  | $ 648,607    

| |  |  |  |  |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  | 

| |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  | 

|                                                      |  | At or For the Year Ended June 30, | 
|----------------------------------------------------- |  | --------------------------------- | 
|                                                      |  | **2007**                          | 
|(In Thousands)                                        |  |                                   | 
|                                                      |  |                                   | 
|Beginning balance                                     |  | $ 917,582                         | 
|                                                      |  |                                   | 
|Net deposits (withdrawals) before
  interest credited |  | 49,816                            | 
|Interest credited                                     |  | 31,174                            | 
|Net increase (decrease) in deposits                   |  | 80,990                            | 
|                                                      |  |                                   | 
|Ending balance                                        |  | $ 998,572                         | 

**Borrowings.**  The FHLB - San Francisco functions as a central reserve bank providing credit for member financial
institutions.  As a member, the Bank is required to own capital stock in the FHLB - San Francisco and is authorized
to apply for advances using such stock and certain of its mortgage loans and other assets (principally investment
securities) as collateral, provided certain creditworthiness standards have been met.  Advances are made pursuant to
several different credit programs.  Each credit program has its own interest rate, maturity, terms and conditions.
Depending on the program, limitations on the amount of advances are based on the financial condition of the member
institution and the adequacy of collateral pledged to secure the credit.  The Bank utilizes advances from the FHLB -
San Francisco as an alternative to deposits to supplement its supply of lendable funds, to meet deposit withdrawal
requirements and to help manage interest rate risk.  The FHLB - San Francisco has, from time to time, served as the
Bank's primary borrowing source.  In September 2006, the FHLB - San Francisco borrowing capacity was increased
from 40% of total assets to 50% of total assets.  Advances from the FHLB - San Francisco are typically secured by the
Bank's single-family residential mortgages, multi-family and commercial real estate loans.  Total mortgage loans
pledged to the FHLB - San Francisco were $875.2 million at June 30, 2007 as compared to $737.3 million at June 30,
2006.  In addition, the Bank pledged investment securities totaling $24.9 million at June 30, 2007 as compared to $54.6
million at June 30, 2006 to collateralize its FHLB - San Francisco advances under the Securities-Backed Credit ("SBC")
facility.  At June 30, 2007, the Bank had $502.8 million of borrowings from the FHLB - San Francisco with a weighted-average rate of 4.55%, with $24.0 million under the SBC facility.  Such borrowings mature between 2007 and 2021.

In addition, the Bank has a borrowing arrangement in the form of a federal funds facility with its correspondent bank
in the amount of $60.0 million.  As of June 30, 2007 and 2006, the Bank had no outstanding correspondent bank
advances.

30

<PAGE>

The following table sets forth certain information regarding borrowings by the Bank at the dates and for the periods
indicated:

|                                                                 | At or For the Year Ended June 30, | 
|---------------------------------------------------------------- | --------------------------------- | 
|                                                                 | 2007                              | 
|(Dollars In Thousands)                                           |                                   | 
|                                                                 |                                   | 
|Balance outstanding at the end of period:                        |                                   | 
|FHLB - San Francisco advances                                    | $ 502,774                         | 
|Correspondent bank advances                                      | $                        -        | 
|                                                                 |                                   | 
|Weighted average rate at the end of period:                      |                                   | 
|FHLB - San Francisco advances                                    | 4.55%                             | 
|Correspondent bank advances                                      | -                                 | 
|                                                                 |                                   | 
|Maximum amount of borrowings
  outstanding at any month end:     |                                   | 
|FHLB - San Francisco advances                                    | $ 689,443                         | 
|Correspondent bank advances                                      | $     1,000                       | 
|                                                                 |                                   | 
|Average short-term borrowings during the period (1)              |                                   | 
|With respect to:                                                 |                                   | 
|FHLB - San Francisco advances                                    | $ 281,267                         | 
|Correspondent bank advances                                      | $               168               | 
|                                                                 |                                   | 
|Weighted average short-term borrowing rate during the period (1) |                                   | 
|With respect to:                                                 |                                   | 
|FHLB - San Francisco advances                                    | 4.89%                             | 
|Correspondent bank advances                                      | 5.34%                             | 

**Subsidiary Activities**

Federal savings institutions generally may
invest up to 3% of their assets in service corporations, provided that at least
one-half of any amount in excess of 1% is used primarily for community,
inner-city and community development projects. The Bank's investment in its
service corporations did not exceed these limits at June 30, 2007.

The Bank has three wholly owned subsidiaries; Provident Financial Corp ("PFC"), Profed Mortgage, Inc., and First
Service Corporation.  PFC's current activities include: (i) acting as trustee for the Bank's real estate transactions and
(ii) holding real estate for investment.  Profed Mortgage, Inc., which formerly conducted the Bank's mortgage banking
activities, and First Service Corporation are currently inactive.  At June 30, 2007, the Bank's investment in its
subsidiaries was $278,000.

**REGULATION**

The following is a brief description of certain laws and regulations which are applicable to the Corporation and the
Bank.  The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere
herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

31

<PAGE>

Legislation is introduced from time to time in the United States Congress that may affect the Corporation's and the
Bank's operations.  In addition, the regulations governing the Corporation and the Bank may be amended from time to
time by the OTS.  Any such legislation or regulatory changes could adversely affect the Corporation and the Bank and
no prediction can be made as to whether any such changes may occur.

**General**

The Bank, as a federally chartered savings institution, is subject to extensive regulation, examination and supervision
by the OTS, as its primary federal regulator, and the FDIC, as its insurer of deposits. The Bank is a member of the
FHLB System and its deposits are insured up to applicable limits by the FDIC. The Bank must file reports with the OTS
and the FDIC concerning its activities and financial condition in addition to obtaining regulatory approvals prior to
entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic
examinations by the OTS and, under certain circumstances, the FDIC to evaluate the Bank's safety and soundness and
compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of
the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change
in such policies, whether by the OTS, the FDIC or Congress, could have a material adverse impact on the Corporation
and the Bank and their operations. The Corporation, as a savings and loan holding company, is required to file certain
reports with, is subject to examination by, and otherwise must comply with the rules and regulations of the OTS.  The
Corporation is also subject to the rules and regulations of the Securities and Exchange Commission ("SEC") under the
federal securities laws.  See "Savings and Loan Holding Company Regulations" on page 37.

**Federal Regulation of Savings Institutions**

**Office of Thrift Supervision.**  The OTS has extensive authority over the operations of savings institutions.
As part
of this authority, the Bank is required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Corporation.  This enforcement authority
includes, among other things, the ability to assess civil money penalties, issue cease-and-desist or removal orders
and initiate injunctive actions.  In general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound practices.  Other actions or inaction may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS.  Except under certain circumstances, public
disclosure of final enforcement actions by the OTS is required.



In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws and it is prohibited
from engaging in any activities not permitted by these laws.  For example, no savings institution may invest in non-investment grade corporate debt securities.  In addition, the permissible level of investment by federal institutions in
loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS.
Federal savings institutions are also generally authorized to branch nationwide.  The Bank is in compliance with the
noted restrictions.

All savings institutions are required to pay assessments to the OTS to fund the agency's operations.  The general
assessments, paid on a semi-annual basis, are determined based on the savings institution's total assets, including
consolidated subsidiaries.  The Bank's annual OTS assessment for the fiscal year ended June 30, 2007 was $320,000.

Federal law provides that
savings institutions are generally subject to the national bank limit on loans
to one borrower. A savings institution may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if secured by specified readily marketable collateral. At
June 30, 2007, the Bank's limit on loans to one borrower was $20.3 million. At
June 30, 2007, the Bank's largest loan commitment to a single borrower was $8.5
million. Of this commitment, $4.2 million has been disbursed in the form of a
condominium tract construction loan located in Southern California, which as of
June 30, 2007 was performing according to its

32

<PAGE>

original terms. The Bank also
monitors multiple loans to a single borrower and/or guarantor. At June 30, 2007,
one such borrower had a total of $7.7 million of loans outstanding, primarily
commercial real estate loans, all of which are performing according to their
original terms.

The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness
standards on such matters as loan underwriting and documentation, asset quality, earnings, internal controls and audit
systems, interest rate risk exposure and compensation and other employee benefits.  Any institution that fails to comply
with these standards must submit a compliance plan.

**Federal Home Loan Bank System.**  The Bank is a member of the FHLB - San Francisco, which is one of 12 regional
FHLBs that administer the home financing credit function of member financial institutions.  Each FHLB serves as a
reserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System.  It makes loans or advances to members in accordance with
policies and procedures, established by the Board of Directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board.  All advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB.  In addition, all long-term advances are required to provide funds for residential home
financing.  At June 30, 2007, the Bank had $502.8 million of outstanding advances from the FHLB - San Francisco
under an available credit facility of $885.2 million, based on 50% of total assets, which is limited to available collateral.
See "Business - Deposit Activities and Other Sources of Funds - Borrowings" on page 28.



As a member, the Bank is required to purchase and maintain stock in the FHLB - San Francisco.  At June 30, 2007, the
Bank had $43.8 million in FHLB - San Francisco stock, which was in compliance with this requirement.  In past years,
the Bank has received substantial dividends on its FHLB - San Francisco stock.  The average dividend yield for fiscal
2007, 2006 and 2005 was 5.35%, 4.78% and 4.41%, respectively.  There is no guarantee that the FHLB - San Francisco
will maintain its dividend at these levels.

Under federal law, the FHLB is required to provide funds for the resolution of troubled savings institutions and to
contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances
targeted for community investment and low- and moderate-income housing projects.  These contributions have adversely
affected the level of FHLB dividends paid and could continue to do so in the future.  These contributions also could
have an adverse effect on the value of FHLB stock in the future.  A reduction in value of the Bank's FHLB stock may
result in a corresponding reduction in the Bank's capital.

**Insurance of Accounts and Regulation by the FDIC.**  The Bank's deposits are insured up to applicable limits by
the DIF of the FDIC.  The DIF is the successor to the Bank Insurance Fund and the Savings Association Insurance
Fund, which were merged effective March 31, 2006.  As insurer, the FDIC imposes deposit insurance premiums
and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions.  It also may
prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to
pose a serious risk to the insurance fund.  The FDIC also has the authority to initiate enforcement actions against
savings institutions, after giving the Office of Thrift Supervision an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.

The FDIC recently amended its risk-based assessment system for 2007 to implement authority granted by the
Federal Deposit Insurance Reform Act of 2005, which was enacted in 2006 ("Reform Act").  Under the revised
system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory
capital levels and certain other factors.  An institution's assessment rate depends upon the category to which it is
assigned.  Risk category I, which contains the least risky depository institutions, is expected to include more than
90% of all institutions.  Unlike the other categories, Risk Category I contains further risk differentiation based on
the FDIC's analysis of financial ratios, examination component ratings and other information.  Assessment rates are
determined by the FDIC and currently range from five to seven basis points for the healthiest institutions (Risk
Category I) to 43 basis points of assessable deposits for the riskiest (Risk Category IV).  The FDIC may adjust rates
uniformly from one quarter to the next, except that no single adjustment can exceed three basis points.  No
institution may pay a dividend if in default of the FDIC assessment.

33

<PAGE>

The Reform Act also provided for a one-time credit for eligible institutions based on their assessment base as of
December 31, 1996.  Subject to certain limitations with respect to institutions that are exhibiting weaknesses, credits
can be used to offset assessments until exhausted.   The Bank's one-time credit was $695,000.  For the quarter
ended March 31, 2007, the deposit assessment was equal to 1.415 basis points for each $100 in domestic deposits,
totaling $141,000.  With this deposit assessment, the remaining credit balance was $554,000 as of June 30, 2007.
The Reform Act also provided for the possibility that the FDIC may pay dividends to insured institutions once the
DIF reserve ratio equals or exceeds 1.35% of estimated insured deposits.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor deposit insurance fund.  This payment is
established quarterly and during the calendar year ended June 30, 2007 averaged 1.22 basis points of assessable
deposits.

The Reform Act provided the FDIC with authority to adjust the DIF ratio to insured deposits within a range of
1.15% and 1.50%, in contrast to the prior statutorily fixed ratio of 1.25%.  The ratio, which is viewed by the FDIC
as the level that the fund should achieve, was established by the agency at 1.25% for 2007.

The FDIC has authority to increase insurance assessments.  A significant increase in insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of The Bank.  There can be no prediction as
to what insurance assessment rates will be in the future.  Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the
Office of Thrift Supervision.  Management of The Bank is not aware of any practice, condition or violation that might
lead to termination of The Bank's deposit insurance.

**Prompt Corrective Action.**  The OTS is required to take certain supervisory actions against undercapitalized
savings institutions, the severity of which depends upon the institution's degree of undercapitalization.  Generally,
an institution is considered to be "undercapitalized" if it has a core capital ratio of less than 4.0% (3.0% or less for
institutions with the highest examination rating), a ratio of total capital to risk-weighted assets of less than 8.0%, or
a ratio of Tier 1 capital to risk-weighted assets of less than 4.0%.  An institution that has a core capital ratio that is
less than 3.0%, a total risk-based capital ratio less than 6.0%, and a Tier 1 risk-based capital ratio of less than 3.0%
or is considered to be "significantly undercapitalized" and an institution that has a tangible capital ratio equal to or
less than 2.0% is deemed to be "critically undercapitalized."  Subject to a narrow exception, the OTS is required to
appoint a receiver or conservator for a savings institution that is "critically undercapitalized."
OTS regulations also
require that a capital restoration plan be filed with the OTS within 45 days of the date a savings institution
receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized."  In
addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized
institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital
distributions and expansion.  "Significantly undercapitalized" and "critically undercapitalized" institutions are
subject to more extensive mandatory regulatory actions.  The OTS also could take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior
executive officers and directors.

At June 30, 2007, the Bank was categorized as "well capitalized" under the prompt corrective action regulations of the
OTS.

**Standards for Safety and Soundness.**  The federal banking regulatory agencies have prescribed, by regulation,
standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; (vi) asset
quality; (vii) earnings; and (viii) compensation, fees and benefits ("Guidelines").  The Guidelines set forth the safety
and soundness standards that the federal banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired.  If the OTS determines that the Bank fails to meet any standard prescribed
by the Guidelines, it may require the Bank to submit an acceptable plan to achieve compliance with the standard.  OTS
regulations establish deadlines for the submission and review of such safety and soundness compliance plans.
Management is aware of no conditions relating to these safety and soundness standards which would require the
submission of a plan of compliance.

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**Qualified Thrift Lender Test.**  All savings institutions, including the Bank, are required to meet a qualified thrift lender
("QTL") test to avoid certain restrictions on their operations.  This test requires a savings institution to have at least 65%
of its total assets as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12
months on a rolling basis.  As an alternative, the savings institution may maintain 60% of its assets in those assets
specified in Section 7701(a)(19) of the Internal Revenue Code ("Code").  Under either test, such assets primarily consist
of residential housing related loans and investments.

A savings institution that fails to meet the QTL is subject to certain operating restrictions and may be required to convert
to a national bank charter.  Recent legislation has expanded the extent to which education loans, credit card loans and
small business loans may be considered "qualified thrift investments." As of June 30, 2007, the Bank maintained
91.09% of its portfolio assets in qualified thrift investments and, therefore, met the qualified thrift lender test.

**Capital Requirements.** The OTS's capital regulations require federal savings institutions to meet three minimum
capital standards: a 1.5% tangible capital ratio, a 4% core capital ratio (3% for institutions receiving the highest rating
on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action
standards discussed above also establish, in effect, a minimum ratio of 2% tangible capital, 4% core capital (3% for
institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital, and 4% Tier
1 risk-based capital.  The OTS regulations also require that, in meeting the tangible, core and risk-based capital ratios,
institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.

The risk-based capital standard requires federal savings institutions to maintain Tier 1 and total capital (which is defined
as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining
the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual
interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the OTS capital
regulation based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders'
equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights
and credit card relationships. The components of supplementary capital currently include cumulative preferred stock,
long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred
stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45%
of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The OTS also has authority to establish individual minimum capital requirements in appropriate cases upon a
determination that an institution's capital level is or may become inadequate in light of the particular circumstances. At
June 30, 2007, the Bank met each of these capital requirements.  For additional information, see Note 10 of the Notes
to Consolidated Financial Statements included in Item 8 of this Form 10-K.

**Limitations on Capital Distributions.**  OTS regulations impose various restrictions on savings institutions with respect
to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out
mergers and other transactions charged to the capital account.  Generally, savings institutions, such as the Bank, that
before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year
up to 100% of net income for the year-to-date plus retained net income for the two preceding years.  However, an
institution deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted
by the OTS.  The Bank may pay dividends to the Corporation in accordance with this general authority.

Savings institutions proposing to make any capital distribution need not submit written notice to the OTS prior to such
distribution unless they are a subsidiary of a holding company or would not remain well-capitalized following the
distribution.  Savings institutions that do not, or would not meet their current minimum capital requirements following
a proposed capital distribution or propose to exceed these net income limitations, must obtain OTS approval prior to
making such distribution.  The OTS may object to the distribution during that
30-day period based

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<PAGE>

on safety and soundness
concerns.

**Activities of Associations and Their Subsidiaries.**  When a savings institution establishes or acquires a subsidiary
or elects to conduct any new activity through a subsidiary that the association controls, the savings institution must
notify the FDIC and the OTS 30 days in advance and provide the information each agency may, by regulation, require.
Savings institutions also must conduct the activities of subsidiaries in accordance with existing regulations and orders.

The OTS may determine that the continuation by a savings institution of its ownership, control of, or its relationship
to, the subsidiary constitutes a serious risk to the safety, soundness or stability of the savings institution or is inconsistent
with sound banking practices or with the purposes of the Federal Deposit Insurance Act.  Based upon that determination,
the FDIC or the OTS has the authority to order the savings institution to divest itself of control of the subsidiary.  The
FDIC also may determine by regulation or order that any specific activity poses a serious threat to the DIF.  If so, it may
require that no DIF member engage in that activity directly.

**Transactions with Affiliates.** The Bank's authority to engage in transactions with "affiliates" is limited by OTS
regulations and by Sections 23A and 23B of the Federal Reserve Act as implemented by the Federal Reserve Board's
Regulation W. The term "affiliates" for these purposes generally means any company that controls or is under common
control with an institution. The Corporation and its non-savings institution subsidiaries would be affiliates of the Bank.
In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable transactions
with non-affiliates. In addition, certain types of transactions are restricted to an aggregate percentage of the institution's
capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from an
institution. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate
other than a subsidiary.  Federally insured savings institutions are subject, with certain exceptions, to certain restrictions
on extensions of credit to their parent holding companies or other affiliates, on investments in the stock or other
securities of affiliates and on the taking of such stock or securities as collateral from any borrower.  In addition, these
institutions are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or
the providing of any property or service.

The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") generally prohibits a company from making loans to its
executive officers and directors. However, that act contains a specific exception for loans by a depository institution
to its executive officers and directors in compliance with federal banking laws. Under such laws, the Bank's
authority to extend credit to executive officers, directors and 10% stockholders ("insiders"), as well as entities which
such persons control, is limited. The law restricts both the individual and aggregate amount of loans the Bank may
make to insiders based, in part, on the Bank's capital position and requires certain Board approval procedures to be
followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the institution and does not give preference to
insiders over other employees. There are additional restrictions applicable to loans to executive officers.

**Community Reinvestment Act.**  Under the Community Reinvestment Act, every FDIC-insured institution has a
continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs
of its entire community, including low and moderate income neighborhoods.  The Community Reinvestment Act does
not establish specific lending requirements or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are best suited to its particular community,
consistent with the Community Reinvestment Act.  The Community Reinvestment Act requires the OTS, in connection
with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to
take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch,
by the Bank.  The OTS may use an unsatisfactory rating as the basis for the denial of an application.  Due to the
heightened attention being given to the Community Reinvestment Act in the past few years, the Bank may be required
to devote additional funds for investment and lending in its local community.  The Bank was examined for Community
Reinvestment Act compliance and received a rating of satisfactory in its latest examination.

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<PAGE>

**Regulatory and Criminal Enforcement Provisions.**  The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring action against all "institution-affiliated parties," including stockholders,
attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an
adverse effect on an insured institution.  Formal enforcement action may range from the issuance of a capital directive
or cease and desist order to removal of officers or directors, receivership, conservatorship or termination of deposit
insurance.  Civil penalties cover a wide range of violations and can amount to $25,000 per day, or $1.1 million per day
in especially egregious cases.  The FDIC has the authority to recommend to the Director of the OTS that enforcement
action be taken with respect to a particular savings institution.  If the Director does not take action, the FDIC has
authority to take such action under certain circumstances.  Federal law also establishes criminal penalties for certain
violations.

**Environmental Issues Associated with Real Estate Lending.**The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), a federal statute, generally imposes strict liability on all prior and
present "owners and operators" of sites containing hazardous waste.  However, Congress asked to protect
secured creditors by providing that the term "owner and operator" excludes a person whose ownership is limited
to protecting its security interest in the site.  Since the enactment of the CERCLA, this "secured creditor
exemption" has been the subject of judicial interpretations which have left open the possibility that lenders could
be liable for cleanup costs on contaminated property that they hold as collateral for a loan.



To the extent that legal uncertainty exists in this area, all creditors, including the Bank, that have made loans
secured by properties with potential hazardous waste contamination (such as petroleum contamination) could be
subject to liability for cleanup costs, which costs often substantially exceed the value of the collateral property.

**Privacy Standards.** The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA"), which was
enacted in 1999, modernized the financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and other financial service providers.   The
Bank is subject to OTS regulations implementing the privacy protection provisions of the GLBA. These regulations
require the Bank to disclose its privacy policy, including identifying with whom it shares "non-public personal
information," to customers at the time of establishing the customer relationship and annually thereafter.

**Anti-Money Laundering and Customer Identification.**  Congress enacted the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act") on
October 26, 2001 in response to the terrorist events of September 11, 2001. The USA Patriot Act gives the federal
government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing, and broadened anti-money laundering requirements. In March 2006, Congress
re-enacted certain expiring provisions of the USA Patriot Act.

**Savings and Loan Holding Company Regulations**

**General.**  The Corporation is a unitary savings and loan holding company subject to the regulatory oversight of the
OTS.  Accordingly, the Corporation is required to register and file reports with the OTS and is subject to regulation and
examination by the OTS.  In addition, the OTS has enforcement authority over the Corporation and its non-savings
institution subsidiaries, which also permits the OTS to restrict or prohibit activities that are determined to present a
serious risk to the subsidiary savings institution.

**Mergers and Acquisitions.**  The Corporation must obtain approval from the OTS before acquiring more than 5% of
the voting stock of another savings institution or savings and loan holding company or acquiring such an institution or
holding company by merger, consolidation or purchase of its assets.  In evaluating an application for the Corporation
to acquire control of a savings institution, the OTS would consider the financial and managerial resources and future
prospects of the Corporation and the target institution, the effect of the acquisition on the risk to the insurance funds,
the convenience and the needs of the community and competitive factors.

**Activities Restrictions.**  As a unitary savings and loan holding company, the Corporation generally is not subject to
activity restrictions. The Corporation and its non-savings institution subsidiaries are subject to statutory and

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<PAGE>

regulatory
restrictions on their business activities specified by federal regulations, which include performing services and holding
properties used by a savings institution subsidiary, activities authorized for savings and loan holding companies as of
March 5, 1987, and non-banking activities permissible for bank holding companies pursuant to the Bank Holding
Company Act of 1956 or authorized for financial holding companies pursuant to the GLBA.

If the Bank fails the QTL test, the Corporation must, within one year of that failure, register as, and will become subject
to, the restrictions applicable to bank holding companies.  See "Federal Regulation of Savings Institutions - Qualified
Thrift Lender Test" on page 35 of this Form 10-K.

**Sarbanes-Oxley Act.**  The Sarbanes-Oxley Act was signed into law on July 30, 2002 in response to public concerns
regarding corporate accountability in connection with certain accounting scandals.  The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.  The Sarbanes-Oxley Act generally applies to all companies that file or are
required to file periodic reports with the SEC, under the Securities Exchange Act of 1934, including the Corporation.

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules,
requires the SEC and securities exchanges to adopt extensive additional disclosures, corporate governance and related
rules and mandates.  The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the
relationship between a board of directors and management and between a board of directors and its committees.

**TAXATION**

**Federal Taxation**

**General.**  The Corporation and the Bank report their income on a fiscal year basis using the accrual method of
accounting and will be subject to federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed below.  The following discussion of tax
matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable
to the Bank or the Corporation.

**Tax Bad Debt Reserves.**  As a result of legislation enacted in 1996, the reserve method of accounting for bad debt
reserves was repealed for tax years beginning after December 31, 1995.  Due to such repeal, the Bank is no longer able
to calculate its deduction for bad debts using the percentage-of-taxable-income or the experience method.  Instead, the
Bank will be permitted to deduct as bad debt expense its specific charge-offs during the taxable year.  In addition, the
legislation required savings institutions to recapture into taxable income, over a six-year period, their post-1987
additions to their bad debt tax reserves.  As of the effective date of the legislation, the Bank had no post-1987 additions
to its bad debt tax reserves.  As of June 30, 2007, the Bank's total pre-1988 bad debt reserve for tax purposes was
approximately $9.0 million.  Under current law, a savings institution will not be required to recapture its pre-1988 bad
debt reserve unless the Bank makes a "non-dividend distribution" as defined below.

**Distributions**. To the extent
that the Bank makes "non-dividend distributions" to the Corporation that are
considered as made from the reserve for losses on qualifying real property
loans, to the extent the reserve for such losses exceeds the amount that would
have been allowed under the experience method; or from the supplemental reserve
for losses on loans ("Excess Distributions"), then an amount based on the amount
distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out of
the Bank's current or accumulated earnings and profits, as calculated for
federal income tax purposes, will not be considered to result in a distribution
from the Bank's bad debt reserve. Thus, any dividends to the Corporation that
would reduce amounts appropriated to the Bank's bad debt reserve and deducted
for federal income tax purposes would create a tax liability for the Bank. The
amount of

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<PAGE>

additional taxable income attributable to an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution. Thus, if the Bank makes
a "non-dividend distribution," then approximately one and one-half times the
amount distributed will be included in taxable income for federal income tax
purposes, assuming a 35% corporate income tax rate (exclusive of state and local
taxes). See "Limitation on Capital Distributions" on page 35 of this Form 10-K
for limits on the payment of dividends by the Bank. The Bank does not intend to
pay dividends that would result in a recapture of any portion of its tax bad
debt reserve. During fiscal 2007, the Bank declared and paid cash dividends to
the Corporation of $20.0 million while the Corporation declared and paid cash
dividends to the shareholders of $4.6 million.

**Corporate Alternative Minimum Tax.**  The Internal Revenue Code of 1986 imposes a tax on alternative minimum
taxable income ("AMTI") at a rate of 20%. In addition, only 90% of AMTI can be offset by net operating loss
carryovers.  AMTI is increased by an amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior toreduction for net operating losses).

**Non-Qualified Compensation Tax Benefits.**  During fiscal 2007, 1,452 shares of common stock under the
Management Recognition Plan ("MRP") were distributed to non-employee members of the Corporation's Board of
Directors in accordance with previous awards and consistent with the vesting schedule.  Also, 28,946 common stock
option contracts to purchase shares of the Corporation's common stock were exercised as non-qualified stock options
during fiscal 2007.  The federal tax benefit from the non-qualified compensation in fiscal 2007 was $60,000.

**Other Matters.**   The Internal Revenue Service has audited the Bank's income tax returns through 1996 and the
California Franchise Tax Board has audited the Bank through 1990.

**State Taxation**

**California.**  The California franchise tax rate applicable to the Bank equals the franchise tax rate applicable to
corporations generally, plus an "in lieu" rate of 2%, which is approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by banks or financial corporations such as the
Bank).  At June 30, 2007, the Corporation's net state tax rate was 7.5%.  Bad debt deductions are available in computing
California franchise taxes using the specific charge-off method.  The Bank and its California subsidiaries file California
franchise tax returns on a combined basis.  The Corporation will be treated as a general corporation subject to the
general corporate tax rate.  The state tax benefit from the non-qualified compensation in fiscal 2007, as described under
the Federal Taxation section, was $21,000.

**Delaware.**  As a Delaware holding company not earning income in Delaware, the Corporation is exempted from
Delaware corporate income tax, but is required to file an annual report with and pay an annual franchise tax to the State
of Delaware.

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<PAGE>

**EXECUTIVE OFFICERS**

The following table sets forth information with respect to the executive officers of the Corporation and the Bank.

|                    |         | Position               
|------------------- | ------- | -----------------------
|Name                | Age (1) | Corporation            
|Craig G. Blunden    | 59      | Chairman, President and
|                    |         | Chief Executive Officer
|                    |         |                        
|Richard L. Gale     | 56      | -                      
|                    |         |                        
|                    |         |                        
|Kathryn R. Gonzales | 49      | -                      
|                    |         |                        
|                    |         |                        
|Lilian Salter       | 52      | -                      
|                    |         |                        
|                    |         |                        
|Donavon P. Ternes   | 47      | Chief Financial Officer
|                    |         | Corporate Secretary    
|                    |         |                        
|David S. Weiant (2) | 48      | -                      
|                    |         |                        

(1)   As of June 30, 2007.(2)   Joined the Bank on June 29, 2007.

**Biographical Information**

Set forth below is certain information regarding the executive officers of the Corporation and the Bank.  There are
no family relationships among or between the executive officers.



*Craig G. Blunden* has been associated with the Bank since 1974 and has held his current positions at the Bank since
1991 and as President and Chief Executive Officer of the Corporation since its formation in 1996.  Mr. Blunden also
serves on the City of Riverside Council of Economic Development Advisors, and is Chairman of the Board of the
Greater Riverside Chamber of Commerce.

*Richard L. Gale*, who joined the Bank in 1988, has served as President of the Provident Bank Mortgage division since
1989.  Mr. Gale has held his current position with the Bank since 1993.

*Kathryn R. Gonzales* joined the Bank as Senior Vice President of Retail Banking on August 7, 2006.  Prior to joining
the Bank, Ms. Gonzales was with Bank of America where she was responsible for working with under-performing
branches and re-energizing their business development capabilities.  Prior to that she was with Arrowhead Central Credit
Union where she was responsible for 25 retail branches and oversaw their significant deposit growth.  Her experience
includes retail branch sales development, branch operations, development of business related products and services, and
commercial lending.

*Lilian Salter,*who**joined the Bank in 1993, was general auditor prior to being promoted to Chief Information Officer
in 1997.  Prior to joining the Bank, Ms. Salter was with Home Federal Bank, San Diego, California for 17 years and
held various positions in information systems, auditing and accounting.

*Donavon P. Ternes* joined the Bank as Senior Vice President and Chief Financial Officer on November 1, 2000.  Prior
to joining the Bank, Mr. Ternes was the President, Chief Executive Officer, Chief Financial Officer and Director of
Mission Savings and Loan Association, a financial institution located in Riverside, California for over 11 years.

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<PAGE>

*David S. Weiant* joined the Bank as Senior Vice President and Chief Lending Officer on June 29, 2007.  Prior to joining
the Bank, Mr. Weiant was a Senior Vice President of Professional Business Bank where he was responsible for
commercial lending in the Los Angeles and Inland Empire regions of Southern California.  Mr. Weiant has more than
25 years of experience with financial institutions including the last 10 years in senior management.

**Item 1A.  Risk Factors**

We assume and manage a certain degree of risk in order to conduct our business strategy.  In addition to the risk factors
described below, other risks and uncertainties not specifically mentioned, or that are currently known to, or deemed by,
management to be immaterial also may materially and adversely affect our financial position, results of operation and/or
cash flows.  Before making an investment decision, you should carefully consider the risks described below together
with all of the other information included in this Form 10-K.  If any of the circumstances described in the following risk
factors actually occur to a significant degree, the value of our common stock could decline, and you could lose all or
part of your investment.

**Fluctuations in interest rates could reduce our profitability and affect the value of our assets.**

Like other financial institutions, we are subject to interest rate risk.  Our primary source of income is net interest income,
which is the difference between interest earned on loans and investment securities and the interest paid on deposits and
borrowings.  We expect that we will periodically experience imbalances in the interest rate sensitivities of our assets
and liabilities and the relationships of various interest rates to each other.  Over any period of time, our interest-earning
assets may be more sensitive to changes in market interest rates than our interest-bearing liabilities, or vice versa.  In
addition, the individual market interest rates underlying our loan and deposit products may not change to the same
degree over a given time period.  In any event, if market interest rates should move contrary to our position, our earnings
may be negatively affected.  In addition, loan volume and quality and deposit volume and mix can be affected by market
interest rates.  Changes in levels of market interest rates could materially adversely affect our net interest spread, asset
quality, origination volume and overall profitability.

Interest rates have recently been at historically low levels.  However, since June 30, 2004, the U.S.
Federal Reserve has increased its target for the federal funds rate 17 times, from 1.00% to 5.25%, and the most
recent interest rate increase was on June 29, 2006.  While these short-term market interest rates have increased
the pricing of our loans, it has been more than offset by the rise in our funding costs.  In a sustained rising
interest rate environment the asset yields may not match rising funding costs, which may negatively impact
interest margins.  A sustained falling interest rate environment would positively impact margins.



We manage our assets and liabilities in order to achieve long-term profitability while limiting our exposure to the
fluctuation of interest rates.  We anticipate periodic imbalances in the interest rate sensitivity of our assets and
liabilities and the relationship of various interest rates to each other.  At any reporting period, we may have earning
assets which are more sensitive to changes in interest rates than interest-bearing liabilities, or vice versa.  The
fluctuation of market interest rates can materially affect our net interest spread, interest margin, loan originations,
deposit volumes and overall profitability.  In addition, we may have valuation risk in measuring our interest rate risk
position.  The valuation risk is attributable to calculation methods (modeling risks) and assumptions used in the
model, including loan prepayments and forward interest rates.

Our mortgage banking business is subject to additional interest rate risk.  For instance, rising interest rates may lower
the loan origination volume thereby reducing the gain on sale of loans.  Additionally, since the loan origination volume
is hedged against interest rate fluctuations with forward loan sale commitments and put option contracts, rising or falling
interest rates may alter the actual loan origination volume such that the hedges are insufficient to protect our profitability
margins.  Also, we cannot be assured that the value of the instruments we use to hedge our loan origination volume will
react to the interest rate fluctuations in the same manner as the value of the loan origination commitments which may
also significantly impact profitability.

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<PAGE>

For further information on our interest rate risks, see the discussion included in "Item 7A. Quantitative and
Qualitative Disclosure About Market Risk" on page 61 of this Form 10-K.

**Secondary mortgage market conditions could have a material adverse impact on our financial condition and
earnings.**

In addition to being affected by interest rates, the secondary mortgage markets are also currently experiencing
unprecedented disruptions resulting from reduced investor demand for mortgage loans and mortgage-backed securities
and increased investor yield requirements for those loans and securities. These conditions may continue or worsen in
the future. In light of current conditions, we expect to retain a larger portion of mortgage loans than we would in other
environments. While our capital and liquidity positions are currently strong and we believe we have sufficient capacity
to hold additional mortgage loans until investor demand improves and yield requirements moderate, our capacity to
retain mortgage loans is limited. As a result, a prolonged period of secondary market illiquidity may reduce our loan
production volumes and could have a material adverse impact on our future earnings and financial condition.

**We are subject to credit risks in connection with our lending practices.**

We are subject to credit risk in
connection with our loans held for investment, loans available for sale,
receivable from sale of loans, investment securities and in connection with
mortgage banking activities, particularly in the sale of loans (counter-party
risk).

A substantial majority of our single family mortgage loans held for investment are adjustable rate loans.  Any rise in
prevailing market interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans,
increasing the possibility of default.  Multi-family and commercial real estate loans bear higher credit risk as compared
to single-family mortgage loans.  These loans are typically secured by properties that are generally greater in amount,
more difficult to evaluate and monitor and are susceptible to default as a result of changes ingeneral economic
conditions and, therefore, involve a greater degree of risk than single-family mortgage loans.  Since payments on loans
secured by multi-family and commercial real estate are often dependent on the successful operation and management
of the properties, repayment of such loans may be impacted by adverse conditions in the real estate market or the
economy.  As with single family mortgage loans, a substantial majority of our multi-family and commercial real estate
loans are adjustable rate, and thus are subject to higher payments by the borrower when prevailing market interest rates
rise.  Our multi-family and commercial real estate loans are primarily located in Los Angeles, Orange, Riverside, San
Bernardino and San Diego Counties.

Our non-traditional single-family loans include interest-only loans, negative amortization and more than 30-year
amortization loans, stated-income loans, and may bear higher credit risk.  As of June 30, 2007, these loans totaled
$659.4 million, comprising 80% of total single family mortgage loans held for investment and 48% of total loans held
for investment.  In the case of interest-only loans a borrower's monthly payment is subject to change in the future when
the loan converts to a fully-amortizing status.  Since the borrower's monthly payment may increase by a substantial
amount even without an increase in prevailing market interest rates, there is no assurance that the borrower will be able
to afford the increased monthly payment.  In the case of stated income loans a borrower may misrepresent his income
or source of income (which we have not verified) in order to obtain the loan.  The borrower may not have sufficient
income to qualify for the loan amount and may not be able to make the monthly loan payment.  In the case of more than
30-year amortization loans the term of the loan requires many more monthly payments from the borrower (ultimately
increasing the cost of the home) and subjects the loan to more interest rate cycles, economic cycles and employment
cycles which increases the possibility that the borrower is negatively impacted by one of these cycles and is no longer
willing or able to meet his monthly payment obligations.  We have recently seen a rise in delinquencies in our non-traditional loans held for investment.  As of June 30, 2007, 1.18% of such loans, totaling $15.9 million, were in non-accrual status, compared to 0.20% of such loans, totaling $2.5 million, in non-accrual status as of June 30, 2006.

42

<PAGE>**Our funding sources may prove insufficient to replace deposits and support our future growth.**

We rely on customer deposits and advances from the FHLB - San Francisco and other borrowings to fund our
operations.  Although we have historically been able to replace maturing deposits and advances if desired, no assurance
can be given that we would be able to replace such funds in the future if our financial condition or the financial
condition of the FHLB - San Francisco or market conditions were to change. Our financial flexibility will be severely
constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate
future growth at acceptable interest rates.  Finally, if we are required to rely more heavily on more expensive funding
sources to support future growth, our revenues may not increase proportionately to cover our costs.  In this case, our
profitability would be adversely affected.

Although we consider such sources of funds adequate for our liquidity needs, we may seek additional debt in the future
to achieve our long-term business objectives.  There can be no assurance additional borrowings, if sought, would be
available to us or, if available, would be on favorable terms.  If additional financing sources are unavailable or are not
available on reasonable terms, our growth and future prospects could be adversely affected.

**Our profitability depends significantly on economic conditions in the State of California.**

Our success depends primarily on the general economic conditions of the State of California and the specific local
markets in which we operate. Adverse economic conditions unique to the California markets could have a material
adverse effect on our financial condition and results of operations.  Further, a significant decline in general economic
conditions, caused by inflation, recession, unemployment, changes in securities markets or other factors could impact
our state and local markets and, in turn, also have a material adverse effect on our financial condition and results of
operations.  Of particular concern are the falling real estate values, which may lead to higher loan losses since the
majority of our loans are secured by real estate located within California.  Falling real estate values may inhibit our
ability to recover on defaulted loans by selling the underlying real estate.

**Competition with other financial institutions could adversely affect our profitability.**

The banking and financial services industry is very competitive. Legal and regulatory developments have made it easier
for new and sometimes unregulated competitors to compete with us. Consolidation among financial service providers
has resulted in fewer very large national and regional banking and financial institutions holding a large accumulation
of assets. These institutions generally have significantly greater resources, a wider geographic presence or greater
accessibility. Some of our competitors are able to offer more services, more favorable pricing or greater customer
convenience than we do. In addition, our competition has grown from new banks and other financial services providers
that target our existing or potential customers. As consolidation continues among large banks, we expect additional
institutions to try to exploit our market.

Technological developments have allowed competitors including some non-depository institutions, to compete more
effectively in local markets and have expanded the range of financial products, services and capital available to our
target customers. If we are unable to implement, maintain and use such technologies effectively, we may not be able
to offer products or achieve cost-efficiencies necessary to compete in our industry. In addition, some of these
competitors have fewer regulatory constraints and lower cost structures.

**The loss of key members of our senior management team could adversely affect our business.**

We believe that our success depends largely on the efforts and abilities of our senior management.  Their experience
and industry contacts significantly benefit us.  The competition for qualified personnel in the financial services industry
is intense, and the loss of any of our key personnel or an inability to continue to attract, retain and motivate key
personnel could adversely affect our business.

**We are subject to extensive government regulation and supervision.**

We are subject to extensive
federal and state regulation and supervision, primarily through the Bank and
certain non-bank subsidiaries. Banking regulations are primarily intended to
protect depositors' funds, federal deposit

43

<PAGE>

insurance funds and the banking
system as a whole, not shareholders. These regulations affect our lending
practices, capital structure, investment practices, dividend policy and growth,
among other things. Congress and federal regulatory agencies continually review
banking laws, regulations and policies for possible changes. Changes to
statutes, regulations or regulatory policies, including changes in
interpretation or implementation of statutes, regulations or policies, could
affect us in substantial and unpredictable ways. Such changes could subject us
to additional costs, limit the types of financial services and products we may
offer and/or increase the ability of non-banks to offer competing financial
services and products, among other things. Failure to comply with laws,
regulations or policies could result in sanctions by regulatory agencies, civil
money penalties and/or reputation damage, which could have a material adverse
effect on our business, financial condition and results of operations. While we
have policies and procedures designed to prevent any such violations, there can
be no assurance that such violations will not occur. For further information,
see "Item 1. Business - REGULATION" on page 31 of this Form 10-K.

**We rely heavily on the proper functioning of our technology.**

We rely heavily on communications and information systems to conduct our business.  Any failure, interruption or
breach in security of these systems could result in failures or disruptions in our customer relationship management,
general ledger, deposit, loan and other systems.  While we have policies and procedures designed to prevent or limit the
effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such
failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed.
The occurrence of any failures, interruptions or security breaches of our information systems could damage our
reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil
litigation and possible financial liability, any of which could have a material adverse effect on our financial condition
and results of operations.

We rely on third-party service providers for much of our communications, information, operating and financial control systems
technology. If any of our third-party service providers experience financial, operational or technological difficulties, or if there
is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and
we cannot assure that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality,
as found in our existing systems, without the need to expend substantial resources, if at all. Any of these circumstances could
have an adverse effect on our business.

**Terrorist activities could cause reductions in investor confidence and substantial volatility in real estate and
securities markets.**

It is impossible to predict the extent to which terrorist activities may occur in the United States or other regions, or their
effect on a particular security issue. It is also uncertain what effects any past or future terrorist activities and/or any
consequent actions on the part of the United States government and others will have on the United States and world
financial markets, local, regional and national economics, and real estate markets across the United States. Among other
things, reduced investor confidence could result in substantial volatility in securities markets, a decline in general
economic conditions and real estate related investments and an increase in loan defaults. Such unexpected losses and
events could materially affect our results of operations.

Provident Financial Holdings, Inc is a separate and distinct legal entity from its subsidiaries.  We receive substantially
all of our revenue from dividends from our subsidiaries.  These dividends are the principal source of funds to pay
dividends on our common stock and interest and principal on our debt.  Various federal and/or state laws and regulations
limit the amount of dividends that the Bank may pay us.  Also, our right to participate in a distribution of assets upon
a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors.  In the event the
Bank is unable to pay dividends to us, we may not be able to service our debt, pay obligations or pay dividends on our
common stock.  The inability to receive dividends from the Bank could have a material adverse effect on our business,
financial condition and results of operations.

44

<PAGE>



**We rely on effective internal controls.**

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to
accurately report our financial results or prevent fraud, and, as a result, investors and depositors could lose
confidence in our financial reporting, which could adversely affect our business, the trading price of our stock
and our ability to attract additional deposits.

In connection with the enactment of the Sarbanes-Oxley Act of 2002 and the implementation of the rules and
regulations promulgated by the SEC, we document and evaluate our internal control over financial reporting in
order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act.  This requires us to prepare an annual
management report on our internal control over financial reporting, including among other matters, management's
assessment of the effectiveness of internal control over financial reporting and an attestation report by our
independent auditors addressing these assessments.  If we fail to identify and correct any significant deficiencies in
the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current
and potential shareholders and depositors could lose confidence in our internal controls and financial reporting,
which could adversely affect our business, financial condition and results of operations, the trading price of our
stock and our ability to attract additional deposits.



**Changes in accounting standards may affect our performance.**

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations.  From time to time there are changes in the financial accounting and reporting standards that govern the preparation
of our financial statements.  These changes can be difficult to predict and can materially impact how we report and record our
financial condition and results of operations.  In some cases, we could be required to apply a new or revised standard
retroactively, resulting in restating prior period financial statements.

**Earthquakes and other natural disasters in our primary market area may result in material losses because of
damage to collateral properties and borrowers' inability to repay loans.**

Since our geographic concentration is in Southern California, we are subject to earthquakes and other natural disasters.
A major earthquake or other natural disaster may disrupt our business operations for an indefinite period of time and
could result in material losses to our operations, although we have not experienced any losses in the past six years as
a result of earthquake damage or other natural disaster to collateral securing loans.  In addition to possibly sustaining
damage to our own property, a substantial number of our borrowers would likely incur property damage to the collateral
securing their loans.  Although we are in an earthquake prone area, we and other lenders in the market area may not
require earthquake insurance as a condition of making a loan. Additionally, if the collateralized properties are only
damaged and not destroyed to the point of total insurable loss, borrowers may suffer sustained job interruption or job
loss, which may materially impair their ability to meet the terms of their loan obligations.

**Item 1B.  Unresolved Staff Comments**

None.

**Item 2.  Properties**

At June 30, 2007, the net book value of the Bank's property (including land and buildings) and its furniture, fixtures
and equipment was $7.1 million.  The Bank's home office is located in Riverside, California.  Including the home office,
the Bank has 13 retail banking offices, 12 of which are located in Riverside County in the cities of Riverside (5),
Moreno Valley, Hemet, Sun City, Rancho Mirage, Corona, Temecula and Blythe and one is located in Redlands, San
Bernardino County, California.  The Bank owns eight of the retail banking offices and five are leased.  The leases expire
from 2009 to 2013.  The Bank also leases nine stand-alone loan production offices, which are located in Diamond Bar,
Glendora, La Quinta, Pleasanton, Rancho Cucamonga, Riverside, San Diego, Torrance and Vista, California.  The leases
expire from 2007 to 2010.

45

<PAGE>

**Item 3.  Legal Proceedings**

Periodically, there have been various claims and lawsuits involving the Bank, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues in the ordinary course of and incident to the Bank's business.  The Bank
is not a party to any pending legal proceedings that it believes would have a material adverse effect on the financial
condition or operations of the Bank.

**Item 4.  Submission of Matters to a Vote of Security Holders**

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2007.

**PART II**

**Item 5. Market for Registrant's Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities**

The common stock of Provident Financial Holdings, Inc. is listed on the Nasdaq Stock Market LLC under the symbol
PROV.  The following table provides the high and low stock prices for PROV during the last two fiscal years.  As of
June 30, 2007, there were approximately 333 stockholders of record.

|               |  | First                |  | Second              |  | Third            |  | Fourth         
|-------------- |  | -------------------- |  | ------------------- |  | ---------------- |  | ---------------
|               |  | (Ended September 30) |  | (Ended December 31) |  | (Ended March 31) |  | (Ended June 30)
|               |  |                      |  |                     |  |                  |  |                
|2007 Quarters: |  |                      |  |                     |  |                  |  |                
|High           |  | $ 31.42              |  | $ 32.80             |  | $ 30.50          |  | $ 27.77        
|Low            |  | $ 29.01              |  | $ 28.81             |  | $ 26.80          |  | $ 23.33        
|2006 Quarters: |  |                      |  |                     |  |                  |  |                
|High           |  | $ 30.92              |  | $ 28.03             |  | $ 32.69          |  | $ 33.15        
|Low            |  | $ 26.92              |  | $ 25.04             |  | $ 25.40          |  | $ 27.09        
|               |  |                      |  |                     |  |                  |  |                

The Corporation adopted a quarterly cash dividend policy on July 24, 2002.  Quarterly dividends of $0.15,
$0.18, $0.18 and $0.18 per share were paid for the quarters ended September 30, 2006, December 31, 2006, March
31, 2007 and June 30, 2007, respectively.  Quarterly dividends of $0.14, $0.14, $0.15 and $0.15 per share were paid
for the quarters ended September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006, respectively.
Future declarations or payments of dividends will be subject to the approval 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, economic conditions and other factors, including the
regulatory restrictions which affect the payment of dividends by the Bank to the Corporation.  See "Item 1. Business
- Regulation - Federal Regulation of Savings Institutions - Limitations on Capital Distributions" on page 35 of this
Form 10-K.  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.



The Corporation continues to repurchase its common stock consistent with Board approved stock repurchase plans.
A total of 664,594 shares were purchased under the May 2006 and January 2007 stock repurchase programs, at an
average cost of $28.07 per share.  On June 25, 2007, the Corporation announced a new plan regarding the
repurchase of 5% of its common stock or approximately 318,847 shares.  As of June 30, 2007, 318,847 shares were
available for future purchase, under the June 2007 stock repurchase program.

46

<PAGE>

The table below sets forth information regarding the Corporation's purchases of its common stock during the fourth
quarter of fiscal 2007.

|Period                           | (a) Total Number of
Shares Purchased |  | (b) Average Price
Paid per Share |  | (c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plan |  | (d) Maximum
Number of Shares
that May Yet Be
Purchased Under
the Plan | 
|-------------------------------- | ------------------------------------ |  | -------------------------------- |  | ----------------------------------------------------------------------- |  | --------------------------------------------------------------------- | 
|April 1, 2007 - April 30,
 
2007 | 36,300                               |  | $ 25.16                          |  | 36,300                                                                  |  | 132,191                                                               | 
|May 1, 2007 - May 31,
 
2007     | 91,249                               |  | 24.58                            |  | 91,249                                                                  |  | 40,942                                                                | 
|June 1, 2007 - June 30,
 
2007   | 40,942                               |  | 24.91                            |  | 40,942                                                                  |  | 318,847    (1)                                                        | 
|Total                            | 168,491                              |  | $ 24.79                          |  | 168,491                                                                 |  | 318,847                                                               | 



(1)  On June 25, 2007, the Corporation announced a new stock repurchase plan of 318,847 shares, which expires on June 25, 2008.

Performance Graph

The
following graph compares the cumulative total shareholder return on the
Corporation's common stock with the cumulative total return on the Nasdaq Stock
Index (U.S. Stock) and Nasdaq Bank Index.  Total return assumes the reinvestment
of all dividends.



|                   |         |          |          |          |          |         
|------------------ | ------- | -------- | -------- | -------- | -------- | --------
|                   | 6/30/02 | 6/30/03  | 6/30/04  | 6/30/05  | 6/30/06  | 6/30/07 
|PROV               | $ 100   | $ 131.97 | $ 161.75 | $ 195.99 | $ 213.58 | $ 182.48
|NASDAQ Stock Index | $ 100   | $ 111.02 | $ 139.94 | $ 141.46 | $ 150.42 | $ 179.30
|NASDAQ Bank Index  | $ 100   | $ 101.5  | $ 121.65 | $ 129.88 | $ 138.62 | $ 141.16

* Assumes
that the value of the investment in the Corporation's common stock and each
index was $100 on June 30, 2002 and that all dividends were reinvested.

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<PAGE>

**Item 6.  Selected Financial Data**

The information contained under the heading "Financial
Highlights" in the Corporation's Annual Report to Shareholders filed as Exhibit
13 to this report on Form 10-K is incorporated herein by reference.

**Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations**

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. These forward-looking statements relate to, among
others, expectations of the business environment in which the Corporation
operates, projections of future performance, perceived opportunities in the
market, potential future credit experience, and statements regarding the
Corporation's mission and vision. These forward-looking statements are based
upon current management expectations, and may, therefore, involve risks and
uncertainties. The Corporation's actual results, performance, or achievements
may differ materially from those suggested, expressed, or implied by
forward-looking statements due to a wide range of factors including, but not
limited to, the credit risks of lending activities, including changes in the
level and direction of loan delinquencies and write-offs and changes in
estimates of the adequacy of the allowance for loan losses, the Corporation's
ability to access cost-effective funding, the general business environment, the
direction of future interest rates and the Corporation's ability to successfully
manage the risks associated with fluctuations in interest rates, the California
real estate market, competitive conditions between banks and non-bank financial
services providers, regulatory changes, litigation, labor market competitiveness, fraud,
secondary market liquidity for loans originated for sale 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 date of the financial statements. Actual results may differ
from these estimates under different assumptions or conditions.

Accounting for 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

48

<PAGE>

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, 2007 and 2006 - Provision for Loan Losses"
on page 53 of this Form 10-K.

Interest is generally 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.  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.

**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 lessor degree, investment services and real
estate operations.

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
non-sufficient fund 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 increase the community banking business by growing total assets; restructure
the balance sheet by decreasing the percentage of investment securities to total
assets and increasing the percentage of loans held for investment to total
assets; decrease the concentration of single-family mortgage loans within loans
held for investment; and increase 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 costing
checking and savings accounts. This strategy is intended to improve core revenue
and lower the Corporation's funding cost base through a higher net interest
margin and ultimately, coupled with the growth of the Corporation, 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. During the next three years the Corporation intends to
restructure its operations in response to the rapidly changing mortgage banking
environment.

49

<PAGE>

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 our depositors.  Real estate operations primarily consist of deriving net rental income from tenants that occupy
the Corporation's real estate held for investment.  In the foreseeable future, real estate operations will not contribute
meaningful revenue as a result of the sale of the commercial office building in November 2005.  Each of these
businesses generates a relatively small portion of the Corporation's net income.

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 and changes in regulation, 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.  Rising short-term interest rates have led to a flatter yield curve placing pressure on the Corporation's
net interest margin since the Corporation's assets are generally priced at the intermediate or long end of the yield
curve and interest-bearing liabilities are generally priced at the short end of the yield curve.  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 California real estate may inhibit the Corporation's ability to recover on
defaulted loans by selling the underlying real estate.





**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, 2007 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                
|(In Thousands)                | or
Less               
|Operating lease obligations   | $   
1,067            
|Time deposits                 | 452,248               
|FHLB - San Francisco
advances | 260,918               
|Total                         | $
714,233             



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

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<PAGE>

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, forward loan sale agreements 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, 2007 and 2006, these commitments were $44.5 million and $86.8 million,
respectively.

**Comparison of Financial Condition at June 30, 2007 and June 30, 2006**



Total assets increased $25.0 million, or 2%, to $1.65 billion at June 30, 2007 from $1.62 billion at June 30, 2006
primarily as a result of an increase in loans held for investment, partly offset by decreases in investment securities
and receivable from sale of loans.



Cash and cash equivalents decreased $3.6 million, or 22%, to $12.8 million at June 30, 2007 from $16.4 million at
June 30, 2006 and was attributable to lower in clearing deposit float at the Federal Reserve Bank and lower federal
funds sold.  The balance of federal funds sold varies from one day to the next depending on the short-term cash
flow requirements of the Bank's operations.



Total investment securities decreased $26.4 million, or 15%, to $150.8 million at June 30, 2007 from $177.2 million
at June 30, 2006.  During fiscal 2007, a total of $44.5 million of investment securities matured and $40.1 million of
the decline was the result of mortgage-backed securities principal payments.  The principal reduction of mortgage-backed securities was primarily attributable to mortgage prepayments and the normal principal payments of the
underlying mortgage loans.  During fiscal 2007, a total of $56.5 million of investment securities were purchased and
no investment securities were called by the issuers.



Loans held for investment increased $86.3 million, or 7%, to $1.35 billion at June 30, 2007 from $1.26 billion at
June 30, 2006 primarily as a result of originating and purchasing $416.4 million of loans held for investment, which
was partly offset by $379.4 million of loan prepayments.  These prepayments were attributable to the continued high
volume of refinance activity during fiscal 2007 in connection with increasing short-term interest rates and a
relatively low fixed-rate mortgage interest rate environment.



During fiscal 2007, the Bank originated approximately $1.42 billion in new loans, primarily through PBM, and
purchased $119.6 million in commercial real estate loans from other financial institutions.  A total of $1.12 billion
of loans were sold during fiscal 2007.  PBM loan production is sold primarily servicing released, except those loans
sold to Fannie Mae and FHLB - San Francisco under the MPF program.  The total loan origination volume was
lower as compared to last year, due primarily to higher interest rates, the general decline in real estate values and a
more competitive environment.  The outstanding balance of loans held for sale decreased to $1.3 million at June 30,
2007 from $4.7 million at June 30, 2006.  The outstanding balance of loans held for sale is largely dependent on the
timing of loan fundings and loan sales.



The receivable from sale of loans decreased $39.4 million, or 39%, to $60.5 million at June 30, 2007 from $99.9 million
at June 30, 2006, resulting from the timing difference between loan sales and loan sale settlements.

The Corporation has no real estate held for investment at June 30, 2007, compared to $653,000 at June 30, 2006.  In
July 2006, the Bank sold its last real estate investment (approximately six acres of land located in Riverside, California)
for a gain of $2.3 million (approximately $1.3 million net of taxes).

Total real estate owned was $3.8 million at June 30, 2007, comprised of 10 properties, primarily single-family residential
homes located in Southern California.  During fiscal 2007,
the Bank sold five properties for a net loss of

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<PAGE>

$32,000,
inclusive of expenses for the sold properties.Real estate owned was primarily the result of loan repurchases during
fiscal 2007.  The Corporation had no real estate owned at June 30, 2006.

Total deposits increased $81.0 million, or 9%, to $998.6 million at June 30, 2007 from $917.6 million at June 30, 2006.
Although the Bank continued its emphasis on expanding customer relationships, particularly in transaction accounts,
increases in short-term interest rates during fiscal 2007 became a catalyst for depositors to move their funds from
savings accounts to time deposits to take advantage of higher yields.  Transaction accounts decreased $41.1 million, or
11%, to $350.0 million at June 30, 2007 from $391.1 million at June 30, 2006, primarily comprised of savings and
checking accounts.  Time deposits increased $122.1 million, or 23%, to $648.6 million at June 30, 2007 from $526.5
million at June 30, 2006.

Borrowings, primarily FHLB - San Francisco advances, decreased $43.4 million, or 8%, to $502.8 million at June 30,
2007 from $546.2 million at June 30, 2006.  FHLB - San Francisco advances were primarily used to supplement the
funding needs of the Bank, to the extent that the increase in deposits and the decrease in investment securities did not
meet loan funding requirements.

Total stockholders' equity decreased $7.3 million, or 5%, to $128.9 million at June 30, 2007 from $136.2 million at June
30, 2006.  The decrease in stockholders' equity during fiscal 2007 was primarily attributable to share repurchases and
cash dividends to shareholders, partly offset by earnings in fiscal 2007, allocation of contributions to the ESOP, the
exercise of stock options and the related tax benefits.  During fiscal 2007, a total of 51,393 shares of stock options were
exercised with an average strike price of $19.80 per share and the associated tax benefit from non-qualified equity
compensation of $81,000 was recognized.  The Corporation repurchased 666,290 shares of common stock, or
approximately 10% of its outstanding shares, at an average price of $28.07 per share, totaling $18.7 million during fiscal
2007.  During fiscal 2007, the Corporation declared and distributed cash dividends to its shareholders of $4.6 million,
or $0.69 per share.  The Corporation's book value per share increased to $20.22 at June 30, 2007 from $19.48 at June
30, 2006.

**Comparison of Operating Results for the Years Ended June 30, 2007 and 2006**

**General.**The Corporation had net income of $11.3 million, or $1.72 per diluted share, for the year ended June 30,
2007, as compared to $20.5 million, or $2.98 per diluted share, for the year ended June 30, 2006.  The $9.2 million
decrease in net income in fiscal 2007 was primarily attributable to a decrease in net interest income, an increase in the
provision for loan losses, a decrease in non-interest income and an increase in non-interest expense.The Corporation's
efficiency ratio increased to 57% in fiscal 2007 from 47% in the same period of fiscal 2006.  Return on average assets
in fiscal 2007 decreased 64 basis points to 0.66% from 1.30% in fiscal 2006.  Return on average equity in fiscal 2007
decreased to 8.39% from 15.71% in fiscal 2006.

**Net Interest Income.**Net interest income before provision for loan losses decreased $2.3 million, or 5%, to $41.8
million in fiscal 2007 from $44.1 million in fiscal 2006.  This decrease resulted principally from a decrease in the net
interest margin, partly offset by an increase in average earning assets.  The average net interest margin declined 36 basis
points to 2.51% in fiscal 2007 from 2.87% in fiscal 2006.  The average balance of earning assets increased $129.5
million, or 8%, to $1.66 billion in fiscal 2007 from $1.53 billion in fiscal 2006.

**Interest Income.**Interest income increased $14.4 million, or 17%, to $101.0 million for fiscal 2007 from $86.6 million
for fiscal 2006.  The increase in interest income was primarily a result of increases in the average balance and the
average yield of earning assets.  The increase in average assets was primarily attributable to the increase in loans
receivable, which was partly offset by the decrease in investment securities.  The average yield on earning assets
increased 42 basis points to 6.07% in fiscal 2007 from 5.65% in fiscal 2006.  The increase in the average yield on
earning assets was the result of increases in the average yield of loans receivable, investment securities, FHLB - San
Francisco stock and federal funds investments during fiscal 2007.

Loan interest income increased $13.7 million, or 18%, to $91.5 million in fiscal 2007 from $77.8 million in fiscal
2006.  This increase was attributable to a higher average loan balance and a higher average loan yield.  The average
balance of loans outstanding, including receivable from sale of loans and loans held for sale, increased $156.1
million, or 12%, to $1.44 billion during fiscal 2007 from $1.29 billion during fiscal 2006.  The average loan yield

52

<PAGE>

during fiscal 2007 increased 29 basis points to 6.33% from 6.04% during fiscal 2006.  The increase in the average
loan yield was primarily attributable to mortgage loans originated with higher interest rates, the upward repricing of
adjustable rate loans during the period and a higher percentage of preferred loans, which generally have a higher
yield.

Interest income from investment securities increased $318,000, or 5%, to $7.1 million in fiscal 2007 from $6.8
million in fiscal 2006.  This increase was primarily a result of an increase in average yield, partly offset by a
decrease in the average balance.  The average balance of investment securities decreased $27.7 million, or 14%, to
$175.4 million in fiscal 2007 from $203.1 million in fiscal 2006.  The average yield on the investment securities
increased 71 basis points to 4.07% during fiscal 2007 from 3.36% during fiscal 2006.  The increase in the average
yield of investment securities was primarily a result of the new purchases with a higher average yield (5.30% versus
the average yield of 3.63% at June 30, 2006) and the maturities with an average yield of 2.65%.  The premium
amortization in fiscal 2007 was $21,000, compared to the premium amortization of $258,000 in fiscal 2006.

FHLB - San Francisco stock dividends increased by $394,000, or 22%, to $2.2 million in fiscal 2007 from $1.8
million in fiscal 2006.  This increase was attributable to a higher average yield and a higher average balance.  The
average yield on FHLB - San Francisco stock increased 57 basis points to 5.35% during fiscal 2007 from 4.78%
during fiscal 2006.  The average balance of FHLB - San Francisco stock increased $3.3 million to $41.6 million
during fiscal 2007 from $38.3 million during fiscal 2006.  The increase in FHLB - San Francisco stock was in
accordance with the borrowing requirements of the FHLB - San Francisco.

**Interest Expense.**  Total interest expense for fiscal 2007 was $59.2 million as compared to $42.6 million for fiscal
2006, an increase of $16.6 million, or 39%.  This increase was primarily attributable to an increase in the average
cost and a higher average balance of interest-bearing liabilities.  The average cost of interest-bearing liabilities was
3.84% during fiscal 2007, up 84 basis points from 3.00% during fiscal 2006.  The average balance of interest-bearing liabilities, principally deposits and borrowings, increased $124.1 million, or 9%, to $1.54 billion during
fiscal 2007 from $1.42 billion during fiscal 2006.

Interest expense on deposits for fiscal 2007 was $31.2 million as compared to $22.1 million for the same period of
fiscal 2006, an increase of $9.1 million, or 41%.  The increase in interest expense on deposits was primarily
attributable to a higher average cost and a higher average balance.  The average cost of deposits increased to 3.30%
in fiscal 2007 from 2.37% during fiscal 2006, an increase of 93 basis points.  The increase in the average cost of
deposits, primarily in time deposits, was attributable to the general rise in short-term interest rates.  The average
balance of deposits increased $10.3 million, or 1%, to $942.9 million during fiscal 2007 from $932.6 million during
fiscal 2006.  The average balance of transaction accounts decreased by $79.3 million, or 18%, to $365.9 million in
fiscal 2007 from $445.2 million in fiscal 2006.  The average balance of time deposits increased by $89.6 million, or
18%, to $577.0 million in fiscal 2007 as compared to $487.4 million in fiscal 2006.  The increase in time deposits is
primarily attributable to the time deposit marketing campaign and depositors switching from transaction accounts to
time deposits to take advantage of higher yields.  The average balance of transaction account deposits to total
deposits in fiscal 2007 was 39%, compared to 48% in fiscal 2006.

Interest expense on borrowings, primarily FHLB - San Francisco advances, for fiscal 2007 increased $7.5 million,
or 37%, to $28.0 million from $20.5 million for fiscal 2006.  The increase in interest expense on borrowings was
primarily a result of a higher average cost and a higher average balance.  The average cost of borrowings increased
to 4.68% for fiscal 2007 from 4.22% in fiscal 2006, an increase of 46 basis points.  The increase in the average cost
of borrowings was the result of higher short-term interest rates and maturities of long-term advances at lower
interest rates.  The average balance of borrowings increased $113.8 million, or 23%, to $599.3 million during fiscal
2007 from $485.5 million during fiscal 2006.

**Provision for Loan Losses.**
During fiscal 2007, the Corporation recorded a provision for loan losses of $5.1
million, an increase of $4.0 million from $1.1 million during fiscal 2006. The
provision for loan losses in fiscal 2007 was primarily attributable to a net
increase of $3.1 million in specific loan loss reserves, an increase in
classified assets and an increase in loans held for investment, primarily in
preferred loans. The increase in specific loan loss reserves was primarily
attributable to the establishment of a specific loan loss reserve of $2.6
million on 23 individual construction loans, with a disbursed total of $5.0
million, which were classified as non-accrual in November 2006. Classified
assets at June 30, 2007 were $32.3 million, comprised of $13.3 million in the
special

53

<PAGE>

mention category and $19.0 million in the
substandard category. Classified assets increased by $23.0 million from June 30,
2006 when classified assets were $9.3 million, comprised of $3.7 million in the
special mention category and $5.6 million in the substandard category.

The Corporation's current operating strategy seeks to grow preferred loans at a faster rate than single family
mortgage loans.  While higher yielding, these loans generally have greater risk than single family mortgage loans.
Further growth in these categories of loans may result in additions to the provision for loan losses.  In addition, as
noted above, the Corporation experienced a significant increase in classified assets during fiscal 2007, a majority of
which were single family mortgage loans.   Rising delinquencies in single family mortgage loans may also result in
additions to the provision for loan losses.

At June 30, 2007, the allowance for loan losses was $14.8 million, comprised of $11.5 million of general loan loss
reserves and $3.3 million of specific loan loss reserves.  At June 30, 2006, the allowance for loan losses was $10.3
million, comprised of $10.1 million of general loan loss reserves and $238,000 of specific loan loss reserves.  The
allowance for loan losses as a percentage of gross loans held for investment was 1.09% at June 30, 2007 compared
to 0.81% at June 30, 2006.  Management considers the allowance for loan losses sufficient to absorb potential
losses inherent in loans held for investment.

The allowance for loan losses is maintained at a level sufficient to provide for estimated losses based on evaluating
known and inherent risks in the loans held for investment and upon management's continuing analysis of the factors
underlying the quality of the loans held for investment.  These factors include changes in the size and composition
of the loans held for investment, actual loan loss experience, current economic conditions, detailed analysis of
individual loans for which full collectibility may not be assured, and
determination of the realizable value of the collateral securing the loans.
Provisions for losses are charged against operations on a monthly basis, as
necessary, to maintain the allowance at appropriate levels. Management believes
that the amount maintained in the allowance will be adequate to absorb losses
inherent in the loans held for investment. Although management believes it uses
the best information available to make such determinations, there can be no
assurance that regulators, in reviewing the Bank's loans held for investment, will not request the
Bank to significantly increase its allowance for loan losses. Future adjustments
to the allowance for loan losses may be necessary and results of operations
could be significantly and adversely affected as a result of economic,
operating, regulatory, and other conditions beyond the control of the Bank.

**Non-Interest Income.**Total non-interest income decreased $8.6 million, or 33%, to $17.6 million in fiscal 2007
from $26.2 million in fiscal 2006.  The decrease was primarily attributable to a decrease in the gain on sale of real
estate ($2.3 million versus $6.3 million), a decrease in the gain on sale of loans and a decrease in loan servicing and
other fees.

The gain on sale of real estate in fiscal 2007 was primarily the result of the sale of approximately six acres of land in
Riverside, California; while the gain on sale of real estate in fiscal 2006 was the result of the sale of a commercial
office building in Riverside, California.  As a result of the property sold in fiscal 2007, the Corporation currently
does not have any remaining real estate held for investment.

The gain on sale of loans decreased $4.2 million, or 31%, to $9.3 million for fiscal 2007 from $13.5 million in fiscal
2006.  The decrease was a result of a lower average loan sale margin and a lower volume of loans originated for sale
in fiscal 2007.  The average loan sale margin for PBM during fiscal 2007 was 0.83%, down 25 basis points from
1.08% during fiscal 2006.  The gain on sale of loans includes a gain of $212,000 on derivative financial instruments
as a result of SFAS No. 133 in fiscal 2007, compared to a gain of $71,000 in fiscal 2006.  The gain on sale includes
a recourse liability of $194,000 for loans sold to investors as of June 30, 2007.  No recourse liability was required
for loans sold to investors as of June 30, 2006.  The volume of loans originated for sale decreased by $111.2
million, or 9%, to $1.13 billion in fiscal 2007 as compared to $1.24 billion in fiscal 2006.  The loan sale margin and
loan sale volume decreased because the mortgage banking environment remains highly competitive and volatile as a
result of the well-publicized collapse of the sub-prime loan market.

Loan servicing and other fees
decreased $440,000, or 17%, to $2.1 million during fiscal 2007 from $2.6 million
during fiscal 2006. The decrease was primarily attributable to lower brokered
loan fees and lower prepayment fees. Total brokered loans in fiscal 2007 were
$41.6 million, down $4.6 million, or 10%, from $46.2 million in the same

54

<PAGE>

period of fiscal 2006. Total
scheduled principal payments and loan prepayments were $379.4 million in the
fiscal 2007, down $96.8 million, or 20%, from $476.2 million in fiscal 2006.

**Non-Interest Expense.**
Total non-interest expense in fiscal 2007 was $33.8 million, an increase of $936,000 or
3%, as compared to $32.9 million in fiscal 2006.  The increase in non-interest expense was primarily the result
of increases in compensation expense and premises and occupancy expenses, partly offset by decreases in
equipment, professional, marketing and other expenses.



The increase in compensation expense was primarily a result of lower deferred compensation attributable to the
application of SFAS No. 91, partly offset by lower incentive compensation.  On July 1, 2006 the Bank lowered
the SFAS No. 91 deferred compensation allocated to each loan originated after completing the annual review and
analysis of SFAS No. 91.  Additionally, fewer loans were originated during fiscal 2007 in comparison to fiscal
2006, which also reduced deferred compensation attributable to the application of SFAS No. 91.



The increase in premises and occupancy expense was due primarily to a $175,000 charge incurred as a result of
closing three loan production offices.  The decrease in other operating expenses was primarily attributable to a
$500,000 charitable contribution to capitalize the newly established Provident Savings Bank Charitable Foundation
in the fourth quarter of fiscal 2006 (not replicated in fiscal 2007).

**Income Taxes.**The provision for income taxes was $9.1 million for fiscal 2007, representing an effective tax rate of
44.7%, as compared to $15.7 million in fiscal 2006, representing an effective tax rate of 43.3%.  The Corporation
determined that the above tax rates meet its income tax obligations.

**Comparison of Operating Results for the Years Ended June 30, 2006 and 2005**

**General.**The Corporation had net income of $20.5 million, or $2.98 per diluted share, for the year ended June 30,
2006, as compared to $18.7 million, or $2.64 per diluted share, for the year ended June 30, 2005.  The $1.8 million
increase in net income in fiscal 2006 was primarily attributable to increases in net interest income and non-interest
income, partly offset by an increase in non-interest expense.

**Net Interest Income.**Net interest income before provision for loan losses increased $1.6 million, or 4%, to $44.1
million in fiscal 2006 from $42.5 million in fiscal 2005.  This increase resulted principally from an increase in average
earning assets, partly offset by a decrease in the net interest margin.  The average balance of earning assets increased
$96.0 million, or 7%, to $1.53 billion in fiscal 2006 from $1.44 billion in fiscal 2005.  The average net interest margin
declined nine basis points to 2.87% in fiscal 2006 from 2.96% in fiscal 2005.

**Interest Income.**Interest income increased $11.1 million, or 15%, to $86.6 million in fiscal 2006 from $75.5 million
in fiscal 2005.  The increase in interest income was primarily a result of increases in the average balance and the average
yield of earning assets.  The increase in average earning assets was primarily attributable to the increase in loans
receivable, which was partly offset by the decrease in investment securities.  Total originations of loans held for
investment, including loan purchases, were $624.5 million, while total loan prepayments were $476.2 million in fiscal
2006.  The increase in the average yield on earning assets was the result of increases in the average yield of loans
receivable, investment securities, FHLB - San Francisco stock and federal funds investments during fiscal 2006.  The
average yield on loans receivable increased 30 basis points to 6.04% in fiscal 2006 from 5.74% in fiscal 2005.  The
increase in the average loan yield was primarily the result of higher mortgage interest rates during fiscal 2006 and the
composition of loans held for investment.  The average yield on investment securities increased 14 basis points to 3.36%
in fiscal 2006 from 3.22% in fiscal 2005.  The increase in the average yield of investment securities was primarily
attributable to lower amortization of premiums resulting from lower MBS principal prepayments.  The average yield
on FHLB - San Francisco stock increased 37 basis points to 4.78% in fiscal 2006 from 4.41% in fiscal 2005.  The
increase in the average yield of FHLB - San Francisco stock was the result of the higher dividend received from the
FHLB - San Francisco.

**Interest Expense.**  Interest expense increased $9.6 million, or 29%, to $42.6 million in fiscal 2006 from $33.0 million
in fiscal 2005.  The increase in interest expense was attributable to the increases in the average cost and

55

<PAGE>

average balance
of interest-bearing liabilities.  The average cost of interest-bearing liabilities increased 55 basis points to 3.00% in fiscal
2006 from 2.45% in fiscal 2005.  The average cost of deposits increased 60 basis points to 2.37% in fiscal 2006 from
1.77% in fiscal 2005.  The increase in the average cost of deposits was the result of the increase in short-term interest
rates during fiscal 2006, maturities of lower costing time deposits and the change in the deposit mix toward higher
costing time deposits.  The average balance of deposits increased $20.5 million, or 2%, to $932.6 million in fiscal 2006
from $912.1 million in fiscal 2005.  The average cost of borrowings, primarily FHLB - San Francisco advances,
increased 32 basis points to 4.22% in fiscal 2006 from 3.90% in fiscal 2005.  The increase in FHLB - San Francisco
advances was primarily attributable to increases in short-term market interest rates during fiscal 2006.  The average
maturity of FHLB - San Francisco advances decreased to 30 months at June 30, 2006 from 36 months at June 30, 2005.
The average balance of FHLB - San Francisco advances increased $54.1 million, or 13%, to $485.5 million in fiscal
2006 from $431.4 million in fiscal 2005.

**Provision for Loan Losses.**Loan loss provisions in fiscal 2006 were $1.1 million as compared to $1.6 million in fiscal
2005.  The decrease in fiscal 2006 was primarily a result of lower growth of loans held for investment and a revision
in the methodology used to calculate the allowance for loan losses.  The decrease was partly offset by a higher
composition of preferred loans, which generally have higher loan loss provisions.  Loans held for investment increased
$131.1 million (from $1.13 billion to $1.26 billion) in fiscal 2006 as compared to $269.4 million (from $862.5 million
to $1.13 billion) in fiscal 2005.  Preferred loans as a percentage of loans held for investment increased to 34% at June
30, 2006 from 28% at June 30, 2005.

Total classified assets (including assets designated as
special mention) increased by $571,000 to $9.3 million at June 30, 2006 from
$8.8 million at June 30, 2005. The allowance for loan losses was $10.3 million,
or 0.81% of gross loans held for investment at June 30, 2006 as compared to $9.2
million, or 0.81% of gross loans held for investment at June 30, 2005. The allowance for loan losses as a
percentage of non-performing loans at the end of fiscal 2006 was 407.7%, as
compared to 1,561.9% at the end of fiscal 2005.

**Non-Interest Income.**Total non-interest income increased $1.8 million, or 7%, to $26.2 million in fiscal 2006 from
$24.4 million in fiscal 2005.  The increase in non-interest income was primarily attributable to the gain on sale of real
estate, an increase in loan servicing and other fees and an increase in deposit account fees, partly offset by decreases
in the gain on sale of loans and gain on sale of investment securities.

In November 2005, the Corporation sold its commercial building in downtown Riverside, California for a pre-tax gain
of $6.3 million (approximately $3.6 million net of taxes).  The Corporation, through the Bank's wholly-owned
subsidiary, Provident Financial Corp, had owned and operated the building since 1999 which was purchased for
investment purposes.

Loan servicing and other fees increased $897,000, or 54%, to $2.6 million in fiscal 2006 from $1.7 million in fiscal
2005, resulting primarily from an increase in servicing fees and an increase in loan prepayment and other loan fees.  In
fiscal 2006, the Corporation recovered an impairment reserve on servicing assets of $82,000 which was previously
established in fiscal 2005.  Total loan prepayments in fiscal 2006 were $476.2 million as compared to $482.9 million
in fiscal 2005.

Deposit account fees increased $304,000, or 17%, to $2.1 million in fiscal 2006 from $1.8 million in fiscal 2005.  The
increase in deposit account fees was primarily attributable to higher non-sufficient fund returned check fees.

Total gain on sale of loans decreased $5.2 million, or 28%, to $13.5 million in fiscal 2006 from $18.7 million in
fiscal 2005, and was the result of lower loan sale volume and a lower average loan sale margin at PBM.  Total loans
originated for sale decreased $48.0 million, or 4%, to $1.24 billion in fiscal 2006 from $1.29 billion in fiscal 2005.
The decline in loan sale volume was primarily attributable to lower loan demand caused by an increase in interest
rates, declining real estate prices and a more competitive environment.  The average loan sale margin for PBM in
fiscal 2006 was 1.08%, down 31 basis points from 1.39% in fiscal 2005.  The decrease in the loan sale margin was
primarily attributable to the more competitive mortgage banking environment.  The loan sale margin at PBM is
derived from total gain on sale of loans divided by total loan sale volume.  The PBM loan sale volume used to
calculate the loan sale margin, which is defined as PBM loans originated for sale adjusted for the change in
commitments to extend credit on loans to be held for sale, was $1.20 billion in fiscal 2006 as compared to $1.31
billion in fiscal 2005.

56

<PAGE>

The net impact of derivative financial instruments (SFAS No. 133) in fiscal 2006 was a favorable adjustment of
$71,000 as compared to an unfavorable adjustment of $264,000 in fiscal 2005.  The fair value of the derivative
financial instruments outstanding at June 30, 2006 was a net liability of $233,000 in comparison to a net liability of
$91,000 at June 30, 2005.  The Corporation implemented the SEC guidance described in the SEC Staff Accounting
Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," which does not allow for the
recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for
sale. These premiums will be realized in future periods when the underlying loans are funded and sold.  The SFAS
No. 133 adjustment is relatively volatile and may have an adverse impact on future earnings.

Gain on sale of investment securities was $384,000 in fiscal 2005, which was not replicated in fiscal 2006.

**Non-Interest Expense.**Total non-interest expense increased $399,000, or 1%, to $32.9 million in fiscal 2006 as
compared to $32.5 million in fiscal 2005.  This increase was attributable primarily to increases in premises and
occupancy expenses and other operating expenses, partially offset by lower compensation expense.  The increase in
premises and occupancy expense was primarily the result of opening two PBM loan production offices; and the
increase in other operating expenses was primarily attributable to a $500,000 charitable contribution to capitalize
the newly established Provident Savings Bank Charitable Foundation.  The decrease in compensation costs was
primarily attributable to a 10% workforce reduction at PBM completed in January 2006 and a 7% workforce
reduction at PBM completed in February 2006.

**Income Taxes.**The provision for income taxes was $15.7 million for fiscal 2006, representing an effective tax rate of
43.3%, as compared to $14.1 million in fiscal 2005, representing an effective tax rate of 42.9%.  The Corporation
determined that the tax rate of 43.3% in fiscal 2006 meets its fiscal 2006 income tax obligations.

**Average Balances, Interest and Average Yields/Costs**

The following table sets forth certain information for the
periods regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities and average yields and
costs thereof. Such yields and costs for the periods indicated are derived by
dividing income or expense by the average monthly balance of assets or
liabilities, respectively, for the periods presented.

57

<PAGE>

|                              |                                                                                      | Year
Ended June 30,
|----------------------------- | ------------------------------------------------------------------------------------ | -------------------
|                              |                                                                                      | 2007               
|                              |                                                                                      |                    
|                              |                                                                                      | Average            
|                              | Balance                                                                              |                    
|(Dollars In Thousands)        |                                                                                      |                    
|                              |                                                                                      |                    
|Interest-earning assets:      |                                                                                      |                    
|                              | Loans
receivable, net (1)                                                            | $ 1,444,845        
|                              | Investment securities                                                                | 175,439            
|                              | FHLB - San Francisco stock                                                           | 41,588             
|                              | Interest-earning deposits                                                            | 1,339              
|                              | Total interest-earning assets                                                        | 1,663,211          
|                              |                                                                                      |                    
|Non interest-earning assets   | 37,959                                                                               |                    
|                              | Total assets                                                                         | $1,701,170         
|                              |                                                                                      |                    
|Interest-bearing liabilities: |                                                                                      |                    
|                              | Checking and money market accounts (2)                                               | $  202,524         
|                              | Savings accounts                                                                     | 163,400            
|                              | Time deposits                                                                        | 576,952            
|                              | Total deposits                                                                       | 942,876            
|                              |                                                                                      |                    
|                              | Borrowings                                                                           | 599,286            
|                              |                                                                                      |                    
|                              | Total
interest-bearing liabilities                                                   | 1,542,162          
|                              |                                                                                      |                    
|                              | Non interest-bearing liabilities                                                     | 24,411             
|                              | Total
liabilities                                                                    | 1,566,573          
|                              |                                                                                      |                    
|                              | Stockholders' equity                                                                 | 134,597            
|                              | Total
liabilities and stockholders' 
     
equity                                    | $1,701,170         
|                              |                                                                                      |                    
|                              | Net interest income                                                                  |                    
|                              |                                                                                      |                    
|                              | Interest rate spread (3)                                                             |                    
|                              | Net interest margin (4)                                                              |                    
|                              | Ratio of average interest-earning
 
assets to average interest-bearing
 
liabilities | 107.85%            



|(1) | Includes receivable
    from sale of loans, loans held for sale and non-accrual loans, as well as
    net deferred loan (cost) fee amortization of $(589), $(363) and $194 for the
    years ended June 30, 2007, 2006 and 2005, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes average balance of non
    interest-bearing checking accounts of $45.9 million, $52.5 million and $46.9
    million in fiscal 2007, 2006 and 2005, respectively.                                                                     
|(3) | Represents difference between
    weighted average yield on total interest-earning assets and weighted average
    rate on total interest-bearing liabilities.                                                                                
|(4) | Represents net interest income
    before provision for loan losses as a percentage of average interest-earning
    assets.                                                                                                                   

58

<PAGE>

**Yields Earned and Rates Paid**

The following table sets forth (on a consolidated basis), for the periods and at the dates indicated, the weighted average
yields earned on the Bank's assets and the weighted average interest rates paid on the Bank's liabilities, together with the
net yield on interest-earning assets.

|
|

| |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  | 

|                                       | Quarter  |  |                     |  |       |  |      
|-------------------------------------- | -------- |  | ------------------- |  | ----- |  | -----
|                                       | Ended    |  |                     |  |       |  |      
|                                       | June 30, |  | Year Ended June 30,
|                                       | 2007     |  | 2007                |  | 2006  |  | 2005 
|                                       |          |  |                     |  |       |  |      
|Weighted average yield on:             |          |  |                     |  |       |  |      
|                                       |          |  |                     |  |       |  |      
|Loans receivable, net (1)              | 6.28%    |  | 6.33%               |  | 6.04% |  | 5.74%
|                                       |          |  |                     |  |       |  |      
|Investment securities                  | 4.38%    |  | 4.07%               |  | 3.36% |  | 3.22%
|                                       |          |  |                     |  |       |  |      
|FHLB - San Francisco stock             | 4.77%    |  | 5.35%               |  | 4.78% |  | 4.41%
|                                       |          |  |                     |  |       |  |      
|Interest-earning deposits              | 5.28%    |  | 5.15%               |  | 3.87% |  | 2.28%
|                                       |          |  |                     |  |       |  |      
|Total interest-earning assets          | 6.05%    |  | 6.07%               |  | 5.65% |  | 5.25%
|                                       |          |  |                     |  |       |  |      
|Weighted average rate paid on:         |          |  |                     |  |       |  |      
|                                       |          |  |                     |  |       |  |      
|Checking and money market accounts (2) | 0.81%    |  | 0.73%               |  | 0.55% |  | 0.53%
|                                       |          |  |                     |  |       |  |      
|Savings accounts                       | 2.04%    |  | 1.73%               |  | 1.41% |  | 1.45%
|                                       |          |  |                     |  |       |  |      
|Time deposits                          | 4.84%    |  | 4.66%               |  | 3.63% |  | 2.76%
|                                       |          |  |                     |  |       |  |      
|Borrowings                             | 4.64%    |  | 4.68%               |  | 4.22% |  | 3.90%
|                                       |          |  |                     |  |       |  |      
|Total interest-bearing liabilities     | 3.97%    |  | 3.84%               |  | 3.00% |  | 2.45%
|                                       |          |  |                     |  |       |  |      
|Interest rate spread (3)               | 2.08%    |  | 2.23%               |  | 2.65% |  | 2.80%
|                                       |          |  |                     |  |       |  |      
|Net interest margin (4)                | 2.37%    |  | 2.51%               |  | 2.87% |  | 2.96%



|(1) | Includes receivable from sale
    of loans, loans held for sale and non-accrual loans, as well as net deferred
    loan (cost) fee amortization of $(589,000), $(363,000) and $194,000 for the
    years ended June 30, 2007, 2006 and 2005, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Includes average balance of non
    interest-bearing checking accounts of $45.9 million, $52.5 million and $46.9
    million in fiscal 2007, 2006 and 2005, respectively.                                                                                 
|(3) | Represents difference between
    weighted average yield on total interest-earning assets and weighted average
    rate on total interest-bearing liabilities.                                                                                            
|(4) | Represents net interest income
    before provision for loan losses as a percentage of average interest-earning
    assets.                                                                                                                               

59

<PAGE>

**Rate/Volume Analysis**

The following table sets forth the effects of changing rates and volumes on interest income and expense of the Bank.
Information is provided with respect to the effects attributable to changes in volume (changes in volume multiplied by prior
rate), the effects attributable to changes in rate (changes in rate multiplied by prior volume) and changes that cannot be
allocated between rate and volume.

|                              |                                    | Year Ended June 30,
2007   |   | Year Ended June 30,
2006   |  
|----------------------------- | ---------------------------------- | -------------------------- | - | -------------------------- | -
|                              |                                    | Compared to Year           |   | Compared to Year           |  
|                              |                                    | Ended June 30, 2006        |   | Ended June 30, 2005        |  
|                              |                                    | Increase (Decrease) Due to |   | Increase (Decrease) Due to |  
|                              |                                    |                            |   |                            |  
|                              |                                    | Rate                       |   | Volume                     |  
|(In Thousands)                |                                    |                            |   |                            |  
|                              |                                    |                            |   |                            |  
|Interest-earnings assets:     |                                    |                            |   |                            |  
|                              | Loans receivable, net (1)          | $  3,817                   |   | $ 9,434                    |  
|                              | Investment securities              | 1,443                      |   | (929                       | )
|                              | FHLB - San Francisco stock         | 216                        |   | 159                        |  
|                              | Interest-earning deposits          | 48                         |   | (92                        | )
|                              | Total net change in income         |                            |   |                            |  
|                              | on interest-earning assets         | 5,524                      |   | 8,572                      |  
|                              |                                    |                            |   |                            |  
|Interest-bearing liabilities: |                                    |                            |   |                            |  
|                              | Checking and money market accounts | 389                        |   | (107                       | )
|                              | Savings accounts                   | 706                        |   | (843                       | )
|                              | Time deposits                      | 5,003                      |   | 3,251                      |  
|                              | Borrowings                         | 2,200                      |   | 4,801                      |  
|                              | Total net change in expense on     |                            |   |                            |  
|                              | interest-bearing
liabilities       | 8,298                      |   | 7,102                      |  
|                              |                                    |                            |   |                            |  
|                              | Net (decrease) increase  in  net   |                            |   |                            |  
|                              | interest income                    | $ (2,774                   | ) | $ 1,470                    |  

|
|

(1)Includes receivable from sale of loans, loans held for sale and non-accrual loans.

**Liquidity and Capital Resources**

The Corporation's primary sources of funds are deposits, proceeds from the sale of loans originated for sale, proceeds
from principal and interest payments on loans, proceeds from the maturity of investment securities and FHLB - San
Francisco advances. While maturities and scheduled amortization of loans and investment securities are a relatively
predictable source of funds, deposit flows, mortgage prepayments and loan sales are greatly influenced by general
interest rates, economic conditions and competition.

The primary investing activity of the Bank is the origination and purchase of loans held for investment.  During the
fiscal years ended June 30, 2007, 2006 and 2005, the Bank originated loans in the amounts of $1.42 billion, $1.75
billion and $2.01 billion, respectively.  In addition, the Bank purchased loans from other financial institutions in fiscal
2007, 2006 and 2005 in the amounts of $119.6 million, $111.7 million and $61.2 million, respectively.  The Bank's
mortgage banking activities resulted in total loans sold in fiscal 2007, 2006 and 2005 of $1.12 billion, $1.26 billion and
$1.31 billion, respectively.  At June 30, 2007, the Bank had loan origination commitments totaling $44.5 million and undisbursed loans in process totaling $25.5 million.  The Bank anticipates that it will have sufficient funds available to
meet its current loan origination commitments.

The Bank's primary financing activity is gathering deposits.  During the fiscal years ended June 30, 2007, 2006 and
2005, the net increase (decrease) in deposits was $81.0 million, ($1.0 million) and $67.6 million, respectively.  On June
30, 2007, time deposits that are scheduled to mature in one year or less were $434.5 million.  Historically, the Bank has
been able to retain a significant amount of its time deposits as they mature by adjusting deposit rates to the current
interest rate environment.

60

<PAGE>

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan
growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities.
The Bank generally maintains sufficient cash and cash equivalents to meet short-term liquidity needs.  At June 30,
2007, total cash and cash equivalents were $12.8 million, or 0.8% of total assets.  Depending on market conditions and
the pricing of deposit products and FHLB - San Francisco advances, the Bank may continue to rely on FHLB - San
Francisco advances for part of its liquidity needs.  As of June 30, 2007, the remaining available borrowing capacity at
FHLB - San Francisco was $391.5 million, and the remaining available borrowing capacity at the Bank's
correspondent bank was $60.0 million.

Although the OTS eliminated the minimum liquidity requirement for savings institutions in April 2002, the regulation
still requires thrifts to maintain adequate liquidity to assure safe and sound operations. The Bank's average liquidity
ratio (defined as the ratio of average qualifying liquid assets to average deposits and borrowings) for the quarter ended
June 30, 2007 increased to 7.2% from 5.1% during the same quarter ended June 30, 2006.

The Bank is required to maintain specific amounts of capital pursuant to OTS requirements.  Under the OTS prompt
corrective action provisions, a minimum ratio of 1.5% for Tangible Capital is required to be deemed other than
"critically undercapitalized," while a minimum of 5.0% for Core Capital, 10.0% for Total Risk-Based Capital and 6.0%
for Tier 1 Risk-Based Capital is required to be deemed "well capitalized."  As of June 30, 2007, the Bank exceeded all
regulatory capital requirements with Tangible Capital, Core Capital, Total Risk-Based Capital and Tier 1 Risk-Based
Capital ratios of 7.6%, 7.6%, 12.5% and 11.4%, respectively.

**Impact of Inflation and Changing Prices**

The Corporation's consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America, which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative purchasing power of money over time as a
result of inflation.  The impact of inflation is reflected in the increasing cost of the Corporation's operations.  Unlike
most industrial companies, nearly all assets and liabilities of the Corporation are monetary.  As a result, interest rates
have a greater impact on the Corporation's performance than do the effects of general levels of inflation.  In addition,
interest rates do not necessarily move in the direction, or to the same extent, as the prices of goods and services.

**Impact of New Accounting Pronouncements**

Various elements of the Corporation's accounting policies, by their nature, are inherently subject to estimation techniques,
valuation assumptions and other subjective assessments.  In particular, management has identified several accounting
policies that, as a result of the judgments, estimates and assumptions inherent in those policies, are critical to an
understanding of the financial statements of the Corporation.  These policies relate to the methodology for the recognition
of interest income, determination of the provision and allowance for loan and lease losses and the valuation of
mortgage servicing rights and real estate held for sale.  These policies and the judgments, estimates and assumptions are
described in greater detail in Management's Discussion and Analysis of Financial Condition and Results of Operations
section and in the section entitled "Recent Accounting Pronouncements" contained in Note 1 of the Notes to the
Consolidated Financial Statements.  Management believes that the judgments, estimates and assumptions used in the
preparation of the financial statements are appropriate based on the factual circumstances at the time.  However, because
of the sensitivity of the financial statements to these critical accounting policies, the use of other judgments, estimates and
assumptions could result in material differences in the results of operations or financial condition.

**Item 7A.  Quantitative and Qualitative Disclosures about Market Risk**

**Quantitative Aspects of Market Risk.**The
Bank does not maintain a trading account for any class of financial instrument
nor does it purchase high-risk derivative financial instruments. Furthermore,
the Bank is not subject to foreign currency exchange rate risk or commodity
price risk. The primary market risk that the Bank faces is interest rate risk.
For information regarding the sensitivity to interest rate risk of the Bank's
interest-earning assets and interest-

61

<PAGE>

bearing liabilities, see "Maturity of Loans Held for
Investment," "Investment Securities Activities," "Time Deposits by Maturities"
and "Interest Rate Risk" on pages 5, 24, 30 and 62, respectively, of this Form
10-K.

**Qualitative Aspects of Market Risk.**  The Bank's principal financial objective is to achieve long-term profitability while
reducing its exposure to fluctuating interest rates.  The Bank has sought to reduce the exposure of its earnings to changes
in interest rates by attempting to manage the repricing mismatch between interest-earning assets and interest-bearing
liabilities.  The principal element in achieving this objective is to increase the interest-rate sensitivity of the Bank's interest-earning assets by retaining for its portfolio new loan originations with interest rates subject to periodic adjustment to market
conditions and by selling fixed-rate, single-family mortgage loans.  In addition, the Bank maintains an investment portfolio,
which is largely in U.S. government sponsored enterprise debt securities and U.S. government sponsored enterprise MBS
with contractual maturities of up to 30 years that reprice frequently.  The Bank relies on retail deposits as its primary source
of fundswhile utilizing FHLB - San Francisco advances as a secondary source of funding.  Management believes retail
deposits, compared to brokered deposits, reduce the effects of interest rate fluctuations because they generally represent
a more stable source of funds.  As part of its interest rate risk management strategy, the Bank promotes transaction accounts
and time deposits with terms up to five years.  For additional information, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 48 of this Form 10-K.

**Interest Rate Risk.**The principal financial objective of the Corporation's interest rate risk management function is to
achieve long-term profitability while limiting its exposure to the fluctuation of interest rates.  The Corporation, through
its ALCO, has sought to reduce the exposure of its earnings to changes in interest rates by managing the repricing
mismatch between interest-earning assets and interest-bearing liabilities.  The principal element in achieving this
objective is to manage the interest-rate sensitivity of the Corporation's assets by retaining loans with interest rates
subject to periodic market adjustments.  In addition, the Bank maintains a liquid investment portfolio comprised of
government sponsored enterprise debt securities and MBS.  The Bank relies on retail deposits as its primary source of
funding while utilizing FHLB - San Francisco advances as a secondary source of funding which can be structured with
favorable interest rate risk characteristics.  As part of its interest rate risk management strategy, the Bank promotes
transaction accounts.

Using data from the Bank's quarterly report to the OTS, the OTS produces a report for the Bank that measures interest
rate risk by modeling the change in Net Portfolio Value ("NPV") over a variety of interest rate scenarios.  The interest
rate risk analysis received from the OTS is similar to the Bank's own interest rate risk model.  NPV is defined as the net
present value of expected cash flows from assets, liabilities and off-balance sheet contracts.  The calculation is intended
to illustrate the change in NPV that would occur in the event of an immediate change in interest rates of -200, -100, -50,
+50, +100, +200 and +300 basis points with no effect given to any steps that management might take to counter the
effect of the interest rate change.

The following table is provided by the OTS and sets forth as of June 30, 2007 the estimated changes in NPV based on
the indicated interest rate environments.  The Bank's balance sheet position as of June 30, 2007 can be summarized as
follows: if interest rates increase or decrease, the NPV of the Bank is expected to decrease, except under the - 50 basis
point rate shock.

62

<PAGE>

|                       |  |  |               |  |            |   |               |  | NPV as Percentage      |                 | 
|---------------------- |  |  | ------------- |  | ---------- | - | ------------- |  | ---------------------- | --------------- | 
|                       |  |  | **Net**       |  | **NPV**    |   | **Portfolio** |  | **Of Portfolio Value** | **Sensitivity** | 
|Basis Points (bp)      |  |  | **Portfolio** |  | **Change** |   | **Value**     |  | **Assets**             | **Measure**     | 
|Change in Rates        |  |  | Value         |  | (1)        |   | Assets        |  | (2)                    | (3)             | 
|(Dollars In Thousands) |  |  |               |  |            |   |               |  |                        |                 | 
|                       |  |  |               |  |            |   |               |  |                        |                 | 
|+300 bp                |  |  | $  109,835    |  | $ (55,168  | ) | $1,590,135    |  | 6.91%                  | -293 bp         | 
|+200 bp                |  |  | 135,068       |  | (29,935    | ) | 1,625,477     |  | 8.31%                  | -153 bp         | 
|+100 bp                |  |  | 153,263       |  | (11,740    | ) | 1,654,328     |  | 9.26%                  | -58 bp          | 
|+50 bp                 |  |  | 159,762       |  | (5,241     | ) | 1,666,526     |  | 9.59%                  | -25 bp          | 
|0 bp                   |  |  | 165,003       |  | -          |   | 1,677,623     |  | 9.84%                  | - bp            | 
|-50 bp                 |  |  | 167,312       |  | 2,309      |   | 1,686,001     |  | 9.92%                  | +8 bp           | 
|-100 bp                |  |  | 166,250       |  | 1,247      |   | 1,691,124     |  | 9.83%                  | -1 bp           | 
|-200 bp                |  |  | 164,306       |  | (697       | ) | 1,702,152     |  | 9.65%                  | -19 bp          | 
|                       |  |  |               |  |            |   |               |  |                        |                 | 

| |  |  |  |  |  |  |  |  |  | 
| |  |  |  |  |  |  |  |  |  | 

(1)   	Represents the (decrease) increase of the estimated NPV at the indicated change in interest rates compared to the
NPV
         
 calculated at June 30, 2007 ("base case").(2)    Calculated as the estimated NPV divided by the portfolio value of total assets.(3)    Calculated as the change in the NPV ratio from the base case at the indicated change in interest rates.

The following table provided by the OTS, is based on the calculations contained in the previous table, and sets forth the
change in the NPV at a +200 basis point rate shock at June 30, 2007 and 2006 (by regulation the Bank must measure
and manage its interest rate risk for an interest rate shock of +/- 200 basis points, whichever produces the largest decline
in NPV).

|                                     |  | **At June 30, 2007** |  | **At June 30, 2006** | 
|------------------------------------ |  | -------------------- |  | -------------------- | 
|**Risk Measure: +200 bp Rate Shock** |  | **(+200 bp)**        |  | **(+200 bp)**        | 
|                                     |  |                      |  |                      | 
|                                     |  |                      |  |                      | 
|Pre-Shock NPV Ratio                  |  | 9.84%                |  | 11.13%               | 
|Post-Shock NPV Ratio                 |  | 8.31%                |  | 10.32%               | 
|Sensitivity Measure                  |  | 153 bp               |  | 81 bp                | 
|TB 13a Level of Risk                 |  | Minimal              |  | Minimal              | 

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis
presented in the foregoing tables.  For example, although certain assets and liabilities may have similar maturities or
repricing characteristics, they may react in different degrees to changes in interest rates.  Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in interest rates, while interest rates on other
types of assets and liabilities may lag behind changes in interest rates.  Additionally, certain assets, such as ARM loans,
have features which restrict changes on a short-term basis and over the life of the loan.  Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early withdrawals of time deposits could likely
deviate significantly from those assumed in calculating the respective table.  It is also possible that, as a result of an
interest rate increase, the increased mortgage payments required of ARM borrowers could result in an increase in
delinquencies and defaults.  Changes in interest rates could also affect the volume and profitability of the Bank's
mortgage banking operations.  Accordingly, the data presented in the tables above should not be relied upon as
indicative of actual results in the event of changes in interest rates.  Furthermore, the NPV presented in the foregoing
tables is not intended to present the fair market value of the Bank, nor does it represent amounts that would be available
for distribution to stockholders in the event of the liquidation of the Corporation.

The Bank also models the sensitivity of net
interest income for the 12-month period subsequent to any given month-end
assuming a dynamic balance sheet (accounting for the Bank's current balance
sheet, 12-month business plan, embedded options, rate floors, periodic caps,
lifetime caps, and loan, investment, deposit and borrowing cash flows, among

63

<PAGE>

others), and immediate, permanent and parallel movements in
interest rates of plus or minus 100 and 200 basis points. The following table
describes the results of the analysis for June 30, 2007 and June 30, 2006.

|June 30, 2007        |  | June 30, 2006          
|-------------------- |  | -----------------------
|**Basis Point (bp)** |  | **Change in**          
|**Change in Rates**  |  | **Net Interest Income**
|+200 bp              |  | -0.97%                 
|+100 bp              |  | +3.76%                 
|-100 bp              |  | +11.52%                
|-200 bp              |  | +11.18%                

For the fiscal year ended June 30, 2007, the Bank is liability sensitive, as its interest-bearing liabilities expected
to reprice during the subsequent 12-month period exceeded its interest-earning assets expected to reprice during that
period.  Therefore, in a rising interest rate environment, the model projects a decline in net interest income over the
subsequent 12-month period, except in the +100 basis point scenario where net interest income is projected to increase.
In a falling interest rate environment, the results project an increase in net interest income over the subsequent 12-month period.  For the fiscal year ended June 30, 2006, the Bank was asset sensitive.  Therefore, in a rising interest rate
environment, the model projects an increase in net interest income over the subsequent 12-month period.  In a falling
interest rate environment, the results project a decline in net interest income over the subsequent 12-month period,
except in the -100 basis point scenario where net interest income is also projected to increase.

Management believes that the assumptions used to complete the analysis described in the table above are
reasonable.  However, past experience has shown that immediate, permanent and parallel movements in interest rates
will not necessarily occur.  Additionally, while the analysis provides a tool to evaluate the projected net interest income
to changes in interest rates, actual results may be substantially different if actual experience differs from the
assumptions used to complete the analysis.  Therefore the model results that we disclose should be thought of as a risk
management tool to compare the trends of our current disclosure to previous disclosures, over time, within the context
of the actual performance of the treasury yield curve.

**Item 8.  Financial Statements and Supplementary Data**

Please refer to the index on page 71 for the Consolidated
Financial Statements and Notes to Consolidated Financial Statements.

**Item 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure**

None.

**Item 9A.   Controls and Procedures**

As of June 30, 2007, the Corporation carried out an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Rule 13a-14(c) of the Securities Exchange Act of 1934. The Corporation's
Disclosure Committee, under the supervision of the Chief Executive Officer and Chief Financial Officer, and with the
participation of the Internal Audit Department, conducted surveys and interviews with a selected group of management
comprised of the critical operational personnel, on the effectiveness of the disclosure controls and procedures.  Based on
the results of the surveys and interviews, the Disclosure Committee completed a report to the Audit Committee of the Board
of Directors and a recommendation to the Corporation's Chief Executive Officer and Chief Financial Officer.  The Chief
Executive Officer and the Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were
effective as of the evaluation date.

64

<PAGE>

During the quarter ended June 30, 2007, no change occurred in the Corporation's internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial
reporting.

The Management Report on Internal Control Over Financial Reporting follows:

The management of Provident Financial Holdings, Inc. and subsidiary (the "Corporation") is responsible for
establishing and maintaining adequate internal control over financial reporting. The Corporation's internal control over
financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles generally accepted in
the United States of America.

To comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the Corporation designed and
implemented a structured and comprehensive assessment process to evaluate its internal control over financial reporting
across the enterprise. The assessment of the effectiveness of the Corporation's internal control over financial reporting
was based on criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Because of its inherent limitations, including the possibility of human
error and the circumvention of overriding controls, a system of internal control over financial reporting can provide
only reasonable assurance and may not prevent or detect misstatements.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.  Based on its assessment,
management has concluded that the Corporation's internal control over financial reporting was effective as of June 30,
2007.

Management's assessment of the effectiveness of internal control over financial reporting as of June 30, 2007, has been
audited by Deloitte & Touche LLP, the independent registered public accounting firm who also audited the Corporation's
consolidated financial statements. Deloitte & Touche LLP's attestation report on management's assessment of the
Corporation's internal control over financial reporting follows.

|Date: September 11, 2007 | /s/ Craig G. Blunden                               
|------------------------ | ---------------------------------------------------
|                         | Craig G. Blunden                                   
|                         | Chairman, President and Chief
    Executive Officer
|                         |                                                    
|                         | /s/ Donavon P. Ternes                              
|                         | Donavon P. Ternes                                  
|                         | Chief Financial Officer                            

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders ofProvident Financial Holdings, Inc.Riverside, California

We have audited management's assessment, included in the accompanying Management Report on Internal Control Over Financial Reporting, that Provident Financial Holdings, Inc. and subsidiary (the "Corporation") maintained effective internal control over financial reporting as of June 30, 2007, based on criteria established in *Internal Control - Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Corporation's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether

65

<PAGE>

effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons performing similar functions, and effected by
the company's board of directors, management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on
the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that the Corporation maintained effective internal control over financial
reporting as of June 30, 2007, is fairly stated, in all material respects, based on the criteria established in *Internal Control -Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over
financial reporting as of June 30, 2007, based on the criteria established in *Internal Control - Integrated Framework*
issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements as of and for the year ended June 30, 2007 of the Corporation and our report
dated September 11, 2007 expressed an unqualified opinion on those financial statements.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
September 11, 2007

**Item 9B.  Other Information**



None.

**PART III**

**Item 10. Directors, Executive Officers and
Corporate Governance**

For information regarding the Corporation's Board of Directors, see the section captioned "Proposal I - Election of
Directors" which is included in the Proxy Statement, a copy of which will be filed with the Securities and Exchange
Commission no later than 120 days after the Corporation's fiscal year end and is incorporated herein by reference.

The executive officers of the Corporation and the Bank are
elected annually and hold office until their respective successors have been
elected and qualified or until death, resignation or removal by the Board of
Directors. For

66

<PAGE>

information regarding the Corporation's executive officers,
see Item 1 - "Executive Officers" beginning on page 40 of this Form 10-K.

**Compliance with Section 16(a) of the Exchange Act**

The information contained under the section captioned "Compliance with Section 16(a) of the Exchange Act" is included
in the Corporation's Proxy Statement and is incorporated herein by reference.



**Code of Ethics for Senior Financial Officers**

The Corporation has adopted a Code of Ethics, which applies to all directors, officers, and employees of the Corporation.
The Code of Ethics is publicly available as Exhibit 14 to the Corporation's Annual Report on Form 10-K for the year ended
June 30, 2007, and is available on the Corporation's website, www.myprovident.com.  If the Corporation makes any
substantial amendments to the Code of Ethics or grants any waiver, including any implicit waiver, from a provision of the
Code to the Corporation's Chief Executive Officer, Chief Financial Officer or Controller, the Corporation will disclose the
nature of such amendment or waiver on the Corporation's website and in a report on Form 8-K.

**Audit Committee Financial Expert**

The Corporation has designated Joseph P. Barr, Audit Committee Chairman, as its audit committee financial expert.
Mr. Barr is independent, as independence for audit committee members is defined under the listing standards of the
NASDAQ Stock Market, a Certified Public Accountant in California and Ohio and has been practicing public
accounting for over 37 years.

**Item 11.  Executive Compensation**

The information contained under the section captioned
"Executive Compensation" and "Directors' Compensation" is included in the Proxy
Statement, a copy of which will be filed with the Securities and Exchange
Commission no later than 120 days after the Corporation's fiscal year end and
incorporated herein by reference.

**Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters**

(a)    	Security Ownership of Certain Beneficial Owners.

The information contained under the section captioned "Security Ownership of Certain Beneficial Owners and
Management" is included in the Corporation's Proxy Statement and is incorporated herein by reference.

(b)     Security Ownership of Management.

The information contained under the sections captioned "Security Ownership of Certain Beneficial Owners and
Management" and "Proposal I -- Election of Directors" is included in the Corporation's Proxy Statement and is incorporated
herein by reference.

(c)    	Changes In Control.

The Corporation is not aware of any arrangements, including any pledge by any person of securities of the Corporation,
the operation of which may at a subsequent date result in a change in control of the Corporation.

(d)     Equity Compensation Plan Information.

The information contained under the section captioned "Executive Compensation - Equity Compensation Plan Information"
is included in the Corporation's Proxy Statement and is incorporated herein by reference.

67

<PAGE>

**Item 13.  Certain Relationships and Related Transactions, and Director Independence**

The information contained under the section captioned
"Transactions with Management" is included in the Proxy Statement, a copy of
which will be filed with the Securities and Exchange Commission no later than
120 days after the Corporation's fiscal year end and is incorporated herein by
reference.

**Item 14.  Principal Accountant Fees and Services**

The information contained under the section captioned "Proposal II - Approval of Appointment of Independent
Auditors" is included in the Corporation's Proxy Statement, a copy of which will be filed with the Securities and
Exchange Commission no later than 120 days after the Corporation's fiscal year end and is incorporated herein by
reference.



**PART IV**

**Item 15.  Exhibits and Financial Statement Schedules**

(a)  1.  Financial StatementsSee the Index to Consolidated Financial Statements on page 71.

2.  Financial Statement SchedulesSchedules to the Consolidated Financial Statements have been omitted as the required
information is             inapplicable.

(b)      Exhibits
  
       
Exhibits are available from the Corporation by written request

| | 3.1  | Certificate of Incorporation of
    Provident Financial Holdings, Inc. (Incorporated by reference to Exhibit 3.1
    to the Corporation's Registration Statement on Form S-1 (File No. 333-2230))               
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                 
| | 3.2  | Bylaws of Provident Financial
    Holdings, Inc. (Incorporated by reference to Exhibit 3.2 to the
    Corporation's Registration Statement on Form S-1 (File No. 333-2230))                                     
| |      |                                                                                                                                                                                                                 
| | 10.1 | Employment Agreement with Craig G. Blunden (Incorporated by reference to Exhibit 10.1 to the
Corporation's Form 8-K dated December 19, 2005)                                                                    
| |      |                                                                                                                                                                                                                 
| | 10.2 | Post-Retirement Compensation Agreement with Craig G. Blunden (Incorporated by reference
to Exhibit 10.2 to the Corporation's Form 8-K dated December 19, 2005)                                                  
| |      |                                                                                                                                                                                                                 
| | 10.3 | 1996 Stock Option Plan (incorporated by reference to Exhibit A to the Corporation's proxy
statement dated December 12, 1996)                                                                                    
| |      |                                                                                                                                                                                                                 
| | 10.4 | 1996 Management Recognition
    Plan (incorporated by reference to Exhibit B to the Corporation's proxy
    statement dated December 12, 1996)                                                                  
| |      |                                                                                                                                                                                                                 
| | 10.5 | Severance Agreement with Richard L. Gale, Kathryn R. Gonzales, Lilian Salter, Donavon P.
Ternes and David S. Weiant (incorporated by reference to Exhibit 10.1 in the Corporation's
Form 8-K dated July 3, 2006)
| |      |                                                                                                                                                                                                                 
| | 10.6 | 2003 Stock Option Plan
    (incorporated by reference to Exhibit A to the Corporation's proxy statement
    dated October 21, 2003)                                                                             

68

<PAGE>

| | 10.7  | Form of Incentive Stock Option
    Agreement for options granted under the 2003 Stock Option Plan (incorporated
    by reference to Exhibit 10.13 to the Corporation's Annual Report on Form
    10-K for the year ended June 30, 2005).    
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                             
| | 10.8  | Form of Non-Qualified Stock
    Option Agreement for options granted under the 2003 Stock Option Plan
    (incorporated by reference to Exhibit 10.14 to the Corporation's Annual
    Report on Form 10-K for the year ended June 30, 2005).
| |       |                                                                                                                                                                                                                                             
| | 10.9  | 2006 Equity Incentive Plan
    (incorporated by reference to Exhibit A to the Corporation's proxy statement
    dated October 12, 2006)                                                                                                     
| |       |                                                                                                                                                                                                                                             
| | 10.10 | Form of Incentive Stock Option
    Agreement for options granted under the 2006 Equity Incentive Plan
    (incorporated by reference to Exhibit 10.10 in the Corporation's Form 10-Q
    for the quarter ended December 31, 2006)           
| |       |                                                                                                                                                                                                                                             
| | 10.11 | Form of Non-Qualified Stock
    Option Agreement for options granted under the 2006 Equity Incentive Plan
    (incorporated by reference to Exhibit 10.11 in the Corporation's Form 10-Q
    for the quarter ended December 31, 2006)       
| |       |                                                                                                                                                                                                                                             
| | 10.12 | Form of Restricted Stock
    Agreement for restricted shares awarded under the 2006 Equity Incentive Plan
    (incorporated by reference to Exhibit 10.12 in the Corporation's Form 10-Q
    for the quarter ended December 31, 2006)       
| |       |                                                                                                                                                                                                                                             
| | 13    | 2007 Annual Report to
    Stockholders                                                                                                                                                                                                      
| |       |                                                                                                                                                                                                                                             
| | 14    | Code of Ethics for the
    Corporation's directors, officers and employees                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                             
| | 21.1  | Subsidiaries of Registrant                                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                             
| | 23.1  | Consent of Independent
    Registered Public Accounting Firm                                                                                                                                                                                
| |       |                                                                                                                                                                                                                                             
| | 31.1  | Certification of Chief
    Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                      
| |       |                                                                                                                                                                                                                                             
| | 31.2  | Certification of Chief
    Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                      
| |       |                                                                                                                                                                                                                                             
| | 32.1  | Certification of Chief
    Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                     
| |       |                                                                                                                                                                                                                                             
| | 32.2  | Certification of Chief
    Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                     



69

<PAGE>

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Provident Financial Holdings, Inc.

/s/ Craig G. BlundenDate:  September 12, 2007                                                                Craig G. BlundenChairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.

|SIGNATURES             |  | TITLE                         | DATE              
|---------------------- |  | ----------------------------- | ------------------
|                       |  |                               |                   
|/s/ Craig G. Blunden   |  |                               |                   
|Craig G. Blunden       |  | Chairman, President and       | September 12, 2007
|                       |  | Chief Executive Officer       |                   
|                       |  | (Principal Executive Officer) |                   
|                       |  |                               |                   
|/s/ Donavon P. Ternes  |  |                               |                   
|Donavon P. Ternes      |  | Chief Financial Officer       | September 12, 2007
|                       |  | (Principal Financial and      |                   
|                       |  | Accounting Officer)           |                   
|                       |  |                               |                   
|/s/ Joseph P. Barr     |  |                               |                   
|Joseph P. Barr         |  | Director                      | September 12, 2007
|                       |  |                               |                   
|/s/ Bruce W. Bennett   |  |                               |                   
|Bruce W. Bennett       |  | Director                      | September 12, 2007
|                       |  |                               |                   
|/s/ Debbi H. Guthrie   |  |                               |                   
|Debbi H. Guthrie       |  | Director                      | September 12, 2007
|                       |  |                               |                   
|/s/ Robert G. Schrader |  |                               |                   
|Robert G. Schrader     |  | Director                      | September 12, 2007
|                       |  |                               |                   
|/s/ Roy H. Taylor      |  |                               |                   
|Roy H. Taylor          |  | Director                      | September 12, 2007
|                       |  |                               |                   
|/s/ William E. Thomas  |  |                               |                   
|William E. Thomas      |  | Director                      | September 12, 2007

70

<PAGE>

**EXHIBIT INDEX**

Exhibit 13        2007 Annual Report to Stockholders

Exhibit 14        Code of Ethics for the Corporation's directors, officers and employees

Exhibit 21.1     Subsidiaries of Registrant

Exhibit 23.1     Consent of Independent Registered Public Accounting Firm

Exhibit 31.1     Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2     Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32        Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section  906 of theSarbanes-
                        
Oxley Act of 2002.



<PAGE>

**EXHIBIT 13**

**2007 Annual Report to Stockholders**





2007 Annual Report<PAGE>



Message From the Chairman

Dear Shareholders:
        I am pleased to forward our Annual Report for fiscal 2007.  We reported net income of $11.3 million, or $1.72 per diluted share, and a return on equity of 8.4%, which is lower than what we have come to expect, but comparable to many of our peers.  The operating environment for financial institutions in fiscal 2007 was more challenging than in recent prior years; made difficult by the inverted to flat yield curve which compressed net interest margins, the collapse of the non-prime loan market resulting in a secondary market liquidity crisis, significantly lower loan sale margins, and the deterioration of credit quality from historically pristine levels.

        Our stock price declined by 17% during fiscal 2007, closing at $25.00 per share on June 30, 2007, down from $30.00 per share on June 30, 2006.  The decline is the first in many years and I believe is a reflection of the general perception in the financial markets that banks, thrifts, mortgage companies and other financial institutions may continue to experience a difficult operating environment for the foreseeable future.

        Although the operating environment deteriorated during fiscal 2007, we continued to concentrate our efforts on the long-term initiatives that will improve our Company and our competitive position within the Inland Empire.  Last year, I described six initiatives for fiscal 2007, four for Provident Bank and two for Provident Bank Mortgage.  

        I am pleased to report that we have accomplished meaningful progress in connection with three of the four strategies at Provident Bank, although we did not accomplish all that we intended regarding transaction account growth.  Specifically, loans held for investment grew by 7% during the year while operating expenses decreased by 1% from the prior year.  With respect to capital management, we repurchased approximately 665,000 shares of common stock during fiscal 2007 and paid a cash dividend of $0.69 per share, up from $0.58 per share in fiscal 2006, a 19% increase.  Total deposits grew by 9% from last year, although transaction account balances declined by 11%.  The decline in our transaction account balances was primarily the result of depositors seeking higher yields in our certificate of deposit products.  

        We were less successful in meeting the two initiatives at Provident Bank Mortgage during fiscal 2007.  High margin loan products decreased to 68% of loans originated for sale and the loan sale margin slipped to 0.83%, a reflection of the highly competitive mortgage banking environment and the recent turmoil in the secondary market.  Additionally, operating expenses increased by 9% from the prior year, primarily a result of growing our staff at the beginning of the fiscal year to build market share and subsequently reducing our staff and loan production offices during the 3rd and 4th quarters of the fiscal year in response to the deteriorating environment.  Provident Bank
        We remain committed to the strategies implemented in prior years that we believe will improve our fundamental performance over time.  For example, the percentage of investment securities to total assets continues to decline, the percentage of loans held for investment to total assets continues to increase, and the percentage of preferred loans (multi-family, commercial real estate, construction and commercial business) to loans held for investment continues to grow.

        We continue to explore branching opportunities within our geographic footprint and have identified several sites that may meet our criteria.  Management considers de novo branching in the high growth communities of the Inland Empire, given our 50 year history in the area, a strategic opportunity to help meet our transaction account growth goals and enhance the franchise value of the Company.  In keeping with this strategy, we opened a new branch location in the La Sierra area of Riverside in January 2007, which has grown to $8.3 million in deposits at June 30, 2007.  Additionally, in October 2006 we announced a second branch location in Moreno Valley, which is scheduled to open in March 2008.Provident Bank Mortgage
        Fiscal 2007 turned out to be a tumultuous year for our mortgage banking business in a deteriorating environment.  We responded quickly to this environment by closing three offices and combining our Call Center with another retail office.  During the course of the year, we reduced the total number of mortgage banking employees by 21% from the peak in November 2006 (increasing the number of production employees by 10% and reducing the number of support employees by 40%).  It is apparent that additional changes are necessary and we will

<PAGE>

Message From the Chairman

---

be diligent in making them.  Those changes may be in the form of a different product mix, further tightening of our underwriting standards, a further reduction in our operating expenses or a combination of these and other changes. The Year Ahead

        Our Business Plan for fiscal 2008 builds on our successes and allows us to refine previously implemented strategies.  In community banking we will continue to emphasize significant yet prudent growth of loans held for investment, the growth of transaction accounts (while recognizing that certificate of deposit activity will likely increase), operating expense control and sound capital management decisions.  In mortgage banking we must change our operating model to achieve breakeven operating results during this highly uncertain mortgage banking environment. A Final Word
        I remain confident that the strategies and initiatives outlined above will continue to improve the fundamental performance of our Company and that the Inland Empire region of Southern California is one of the best regions in the nation to operate a community bank.  I believe that the Company is well positioned for future growth and will be able to capitalize on opportunities very quickly once the environment becomes more favorable.
Sincerely,/s/Craig G. Blunden
Craig G. Blunden
Chairman, President and
Chief Executive Officer

<PAGE>

Message From the Chairman

---





<PAGE>

Message From the Chairman

---





<PAGE>

Message From the Chairman

---





<PAGE>

Financial Highlights

---

The following tables set forth information concerning the consolidated financial position and results of operations of the Corporation and its subsidiary at the dates and for the periods indicated.

| | **At or For The Year Ended June 30,**
| | -------------------------------------

|                                              | **2007**    | **2006**    | **2005**    | **2004**    | **2003**   
|--------------------------------------------- | ----------- | ----------- | ----------- | ----------- | -----------
|(In Thousands, Except Per Share Information ) |             |             |             |             |            
|                                              |             |             |             |             |            
|**FINANCIAL CONDITION DATA:**                 |             |             |             |             |            
|Total assets                                  | $ 1,647,516 | $ 1,622,470 | $ 1,632,122 | $ 1,319,035 | $ 1,261,506
|Loans held for investment, net                | 1,349,289   | 1,262,997   | 1,131,905   | 862,535     | 744,219    
|Loans held for sale                           | 1,337       | 4,713       | 5,691       | 20,127      | 4,247      
|Receivable from sale of loans                 | 60,513      | 99,930      | 167,813     | 86,480      | 114,902    
|Cash and cash equivalents                     | 12,824      | 16,358      | 25,902      | 38,349      | 48,851     
|Investment securities                         | 150,843     | 177,189     | 232,432     | 252,580     | 297,111    
|Deposits                                      | 998,572     | 917,582     | 918,631     | 851,039     | 754,106    
|Borrowings                                    | 502,774     | 546,211     | 560,845     | 324,877     | 367,938    
|Stockholders' equity                          | 128,927     | 136,210     | 122,989     | 109,982     | 106,878    
|Book value per share                          | 20.22       | 19.48       | 17.68       | 15.51       | 14.29      
|                                              |             |             |             |             |            
|**OPERATING DATA:**                           |             |             |             |             |            
|Interest income                               | $ 100,968   | $ 86,627    | $ 75,495    | $ 62,151    | $ 59,856   
|Interest expense                              | 59,192      | 42,573      | 32,982      | 25,919      | 28,413     
|Net interest income                           | 41,776      | 44,054      | 42,513      | 36,232      | 31,443     
|Provision for loan losses                     | 5,078       | 1,134       | 1,641       | 819         | 1,055      
|Net interest income after provision           | 36,698      | 42,920      | 40,872      | 35,413      | 30,388     
|Loan servicing and other fees                 | 2,132       | 2,572       | 1,675       | 2,292       | 1,845      
|Gain on sale of loans, net                    | 9,318       | 13,481      | 18,706      | 14,346      | 19,200     
|Deposit account fees                          | 2,087       | 2,093       | 1,789       | 1,986       | 1,734      
|Net gain on sale of investment securities     | -           | -           | 384         | -           | 694        
|Other non-interest income                     | 1,665       | 1,708       | 1,864       | 1,529       | 2,298      
|Net gain on sale of real estate               | 2,359       | 6,355       | -           | -           | -          
|Operating expenses                            | 33,849      | 32,913      | 32,514      | 28,780      | 27,913     
|Income before income taxes                    | 20,410      | 36,216      | 32,776      | 26,786      | 28,246     
|Provision for income taxes                    | 9,124       | 15,676      | 14,077      | 11,717      | 11,357     
|Net income                                    | $  11,286   | $ 20,540    | $ 18,699    | $ 15,069    | $ 16,889   
|Basic earnings per share                      | $ 1.75      | $ 3.10      | $ 2.84      | $ 2.24      | $ 2.37     
|Diluted earnings per share                    | $ 1.72      | $ 2.98      | $ 2.64      | $ 2.09      | $ 2.20     
|Cash dividend per share                       | $ 0.69      | $ 0.58      | $ 0.52      | $ 0.33      | $ 0.13     

<PAGE>

Financial Highlights

---

|                                                                                                       |  | **At or For The Year Ended June 30,**
|------------------------------------------------------------------------------------------------------ |  | -------------------------------------
|                                                                                                       |  | **2007**                             
|                                                                                                       |  |                                      
|**KEY OPERATING RATIOS:**                                                                              |  |                                      
|                                                                                                       |  |                                      
|**Performance Ratios**                                                                                 |  |                                      
|Return on average assets                                                                               |  | 0.66                                 
|Return on average stockholders' equity                                                                 |  | 8.39                                 
|Interest rate spread                                                                                   |  | 2.23                                 
|Net interest margin                                                                                    |  | 2.51                                 
|Average interest-earning assets to    average interest-bearing liabilities.                            |  | 107.85                               
|Operating and administrative expenses    as a percentage of average total assets                       |  | 1.99                                 
|Efficiency ratio                                                                                       |  | 57.05                                
|Stockholders' equity to total assets ratio                                                             |  | 7.83                                 
|Dividend payout ratio                                                                                  |  | 40.12                                
|                                                                                                       |  |                                      
|**Regulatory Capital Ratios**                                                                          |  |                                      
|Tangible capital                                                                                       |  | 7.63                                 
|Tier 1 leverage capital                                                                                |  | 7.63                                 
|Total risk-based capital                                                                               |  | 12.51                                
|Tier 1 risk-based capital                                                                              |  | 11.40                                
|                                                                                                       |  |                                      
|**Asset Quality Ratios**                                                                               |  |                                      
|Non-accrual and 90 days or more    past due loans as a percentage of    loans held for investment, net |  | 1.18                                 
|Non-performing assets as a percentage    of total assets                                               |  | 1.20                                 
|Allowance for loan losses as a    percentage of gross loans held for    investment                     |  | 1.09                                 
|Allowance for loan losses as a    percentage of non-performing loans                                   |  | 93.32                                
|Net charge-offs to average    loans receivable, net                                                    |  | 0.04                                 
|                                                                                                       |  |                                      

<PAGE>

**Consolidated Financial Statements ofProvident Financial Holdings, Inc.**

---

**Index**

|                                                                                                 |     
|------------------------------------------------------------------------------------------------ | ----
|                                                                                                 | Page
|Report of Independent Registered Public Accounting Firm                                          | 72  
|Consolidated Statements of Financial Condition as of June 30, 2007 and 2006                      | 73  
|Consolidated Statements of Operations for the years ended June 30, 2007, 2006 and 2005           | 74  
|Consolidated Statements of Stockholders' Equity for the years ended June 30, 2007, 2006 and 2005 | 75  
|Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005           | 76  
|Notes to Consolidated Financial Statements                                                       | 78  



71<PAGE>


**Report of Independent Registered Public Accounting Firm**



To the Board of Directors and Stockholders ofProvident Financial Holdings, Inc.Riverside, California 

We have audited the accompanying consolidated statements of financial condition of Provident Financial Holdings, Inc. and subsidiary (the "Corporation") as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2007. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Provident Financial Holdings, Inc. and subsidiary as of June 30, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2007, in conformity with
accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Corporation's internal control over financial reporting as of June 30, 2007, based on the criteria established in *Internal Control - Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 11, 2007, expressed an
unqualified opinion on management's assessment of the effectiveness of the Corporation's internal control over
financial reporting and an unqualified opinion on the effectiveness of the Corporation's internal control over
financial reporting.

/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
September 11, 2007


72<PAGE>

**Consolidated Statements of Financial Condition**
**(In Thousands, Except Share Information)**

|                                                                                                                      |               |   |               |  
|--------------------------------------------------------------------------------------------------------------------- | ------------- | - | ------------- | -
|                                                                                                                      | **June 30,**  |  
|                                                                                                                      | **2007**      |   | **2006**      |  
|**Assets**                                                                                                            |               |   |               |  
|Cash and cash equivalents                                                                                             | $      12,824 |   | $      16,358 |  
|                                                                                                                      |               |   |               |  
|Investment securities - held to maturity                                                                              |               |   |               |  
|(fair value $18,837 and $49,914, respectively)                                                                        | 19,001        |   | 51,031        |  
|Investment securities - available for sale, at fair value                                                             | 131,842       |   | 126,158       |  
|Loans held for investment, net of allowance for loan losses of $14,845 and    $10,307, respectively                   | 1,349,289     |   | 1,262,997     |  
|Loans held for sale, at lower of cost or market                                                                       | 1,337         |   | 4,713         |  
|Receivable from sale of loans                                                                                         | 60,513        |   | 99,930        |  
|Accrued interest receivable                                                                                           | 7,235         |   | 6,774         |  
|Real estate held for investment, net                                                                                  | -             |   | 653           |  
|Real estate owned, net                                                                                                | 3,804         |   | -             |  
|Federal Home Loan Bank ("FHLB") - San Francisco stock                                                                 | 43,832        |   | 37,585        |  
|Premises and equipment, net                                                                                           | 7,123         |   | 6,860         |  
|Prepaid expenses and other assets                                                                                     | 10,716        |   | 9,411         |  
|Total assets                                                                                                          | $ 1,647,516   |   | $ 1,622,470   |  
|                                                                                                                      |               |   |               |  
|**Liabilities and Stockholders' Equity**                                                                              |               |   |               |  
|Liabilities:                                                                                                          |               |   |               |  
|Non interest-bearing deposits                                                                                         | $      43,694 |   | $      48,776 |  
|Interest-bearing deposits                                                                                             | 954,878       |   | 868,806       |  
|Total deposits                                                                                                        | 998,572       |   | 917,582       |  
|                                                                                                                      |               |   |               |  
|Borrowings                                                                                                            | 502,774       |   | 546,211       |  
|Accounts payable, accrued interest and other liabilities                                                              | 17,243        |   | 22,467        |  
|Total liabilities                                                                                                     | 1,518,589     |   | 1,486,260     |  
|                                                                                                                      |               |   |               |  
|Commitments and contingencies (Note 14)                                                                               |               |   |               |  
|                                                                                                                      |               |   |               |  
|Stockholders' equity:                                                                                                 |               |   |               |  
|Preferred stock, $0.01 par value (2,000,000 shares authorized;      none issued and outstanding)                      | -             |   | -             |  
|Common stock, $0.01 par value (15,000,000 shares authorized;                                                          |               |   |               |  
|12,428,365 and 12,376,972 shares issued, respectively; 6,376,945 and      6,991,842 shares outstanding, respectively) | 124           |   | 124           |  
|Additional paid-in capital                                                                                            | 69,456        |   | 66,798        |  
|Retained earnings                                                                                                     | 149,523       |   | 142,867       |  
|Treasury stock at cost (6,051,420 and 5,385,130 shares, respectively)                                                 | (90,694       | ) | (72,524       | )
|Unearned stock compensation                                                                                           | (175          | ) | (644          | )
|Accumulated other comprehensive income (loss), net of tax                                                             | 693           |   | (411          | )
|Total stockholders' equity                                                                                            | 128,927       |   | 136,210       |  
|Total liabilities and stockholders' equity                                                                            | $ 1,647,516   |   | $ 1,622,470   |  



The accompanying notes are an integral part of these consolidated financial statements.

73

---

<PAGE>

**Consolidated Statements of Operations**

**(In Thousands, Except Share Information)**

---

|                                                      |                         |  |             |  |             | 
|----------------------------------------------------- | ----------------------- |  | ----------- |  | ----------- | 
|                                                      | **Year Ended June 30,**
|                                                      | **2007**                |  | **2006**    |  | **2005**    | 
|Interest income:                                      |                         |  |             |  |             | 
|Loans receivable, net                                 | $    91,525             |  | $    77,821 |  | $    65,734 | 
|Investment securities                                 | 7,149                   |  | 6,831       |  | 8,268       | 
|FHLB - San Francisco stock                            | 2,225                   |  | 1,831       |  | 1,445       | 
|Interest-earning deposits                             | 69                      |  | 144         |  | 48          | 
|Total interest income                                 | 100,968                 |  | 86,627      |  | 75,495      | 
|                                                      |                         |  |             |  |             | 
|Interest expense:                                     |                         |  |             |  |             | 
|Deposits                                              | 31,161                  |  | 22,066      |  | 16,162      | 
|Borrowings                                            | 28,031                  |  | 20,507      |  | 16,820      | 
|Total interest expense                                | 59,192                  |  | 42,573      |  | 32,982      | 
|Net interest income, before provision for loan losses | 41,776                  |  | 44,054      |  | 42,513      | 
|Provision for loan losses                             | 5,078                   |  | 1,134       |  | 1,641       | 
|Net interest income, after provision for loan losses  | 36,698                  |  | 42,920      |  | 40,872      | 
|                                                      |                         |  |             |  |             | 
|Non-interest income:                                  |                         |  |             |  |             | 
|Loan servicing and other fees                         | 2,132                   |  | 2,572       |  | 1,675       | 
|Gain on sale of loans, net                            | 9,318                   |  | 13,481      |  | 18,706      | 
|Deposit account fees                                  | 2,087                   |  | 2,093       |  | 1,789       | 
|Net gain on sale of investment securities             | -                       |  | -           |  | 384         | 
|Net gain on sale of real estate                       | 2,359                   |  | 6,355       |  | -           | 
|Other                                                 | 1,665                   |  | 1,708       |  | 1,864       | 
|Total non-interest income                             | 17,561                  |  | 26,209      |  | 24,418      | 
|                                                      |                         |  |             |  |             | 
|Non-interest expense:                                 |                         |  |             |  |             | 
|Salaries and employee benefits                        | 22,032                  |  | 20,480      |  | 21,633      | 
|Premises and occupancy                                | 3,314                   |  | 3,036       |  | 2,735       | 
|Equipment expense                                     | 1,570                   |  | 1,689       |  | 1,523       | 
|Professional expense                                  | 1,193                   |  | 1,317       |  | 1,225       | 
|Sales and marketing expense                           | 945                     |  | 1,125       |  | 895         | 
|Other                                                 | 4,795                   |  | 5,266       |  | 4,503       | 
|Total non-interest expense                            | 33,849                  |  | 32,913      |  | 32,514      | 
|Income before income taxes                            | 20,410                  |  | 36,216      |  | 32,776      | 
|Provision for income taxes                            | 9,124                   |  | 15,676      |  | 14,077      | 
|Net income                                            | $ 11,286                |  | $ 20,540    |  | $ 18,699    | 
|Basic earnings per share                              | $     1.75              |  | $     3.10  |  | $     2.84  | 
|Diluted earnings per share                            | $     1.72              |  | $     2.98  |  | $     2.64  | 
|Cash dividends per share                              | $     0.69              |  | $     0.58  |  | $     0.52  | 

The accompanying notes are an integral part of these consolidated financial statements.

74

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<PAGE>

**Consolidated Statements of Stockholders Equity**

**(In Thousands, Except Share Information)**

---

|                                                                               |              |                          |        |          |   |           |   |               |   |                                                    |   |          |   |           |  
|------------------------------------------------------------------------------ | ------------ | ------------------------ | ------ | -------- | - | --------- | - | ------------- | - | -------------------------------------------------- | - | -------- | - | --------- | -
|                                                                               | Common Stock | AdditionalPaid-inCapital |        | Retained |   | Treasury  |   | UnearnedStock |   | Accumulat-ed OtherComprehen-sive (Loss)Income, Net |   |          |  
|                                                                               | Shares       |                          | Amount |          |   | Earnings  |   | Stock         |   | Compensation                                       |   | of Tax   |   | Total     |  
|Balance at July 1, 2004                                                        | 7,091,719    |                          | $ 119  | $ 57,186 |   | $ 111,329 |   | $ (56,753     | ) | $ (1,889                                           | ) | $  (10   | ) | $ 109,982 |  
|Comprehensive income:                                                          |              |                          |        |          |   |           |   |               |   |                                                    |   |          |   |           |  
|Net income                                                                     |              |                          |        |          |   | 18,699    |   |               |   |                                                    |   |          |   | 18,699    |  
|Unrealized holding gain on      securities available for sale,      net of tax |              |                          |        |          |   |           |   |               |   |                                                    |   | 319      |   | 319       |  
|Total comprehensive income                                                     |              |                          |        |          |   |           |   |               |   |                                                    |   | 19,018   |  
|Purchase of treasury stock                                                     | (209,679     | )                        |        |          |   |           |   | (5,293        | ) |                                                    |   |          |   | (5,293    | )
|Exercise of stock options                                                      | 74,775       |                          | 1      | 594      |   |           |   |               |   |                                                    |   |          |   | 595       |  
|Amortization for restricted stock                                              |              |                          |        |          |   |           |   | 135           |   |                                                    |   | 135      |  
|Tax benefit from non-qualified   equity compensation                           |              |                          |        | 322      |   |           |   |               |   |                                                    |   |          |   | 322       |  
|Allocation of contributions to   Employee Stock Ownership Plan   ("ESOP")      |              |                          |        | 1,395    |   |           |   |               |   | 270                                                |   |          |   | 1,665     |  
|Prepayment of ESOP loan                                                        |              |                          |        |          |   |           |   |               |   | 212                                                |   |          |   | 212       |  
|Cash dividends                                                                 |              |                          |        |          |   | (3,647    | ) |               |   |                                                    |   |          |   | (3,647    | )
|Balance at June 30, 2005                                                       | 6,956,815    |                          | 120    | 59,497   |   | 126,381   |   | (62,046       | ) | (1,272                                             | ) | 309      |   | 122,989   |  
|Comprehensive income:                                                          |              |                          |        |          |   |           |   |               |   |                                                    |   |          |   |           |  
|Net income                                                                     |              |                          |        |          |   | 20,540    |   |               |   |                                                    |   |          |   | 20,540    |  
|Unrealized holding loss on     securities available for sale,     net of tax   |              |                          |        |          |   |           |   |               |   |                                                    |   | (720     | ) | (720      | )
|Total comprehensive income                                                     |              |                          |        |          |   |           |   |               |   |                                                    |   | 19,820   |  
|Purchase of treasury stock                                                     | (368,605     | )                        |        |          |   |           |   | (10,478       | ) |                                                    |   |          |   | (10,478   | )
|Exercise of stock options                                                      | 403,632      |                          | 4      | 2,929    |   |           |   |               |   |                                                    |   |          |   | 2,933     |  
|Reclass of unearned   restricted stock                                         |              |                          |        | (155     | ) |           |   |               |   | 155                                                |   |          |   | -         |  
|Amortization for restricted stock                                              |              | 92                       |        |          |   |           |   |               |   |                                                    |   | 92       |  
|Stock options expense                                                          |              |                          |        | 394      |   |           |   |               |   |                                                    |   |          |   | 394       |  
|Tax benefit from non-qualified   equity compensation                           |              |                          |        | 2,572    |   |           |   |               |   |                                                    |   |          |   | 2,572     |  
|Allocation of contributions   to ESOP                                          |              |                          |        | 1,469    |   |           |   |               |   | 271                                                |   |          |   | 1,740     |  
|Prepayment of ESOP loan                                                        |              |                          |        |          |   |           |   |               |   | 202                                                |   |          |   | 202       |  
|Cash dividends                                                                 |              |                          |        |          |   | (4,054    | ) |               |   |                                                    |   |          |   | (4,054    | )
|Balance at June 30, 2006                                                       | 6,991,842    |                          | 124    | 66,798   |   | 142,867   |   | (72,524       | ) | (644                                               | ) | (411     | ) | 136,210   |  
|Comprehensive income:                                                          |              |                          |        |          |   |           |   |               |   |                                                    |   |          |   |           |  
|Net income                                                                     |              |                          |        |          |   | 11,286    |   |               |   |                                                    |   |          |   | 11,286    |  
|Unrealized holding gain on     securities available for sale,     net of tax   |              |                          |        |          |   |           |   |               |   |                                                    |   | 1,104    |   | 1,104     |  
|Total comprehensive income                                                     |              |                          |        |          |   |           |   |               |   |                                                    |   | 12,390   |  
|Purchase of treasury stock                                                     | (666,290     | )                        |        |          |   |           |   | (18,703       | ) |                                                    |   |          |   | (18,703   | )
|Exercise of stock options                                                      | 51,393       |                          |        | 1,017    |   |           |   |               |   |                                                    |   |          |   | 1,017     |  
|Amortization for restricted stock                                              |              | 165                      |        |          |   |           |   |               |   |                                                    |   | 165      |  
|Awards for restricted stock                                                    |              | (533                     | )      |          |   | 533       |   |               |   |                                                    |   | -        |  
|Stock options expense                                                          |              |                          |        | 462      |   |           |   |               |   |                                                    |   |          |   | 462       |  
|Tax benefit from non-qualified   equity compensation                           |              |                          |        | 81       |   |           |   |               |   |                                                    |   |          |   | 81        |  
|Allocation of contributions   to ESOP                                          |              |                          |        | 1,466    |   |           |   |               |   | 270                                                |   |          |   | 1,736     |  
|Prepayment of ESOP loan                                                        |              |                          |        |          |   |           |   |               |   | 199                                                |   |          |   | 199       |  
|Cash dividends                                                                 |              |                          |        |          |   | (4,630    | ) |               |   |                                                    |   |          |   | (4,630    | )
|Balance at June 30, 2007                                                       | 6,376,945    |                          | $ 124  | $ 69,456 |   | $ 149,523 |   | $ (90,694     | ) | $    (175                                          | ) | $    693 |   | $128,927  |  

The accompanying notes are an integral part of these consolidated financial statements.

75

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<PAGE>





**Consolidated Statements of Cash Flows**

**(In Thousands)**

---



|                                                                                                 |                         |   |               |   |                |  
|------------------------------------------------------------------------------------------------ | ----------------------- | - | ------------- | - | -------------- | -
|                                                                                                 | **Year Ended June 30,**
|                                                                                                 | **2007**                |   | **2006**      |   | **2005**       |  
|Cash flows from operating activities:                                                            |                         |   |               |   |                |  
|Net income                                                                                       | $      11,286           |   | $      20,540 |   | $      18,699  |  
|Adjustments to reconcile net income to net     cash provided by (used for) operating activities: |                         |   |               |   |                |  
|Depreciation and amortization                                                                    | 2,212                   |   | 3,195         |   | 3,509          |  
|Provision for loan losses                                                                        | 5,078                   |   | 1,134         |   | 1,641          |  
|Gain on sale of loans                                                                            | (9,318                  | ) | (13,481       | ) | (18,706        | )
|Net gain on sale of real estate                                                                  | (2,359                  | ) | (6,355        | ) | -              |  
|Net gain on sale of investment securities                                                        | -                       |   | -             |   | (384           | )
|Stock-based compensation                                                                         | 2,247                   |   | 2,064         |   | 2,120          |  
|FHLB - San Francisco stock dividend                                                              | (2,154                  | ) | (1,757        | ) | (1,263         | )
|Deferred income taxes                                                                            | 164                     |   | (2,049        | ) | 1,089          |  
|Tax benefit from non-qualified equity compensation                                               | (81                     | ) | (2,572        | ) | 322            |  
|Decrease in accounts payable, accrued interest and     other liabilities                         | (6,601                  | ) | (1,683        | ) | (4,907         | )
|Increase in prepaid expenses and other assets                                                    | (1,764                  | ) | (3,096        | ) | (1,518         | )
|Loans originated for sale                                                                        | (1,126,616              | ) | (1,237,806    | ) | (1,285,837     | )
|Proceeds from sale of loans and net change in receivable      from sale of loans                 | 1,176,489               |   | 1,301,586     |   | 1,232,021      |  
|Net cash provided by (used for) operating activities                                             | 48,583                  |   | 59,720        |   | (53,214        | )
|                                                                                                 |                         |   |               |   |               
|Cash flows from investing activities:                                                            |                         |   |               |   |                |  
|Net increase in loans held for investment                                                        | (94,950                 | ) | (114,439      | ) | (265,192       | )
|Maturity and call of investment securities held to maturity                                      | 32,030                  |   | 1,200         |   | 9,975          |  
|Maturity and call of investment securities available for sale                                    | 12,434                  |   | 3,000         |   | -              |  
|Principal payments from mortgage backed securities                                               | 40,089                  |   | 49,020        |   | 58,660         |  
|Purchase of investment securities available for sale                                             | (56,539                 | ) | -             |   | (49,345        | )
|Proceeds from sale of investment securities available for sale                                   | -                       |   | -             |   | 390            |  
|Net (purchase) redemption of FHLB - San Francisco stock                                          | (4,093                  | ) | 1,302         |   | (7,984         | )
|Net sales (additions) of real estate                                                             | 4,829                   |   | 16,051        |   | (294           | )
|Purchase of premises and equipment                                                               | (1,235                  | ) | (688          | ) | (658           | )
|Net cash used for investing activities                                                           | $     (67,435           | ) | $     (44,554 | ) | $     (254,448 | )



(continued)



The accompanying notes are an integral part of these consolidated financial statements.



76

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<PAGE>





**Consolidated Statements of Cash Flows**

**(In Thousands)**

---



|                                                                  |                         |   |                       |   |                           |  
|----------------------------------------------------------------- | ----------------------- | - | --------------------- | - | ------------------------- | -
|                                                                  | **Year Ended June 30,**
|                                                                  | **2007**                |   | **2006**              |   | **2005**                  |  
|Cash flows from financing activities:                             |                         |   |                       |   |                           |  
|Net increase (decrease) in deposits                               | $       80,990          |   | $        (1,049       | ) | $      67,592             |  
|(Repayment of) proceeds from borrowings, net                      | (43,437                 | ) | (14,634               | ) | 235,968                   |  
|Treasury stock purchases                                          | (18,703                 | ) | (10,478               | ) | (5,293                    | )
|Exercise of stock options                                         | 1,017                   |   | 2,933                 |   | 595                       |  
|Tax benefit from non-qualified equity compensation                | 81                      |   | 2,572                 |   | -                         |  
|Cash dividends                                                    | (4,630                  | ) | (4,054                | ) | (3,647                    | )
|Net cash provided by (used for) financing activities              | 15,318                  |   | (24,710               | ) | 295,215                   |  
|                                                                  |                         |   |                       |   |                           |  
|Net decrease in cash and cash equivalents                         | (3,534                  | ) | (9,544                | ) | (12,447                   | )
|Cash and cash equivalents at beginning of year                    | 16,358                  |   | 25,902                |   | 38,349                    |  
|Cash and cash equivalents at end of year                          | $               12,824  |   | $              16,358 |   | $              25,902     |  
|                                                                  |                         |   |                       |   |                           |  
|Supplemental information:                                         |                         |   |                       |   |                           |  
|Cash paid for interest                                            | $      58,905           |   | $      42,437         |   | $      31,983             |  
|Cash paid for income taxes                                        | $      10,550           |   | $      16,200         |   | $      14,900             |  
|Transfer of loans held for investment to      loans held for sale | $                -      |   | $      18,472         |   | $       5,625             |  
|Transfer of loans held for sale to      loans held for investment | $      21,624           |   | $        6,827        |   | $        1,571            |  
|Real estate acquired in settlement of loans                       | $        5,902          |   | $             411     |   | $                       - |  



The accompanying notes are an integral part of these consolidated financial statements.



77

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<PAGE>





**Notes to Consolidated Financial Statements**

---



**1.   Summary of Significant Accounting Policies:**

Provident Savings Bank, F.S.B. (the "Bank") converted from a federally chartered mutual savings bank to a federally chartered stock bank effective June 27, 1996.  Provident Financial Holdings, Inc., a Delaware corporation organized by the Bank, acquired all of the capital stock of the Bank issued in the conversion; the
transaction was recorded on a book value basis. 


The consolidated financial statements include the accounts of Provident Financial Holdings, Inc., and its wholly owned subsidiary, Provident Savings Bank, F.S.B. (collectively, the "Corporation").  All inter-company balances and transactions have been eliminated.

The Corporation operates in two business segments: community banking (Provident Bank) and mortgage banking (Provident Bank Mortgage ("PBM"), a division of Provident Bank).  Provident Bank activities include
attracting deposits, offering banking services and originating multi-family, commercial real estate, construction,
commercial business and consumer loans.  Deposits are collected primarily from 13 banking locations located
in Riverside and San Bernardino counties in California.  PBM activities include originating single-family loans
(first mortgage, one-to-four units), second mortgages and equity lines of credit for sale to investors or for
investment.  Loans are primarily originated in Southern California by loan agents employed by the Bank, as
well as from the banking locations and freestanding lending offices.  PBM originates loans from eight
freestanding lending offices in Southern California and one free standing lending office in Northern California,
as well as from the banking locations.
The accounting and reporting policies of the Corporation conform to accounting principles generally accepted in the United States of America and to prevailing practices within the banking industry.  The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.   Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets, loan servicing assets and derivative financial instruments. 
The following accounting policies, together with those disclosed elsewhere in the consolidated financial statements, represent the significant accounting policies of Provident Financial Holdings, Inc. and the Bank.

**Cash and cash equivalents**

Cash and cash equivalents include cash on hand and due from banks, as well as overnight deposits placed at correspondent banks.**Investment securities**

The Corporation classifies its qualifying investments as available for sale or held to maturity.  The Corporation's policy of classifying investments as held to maturity is based upon its ability and management's positive intent to hold such securities to maturity.  Securities expected to be held to maturity are carried at amortized historical cost.   All other securities are classified as available for sale and are carried at fair value.  Fair value is determined based upon quoted market prices.  Unrealized holding gains and losses on securities available for sale are included in accumulated other comprehensive income (loss), net of tax.  Gains and losses on dispositions of investment securities are included in non-interest income and are determined using the specific identification method.  Purchase premiums and discounts are amortized over the expected average life of the securities using the effective interest method.  Declines in the fair value of held to maturity and available for sale securities below their amortized
historical cost that are deemed to be other than temporary are reflected in earnings as realized losses.



78

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<PAGE>





**Notes to Consolidated Financial Statements**

---



**Loans**

Loans held for investment consist primarily of long-term loans secured by first trust deeds on single-family residences, other residential property, commercial property and land.  The single-family adjustable-rate mortgage ("ARM") is the Corporation's primary loan investment.  Additionally, multi-family, commercial real estate,
construction, commercial business and consumer loans are becoming a substantial part of loans held for investment.
These loans are generally offered to customers and businesses located in Southern California, primarily in Riverside
and San Bernardino counties, commonly known as the Inland Empire, and to a lesser extent in Orange, Los
Angeles, San Diego and other counties, including Alameda county and surrounding counties in Northern California.
Deterioration in the economic conditions of these markets could adversely affect the Corporation's business,
financial condition and profitability.  Such deterioration could give rise to increased loan delinquencies, an increase
in problem assets and foreclosures, decreased loan demand and a decline in real estate values. Loan origination fees and certain direct origination expenses are deferred and amortized to interest income over the contractual life of the loan using the effective interest method.  The amortization is discontinued for non-performing loans.  Interest receivable represents, for the most part, the current month's interest, which will be included as a part of the borrower's next monthly loan payment.  Interest receivable is accrued only if deemed collectible.  Loans generally are deemed to be in non-accrual status when they become 90 days past due or if the loan is deemed impaired.  When a loan is placed on non-accrual status, interest accrued but not received is reversed against income.   Income on non-accrual loans is subsequently recognized only to the extent that cash is received and the loans' principal balance is deemed collectible.  Non-accrual loans that become current as to both principal and interest are returned to accrual status and future payments are expected to be collected. **Receivable from sale of loans**

Receivable from sale of loans represents expected settlement proceeds from the sale of loans, which have closed but have not settled. The duration of the loan sale settlement generally ranges from three to 30 days.**PBM (Provident Bank Mortgage) activities**

Loans are originated for both investment and sale in the secondary market.  Since the Corporation is primarily an adjustable-rate mortgage and consumer lender for its own portfolio, most fixed-rate loans are originated for sale to institutional investors. Loans held for sale are carried at the lower of cost or fair value.  Fair value is generally determined by outstanding commitments from investors or investors' current yield requirements as calculated on the aggregate loan basis.  Loans are generally sold without recourse, other than standard representations and warranties, except those loans sold to the FHLB - San Francisco under the Mortgage Partnership Finance ("MPF") program and to Freddie Mac under a commitment which has a recourse provision.  Most loans are sold on a servicing released basis.  In some transactions, primarily loans sold under the MPF program, the Corporation may retain the servicing rights in order to generate servicing income.  Where the Corporation continues to service loans after sale, investors are paid their share of the principal collections together with interest at an agreed-upon rate, which generally differs from the
loan's contractual interest rate.Loans sold to the FHLB - San Francisco under the MPF program also have a recourse liability.  The FHLB - San Francisco absorbs the first four basis points of loss and a credit scoring process is used to calculate the maximum recourse amount for the Bank.  All losses above the Bank's maximum recourse are the responsibility of the FHLB - San Francisco.  In consideration of the obligation of the Bank to accept the recourse liability, the FHLB - San
Francisco pays the Bank a credit enhancement fee on a monthly basis.  As of June 30, 2007, the Bank has $173.2
million outstanding under this program and has established a recourse liability of $191,000 as compared to $201.6



79

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<PAGE>





**Notes to Consolidated Financial Statements**

---



million outstanding under this program and a recourse liability of $222,000 at June 30, 2006.  As of June 30, 2007, no losses had been experienced in this program.

Occasionally, the Bank is required to repurchase loans sold to Fannie Mae, FHLB - San Francisco or other institutional investors if it is determined that such loans do not meet the credit requirements of the investor, or if one of the parties involved in the loan misrepresented pertinent facts, committed fraud, or if such loans were 90-days past due within 120 days of the loan funding date.  During the year ended June 30, 2007, the Bank repurchased $14.6 million of single-family mortgage loans as compared to $2.0 million in fiscal 2006 and $962,000 in fiscal 2005.  In addition to the recourse liability for the MPF program, the Bank has established a recourse liability of $194,000 for loans sold to other investors as of June 30, 2007.  No recourse liability on loans sold to other investors was required as of June 30, 2006 and June 30, 2005.  Activity in the recourse liability for the years ended June 30, 2007, 2006 and 2005 was as follows:

|                           |          |  |          |   |          | 
|-------------------------- | -------- |  | -------- | - | -------- | 
|(In Thousands)             | **2007** |  | **2006** |   | **2005** | 
|Balance, beginning of year | $ 222    |  | $ 261    |   | $ 259    | 
|                           |          |  |          |   |          | 
|Provision (recovery)       | 163      |  | (39      | ) | 2        | 
|                           |          |  |          |   |          | 
|Balance, end of the year   | $ 385    |  | $ 222    |   | $ 261    | 

The Bank is obligated to refund loan sale premiums to investors when loans pay off within a specific time period following the loan sale; the time period ranges from three to six months, depending upon the sale agreement.  Total loan sale premium refunds in fiscal 2007, 2006 and 2005 were $358,000, $648,000 and $1.2 million, respectively.   As of June 30, 2007 and 2006, the Bank has accrued $149,000 and $144,000, respectively, for future loan sale premium refunds. Gains or losses on the sale of loans, including fees received or paid, are recognized at the time of sale and are determined by the difference between the net sales proceeds and the allocated book value of the loans sold.  When loans are sold with servicing retained, the carrying value of the loans is allocated between the portion sold and the portion retained (i.e., servicing assets and interest-only strips), based on estimates of their relative fair values.  
Servicing assets are amortized in proportion to and over the period of the estimated net servicing income and are carried at the lower of cost or fair value.  The fair value of servicing assets is determined based on the present value of estimated net future cash flows related to contractually specified servicing fees.  The Corporation periodically evaluates servicing assets for impairment, which is measured as the excess of cost over fair value.  This review is performed on a disaggregated basis, based on loan type and interest rate.  In estimating fair values at June 30, 2007 and 2006, the Corporation used a Constant Prepayment Rate ("CPR") of 3.53% and 5.19%, respectively, and a
weighted-average discount rate of 9.00% and 9.01%, respectively.  Servicing assets, which are included in Other
Assets in the accompanying Consolidated Statements of Financial Condition, had a carrying value of $991,000 and
a fair value of $2.2 million at June 30, 2007.  There were no impairment allowances required for the servicing asset
as of June 30, 2007 and 2006.  Servicing assets at June 30, 2006 had a carrying value of $1.4 million and a fair
value of $2.2 million.  Total additions to loan servicing assets during the fiscal years ended June 30, 2007 and 2006
were $33,000 and $143,000, respectively.  Total amortization of the loan servicing assets during fiscal years ended
June 30, 2007, 2006 and 2005 were $421,000, $473,000 and $510,000, respectively.Rights to future income from serviced loans that exceed contractually specified servicing fees are recorded as interest-only strips.  Interest-only strips are carried at fair value, utilizing the same assumptions as used to value the related servicing assets, with any unrealized gain or loss, net of tax, recorded as a component of accumulated other comprehensive income (loss).  Interest-only strips are included in Other Assets in the accompanying Consolidated Statements of Financial Condition and had a fair value of $603,000, gross unrealized gains of $378,000 and an

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**Notes to Consolidated Financial Statements**

---



unamortized cost of $225,000 at June 30, 2007.   Interest-only strips at June 30, 2006 had a fair value of $584,000, gross unrealized gains of $259,000 and an unamortized cost of $325,000.  Total additions to interest-only strips during the fiscal years ended June 30, 2007 and 2006 were $5,000 and $58,000, respectively.  Total amortization of the interest-only strips during fiscal years ended June 30, 2007, 2006 and 2005 were $105,000, $114,000 and $141,000, respectively.
During the years ended June 30, 2007, 2006 and 2005, the Corporation sold 38%, 26% and 29%, respectively, of its loans originated for sale to a single primary investor.  If the Corporation is unable to sell loans to the primary investors, to find alternative investors, or to change its loan programs to meet investor guidelines, it may have a significant negative impact on the Corporation's operations.

During the fourth quarter ended June 30, 2007, the Bank closed three PBM loan production offices in Carlsbad, Corona and Huntington Beach, California and consolidated the PBM Call Center with the PBM loan production  office in Riverside, California.  The closures and consolidation of the PBM offices was due primarily to the decline in loan demand, resulting from, among others, the decline in the real estate market, stricter loan underwriting standards and the well documented deterioration of the mortgage banking environment.

For the fiscal year ended June 30, 2007, the Bank recognized $212,000 of charges related to the action described above ($175,000 in premises and occupancy expense and $37,000 in salaries and employee benefits expense).  As of June 30, 2007, the Bank does not have a remaining liability with respect to these actions and does not believe that additional charges will be incurred.**Allowance for loan losses**

It is the policy of the Corporation to provide an allowance for loan losses inherent in the loans held for investment as of the balance sheet date when any significant and permanent decline in the borrower's ability to pay has occurred.   Periodic reviews are made in an attempt to identify potential problems at an early stage. Individual loans are periodically reviewed and are classified according to their inherent risk.  The internal asset review policy used by the Corporation is the primary basis by which the Corporation evaluates the probable loss exposure.  Management's determination of the adequacy of the allowance for loan losses is based on an evaluation of the loans held for investment, past experience, prevailing market conditions, and other relevant factors.  The determination of the allowance for loan losses is based on estimates that are particularly susceptible to changes in the economic environment and market conditions.  The allowance is increased by the provision for losses charged against income and reduced by charge-offs, net of recoveries.

**Impaired loans**

The Corporation assesses loans individually and identifies impairment when the accrual of interest has been discontinued, loans have been restructured or management has serious doubts about the future collectibility of principal and interest, even though the loans are currently performing.  Factors considered in determining impairment include, but are not limited to, expected future cash flows, the financial condition of the borrower and current economic conditions.  The Corporation measures each impaired loan based on the fair value of its collateral and charges off those loans or portions of loans deemed uncollectible.

**Real estate**

Real estate acquired through foreclosure is initially recorded at the lesser of the loan balance at the time of foreclosure or the fair value of the real estate acquired, less estimated selling costs.  Subsequent to foreclosure, the Corporation charges current earnings with a provision for estimated losses if the carrying value of the property exceeds its fair value.   Gains or losses on the sale of real estate are recognized upon disposition of the property.   Costs relating to improvement of the property are capitalized.  Other costs are expensed as incurred.

81

---

<PAGE>

**Notes to Consolidated Financial Statements**

---



**Impairment of long-lived assets**

The Corporation reviews its long-lived assets for impairment annually or when events or circumstances indicate that the carrying amount of these assets may not be recoverable.  An asset is considered impaired when the expected undiscounted cash flows over the remaining useful life are less than the net book value.  When impairment is indicated for an asset, the amount of impairment loss is the excess of the net book value over its fair value.**Premises and equipment**

Premises and equipment are stated at cost, less accumulated depreciation and amortization.  Depreciation is computed primarily on a straight-line basis over the estimated useful lives as follows:

Buildings
10 to 40 yearsFurniture and fixtures
3 to 10 yearsAutomobiles
3 yearsComputer equipment
3 to 5 yearsLeasehold improvements are amortized over the shorter of the respective lease terms or the lives of the improvements.   Maintenance and repair costs are charged to operations as incurred.**Income taxes**

Taxes are provided for on substantially all income and expense items included in earnings, regardless of the period in which such items are recognized for tax purposes.  Taxes on income are determined by using the liability method.  This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns.  In estimating future tax consequences, all expected future events other than enactment of changes in the tax law or rates are considered.  **Cash dividend**

Since July 24, 2002, the Corporation has distributed a quarterly cash dividend on the Corporation's outstanding shares of common stock. 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, 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.**Stock repurchases**

The Corporation repurchases its common stock consistent with Board-approved stock repurchase plans. During fiscal 2007, the Corporation completed the May 2006 stock repurchase program (5% of its common stock or approximately 350,558 shares), the January 2007 stock repurchase program (5% of its common stock or
approximately 333,365 shares) and on June 25, 2007, the Corporation announced a plan regarding the repurchase of
5% of its common stock or approximately 318,847 shares.  As of June 30, 2007, no shares have been repurchased
under the June 2007 stock repurchase program, leaving 318,847 authorized shares available for future repurchase
activity.  For fiscal 2007, the Corporation repurchased 664,594 shares at an average cost of $28.06 per share.
During fiscal 2007, the Corporation also repurchased 1,696 shares of restricted stock in lieu of distribution to
employees (to satisfy the minimum income tax required to be withheld from employees) at an average cost of
$29.88 per share.


82<PAGE>
**Notes to Consolidated Financial Statements**

**Earnings per common share (EPS)**

Basic EPS represents net income divided by the weighted average common shares outstanding during the period excluding any potential dilutive effects.  Diluted EPS gives effect to all potential issuance of common stock that would have caused basic EPS to be lower as if the issuance had already occurred.  Accordingly, diluted EPS reflects an increase in the weighted average shares outstanding as a result of the assumed exercise of stock options and the vesting of restricted stock.**Stock-based compensation**

Prior to the fiscal year ended June 30, 2005, stock options were accounted for under Accounting Principles Board ("APB") Opinion No. 25 using the intrinsic value method.  Accordingly, no stock option expense was recorded in periods prior to the fiscal year ended June 30, 2005, since the exercise price of the options issued has always been equal to the market value at the date of grant.  Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment," requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors.  Effective July 1, 2005, the Corporation adopted SFAS No. 123(R) using the modified prospective method under which the provisions of SFAS No. 123(R) are applied to new awards and to awards modified, repurchased or cancelled after June 30, 2005 and to awards outstanding on June 30, 2005 for which requisite service has not yet been rendered.
The adoption of SFAS No. 123(R) resulted in incremental stock-based compensation expense during fiscal 2007 and fiscal 2006 and are solely related to issued and unvested stock option grants.  The incremental stock-based compensation expense for fiscal years ended June 30, 2007 and 2006 was $462,000 and $394,000, respectively.  The impact of this additional expense on basic and diluted earnings per share for fiscal 2007 and 2006 was a reduction of $0.06 and $0.03, respectively.  Cash provided by operating activities for fiscal 2007 and 2006 decreased by $81,000 and $2.6 million, respectively, and cash provided by financing activities increased by an identical amount for fiscal 2007 and 2006, respectively, related to excess tax benefits from stock-based payment arrangements.






83<PAGE>
**Notes to Consolidated Financial Statements**As required under SFAS No. 123(R), the reported net income and earnings per share for the fiscal year ended June 30, 2005 have been presented below to reflect the impact had the Corporation been required to recognize compensation cost based on the fair value at the grant date for stock options. The pro forma amounts are as follows:
    






(In Thousands, Except Per Share Amounts)
**Year Ended   June 30, 2005**Net income, as reported
$ 18,699Add:Stock-based compensation expense included   in the reported net income, net of tax
263Deduct:Total stock-based compensation expense, determined   using the fair value method, net of tax
(  951
)Pro forma net income
$ 18,011Earnings per share:Basic - as reported
$ 2.84Basic - pro forma
$ 2.73Diluted - as reported
$ 2.64Diluted - pro forma
$ 2.54**ESOP (Employee Stock Ownership Plan)**
The Corporation recognizes compensation expense when shares are committed to be released to employees in an amount equal to the fair value of the shares so committed.  The difference between the amount of compensation expense and the cost of the shares released is recorded as additional paid-in capital.  Cash dividends received on the unallocated ESOP shares are applied as a prepayment to the ESOP loan and reduce the amount of unearned stock compensation. **Restricted Stock**
The Corporation recognizes compensation expense over the vesting period of the shares awarded, equal to the fair value of the shares at the date of the award.**Post retirement benefits**
The estimated obligation for post retirement health care and life insurance benefits is determined based on an actuarial computation of the cost of current and future benefits for the eligible retirees and employees grandfathered as of June 30, 2007.  The post retirement benefit liability is included in other liabilities in the accompanying consolidated financial statements.  Effective July 1, 2003, the Corporation discontinued the post retirement health care and life insurance benefits to any employee not previously qualified (grandfathered) for these benefits.**Comprehensive income**

Accounting principles generally require that realized revenue, expenses, gains and losses be included in net income.   Although certain changes in assets and liabilities, such as unrealized gains or losses on available for sale securities, are reported as a separate component of the stockholders' equity section of the Consolidated Statements of Financial Condition, such items, along with income, are components of comprehensive income.




84<PAGE>
**Notes to Consolidated Financial Statements**


The components of other comprehensive income and their related tax effects are as follows:






**For the Year Ended June 30,**(In Thousands)
**2007**

**2006**

**2005**Unrealized holding gains (losses) on   securities available for sale, net
$ 1,903

$ (1,241
)
$ 934Reclassification adjustment for gains   realized in income
-

-

(384
)Net unrealized gains (losses)
1,903

(1,241
)
550Tax effect
(799
)
521

(231
)Net-of-tax amount
$ 1,104

$    (720
)
$ 319


**Recent accounting pronouncements**Statement of Financial Accounting Standards ("SFAS" or "Statement") No. 159:In February 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities--Including an amendment of FASB Statement No. 115." This Statement permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB's long-term measurement objectives for accounting for financial instruments.  This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007.  Management has not determined the impact, if any, of this Statement on the Corporation's financial condition, results of operations, or cash flows.SFAS No. 157:
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."  This Statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.   This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Management has not determined the impact, if any, of this Statement on the Corporation's financial condition, results of operations, or cash flows.SEC Staff Accounting Bulletin No. 108:
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, "Quantifying Financial Misstatements," which expresses the Staff's views regarding the process of quantifying financial statement misstatements.  Registrants are required to quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements.  The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the "rollover" (current year statement of operations perspective) and "iron curtain" (year-end consolidated statement of financial condition perspective) approaches.  The financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors.  The adoption of this guidance did not have a material effect on the Corporation's financial condition, results of operations, or cash flows.FASB Interpretation No. 48 ("FIN 48"):
In July 2006 the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," which supplements SFAS No. 109, "Accounting for Income Taxes," by defining the confidence level that a tax position


85<PAGE>
    
    

**Notes to Consolidated Financial Statements**

must meet in order to be recognized in the financial statements.  The interpretation requires that the tax effects of a position be recognized only if it is "more-likely-than-not" to be sustained based solely on its technical merits as of the reporting date.  The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to the economic benefits of a tax position.  If a tax position is not considered more-likely-than-not to be sustained based solely on technical merits, no benefits of the position are to be recognized.  Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit.  The interpretation also requires enterprises to make explicit disclosures about uncertainties in their income tax positions, including a detailed roll forward of tax benefits taken that do not qualify for financial statement recognition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The adoption of this interpretation will not have a material impact on the Corporation's financial condition, results of operations, or cash flows.

**2.   Investment Securities:**The amortized cost and estimated fair value of investment securities as of June 30, 2007 and 2006 were as follows:






June 30, 2007
**AmortizedCost**

**GrossUnrealizedGains**

**GrossUnrealized(Losses)**

**EstimatedFairValue**

**CarryingValue**(In Thousands)**Held to maturity**U.S. government sponsored    enterprise debt securities
$   19,000

$         -

$ (164
)
$  18,836

$   19,000U.S. government agency MBS (1)
1

-

-

1

1Total held to maturity
19,001

-

(164
)
18,837

19,001**Available for sale**U.S. government sponsored    enterprise debt securities
9,849

-

(166
)
9,683

9,683U.S. government agency MBS
57,555

19

(35
)
57,539

57,539U.S. government sponsored    enterprise MBS
58,861

337

(132
)
59,066

59,066Private issue CMO (2)
4,627

22

(8
)
4,641

4,641Freddie Mac common stock
6

358

-

364

364Fannie Mae common stock
1

25

-

26

26Other common stock
118

405

-

523

523Total available for sale
131,017

1,166

(341
)
131,842

131,842Total investment securities
$ 150,018

$ 1,166

$ (505
)
$ 150,679

$ 150,843(1)    Mortgage-backed Securities ("MBS").

 (2)    Collateralized Mortgage Obligations ("CMO").


86<PAGE>
**Notes to Consolidated Financial Statements**

|                                                        |                   |  |                          |  |                             |   |                        |  |                  
|------------------------------------------------------- | ----------------- |  | ------------------------ |  | --------------------------- | - | ---------------------- |  | -----------------
|June 30, 2006                                           | **AmortizedCost** |  | **GrossUnrealizedGains** |  | **GrossUnrealized(Losses)** |   | **EstimatedFairValue** |  | **CarryingValue**
|(In Thousands)                                          |                   |  |                          |  |                             |   |                        |  |                  
|**Held to maturity**                                    |                   |  |                          |  |                             |   |                        |  |                  
|                                                        |                   |  |                          |  |                             |   |                        |  |                  
|U.S. government sponsored    enterprise debt securities | $   51,028        |  | $                -       |  | $    (1,117                 | ) | $  49,911              |  | $   51,028       
|U.S. government agency MBS (1)                          | 3                 |  | -                        |  | -                           |   | 3                      |  | 3                
|Total held to maturity                                  | 51,031            |  | -                        |  | (1,117                      | ) | 49,914                 |  | 51,031           
|                                                        |                   |  |                          |  |                             |   |                        |  |                  
|**Available for sale**                                  |                   |  |                          |  |                             |   |                        |  |                  
|U.S. government sponsored    enterprise debt securities | 21,846            |  | -                        |  | (582                        | ) | 21,264                 |  | 21,264           
|U.S. government agency MBS                              | 38,143            |  | -                        |  | (778                        | ) | 37,365                 |  | 37,365           
|U.S. government sponsored    enterprise MBS             | 61,455            |  | 272                      |  | (478                        | ) | 61,249                 |  | 61,249           
|Private issue CMO (2)                                   | 5,557             |  | -                        |  | (145                        | ) | 5,412                  |  | 5,412            
|Freddie Mac common stock                                | 6                 |  | 336                      |  | -                           |   | 342                    |  | 342              
|Fannie Mae common stock                                 | 1                 |  | 18                       |  | -                           |   | 19                     |  | 19               
|Other common stock                                      | 118               |  | 389                      |  | -                           |   | 507                    |  | 507              
|Total available for sale                                | 127,126           |  | 1,015                    |  | (1,983                      | ) | 126,158                |  | 126,158          
|Total investment securities                             | $ 178,157         |  | $ 1,015                  |  | $ (3,100                    | ) | $ 176,072              |  | $ 177,189        

No investment securities were sold during the fiscal years ended June 30, 2007 and 2006.  The gross realized gain on sale of investment securities based on identified securities during the fiscal year ended June 30, 2005 was $384,000.  There were no realized losses during the fiscal year ended June 30, 2005.  The tax expense on the sale of investment securities for June 30, 2005 was $161,000.  
During fiscal 2007, $44.5 million of investment securities matured, $40.1 million of MBS principal payments were received and $56.5 million of investment securities were purchased.  In fiscal 2006, $4.2 million of investment securities matured and $49.0 million of MBS principal payments were received.  As of June 30, 2007, MBS and CMO investments represented 80% of investment securities compared to 59% at June 30, 2006.

87

---

<PAGE>

**Notes to Consolidated Financial Statements**

---

As of June 30, 2007 and 2006, the Corporation held investments with an unrealized loss position totaling $505,000 and $3.1 million, respectively, consisting of the following:

|**As of June 30, 2007**                                | **Unrealized HoldingLosses** |                      | **Unrealized HoldingLosses** |               | **Unrealized HoldingLosses**
|------------------------------------------------------ | ---------------------------- | -------------------- | ---------------------------- | ------------- | ----------------------------
|(In Thousands)                                         | **Less Than 12 Months**      |                      | **12 Months or More**        |               | **Total**                   
|**Description  of Securities**                         | **FairValue**                | **UnrealizedLosses** |                              | **FairValue** | **UnrealizedLosses**        
|U.S. government sponsored  enterprise debt securities: |                              |                      |                              |               |                             
|Freddie Mac                                            | $           -                | $      -             |                              | $ 10,869      | $ 130                       
|FHLB                                                   | -                            | -                    |                              | 17,650        | 200                         
|U.S. government agency MBS:                            |                              |                      |                              |               |                             
|GNMA (1)                                               | 27,769                       | 32                   |                              | 4,762         | 3                           
|U.S. government sponsored  enterprise MBS:             |                              |                      |                              |               |                             
|Fannie Mae                                             | -                            | -                    |                              | 2,988         | 54                          
|Freddie Mac                                            | 14,821                       | 78                   |                              | -             | -                           
|Private issue CMO:                                     |                              |                      |                              |               |                             
|Washington Mutual, Inc.                                | -                            | -                    |                              | 1,222         | 8                           
|Total                                                  | $ 42,590                     | $ 110                |                              | $ 37,491      | $ 395                       

|                                                       |                              |                      |                              |               |                             
|------------------------------------------------------ | ---------------------------- | -------------------- | ---------------------------- | ------------- | ----------------------------
|**As of June 30, 2006**                                | **Unrealized HoldingLosses** |                      | **Unrealized HoldingLosses** |               | **Unrealized HoldingLosses**
|(In Thousands)                                         | **Less Than 12 Months**      |                      | **12 Months or More**        |               | **Total**                   
|**Description  of Securities**                         | **FairValue**                | **UnrealizedLosses** |                              | **FairValue** | **UnrealizedLosses**        
|U.S. government sponsored  enterprise debt securities: |                              |                      |                              |               |                             
|Fannie Mae                                             | $           -                | $      -             |                              | $     6,866   | $    132                    
|Freddie Mac                                            | -                            | -                    |                              | 10,606        | 393                         
|FHLB                                                   | -                            | -                    |                              | 47,816        | 1,061                       
|FFCB (2)                                               | -                            | -                    |                              | 5,887         | 113                         
|U.S. government agency MBS:                            |                              |                      |                              |               |                             
|GNMA (1)                                               | 22,103                       | 358                  |                              | 15,262        | 420                         
|U.S. government sponsored  enterprise MBS:             |                              |                      |                              |               |                             
|Fannie Mae                                             | 18,647                       | 66                   |                              | 15,375        | 410                         
|Freddie Mac                                            | 1,369                        | 2                    |                              | -             | -                           
|Private issue CMO:                                     |                              |                      |                              |               |                             
|Washington Mutual, Inc.                                | -                            | -                    |                              | 5,412         | 145                         
|Total                                                  | $ 42,119                     | $ 426                |                              | $ 107,224     | $ 2,674                     

(1)   Government National Mortgage Association ("GNMA")

 (2)   Federal Farm Credit Banks ("FFCB")As of June 30, 2007, the unrealized holding losses relate to a total of 14 investment securities, which consist of two adjustable rate MBS, one adjustable rate CMO and 11 fixed rate government sponsored enterprise debt obligations, which have been in an unrealized loss position (ranging from a de minimus percentage to 2.4% of cost) for more than

88

---

<PAGE>

**Notes to Consolidated Financial Statements**

---



12 months.  Such unrealized holding losses are primarily the result of an increase in market interest rates during fiscal 2007 and fiscal 2006.  Based on the nature of the investments and other considerations discussed above, management concluded that such unrealized losses were not other than temporary as of June 30, 2007.Contractual maturities of investment securities as of June 30, 2007 and 2006 were as follows:

|                                  | **June 30, 2007** |  | **June 30, 2006**     
|--------------------------------- | ----------------- |  | ----------------------
|(In Thousands)                    | **AmortizedCost** |  | **EstimatedFairValue**
|**Held to maturity**              |                   |  |                       
|Due in one year or less           | $   19,000        |  | $ 18,836              
|Due after one through five years  | 1                 |  | 1                     
|Due after five years              | -                 |  | -                     
|                                  | 19,001            |  | 18,837                
|**Available for sale**            |                   |  |                       
|Due in one year or less           | 8,095             |  | 7,965                 
|Due after one through five years  | 1,850             |  | 1,813                 
|Due after five through ten years  | -                 |  | -                     
|Due after ten years               | 120,947           |  | 121,151               
|No stated maturity (common stock) | 125               |  | 913                   
|                                  | 131,017           |  | 131,842               
|**Total investment securities**   | $ 150,018         |  | $ 150,679             

**3.   Loans Held for Investment:**

Loans held for investment consisted of the following:

|                                     | **June 30,**
|------------------------------------ | ------------
|(In Thousands)                       | **2007**    
|                                     |             
|Mortgage loans:                      |             
|Single-family                        | $    826,249
|Multi-family                         | 330,231     
|Commercial real estate               | 147,545     
|Construction                         | 60,571      
|Commercial business loans            | 10,054      
|Consumer loans                       | 509         
|Other loans                          | 9,307       
|                                     | 1,384,466   
|Less:                                |             
|Undisbursed loan funds               | (25,484     
|Deferred loan costs                  | 5,152       
|Allowance for loan losses            | (14,845     
|Total loans held for investment, net | $ 1,349,289 

Fixed-rate loans comprised 4% and 2% of loans held for investment at June 30, 2007 and 2006, respectively.  As of June 30, 2007, the Bank had $87.4 million in mortgage loans that are subject to negative amortization, consisting of $47.8
million in multi-family loans, $27.0 million in commercial real estate loans and $12.6 million in single-family

89

---

<PAGE>

**Notes to Consolidated Financial Statements**

---

loans.   This compares to negative amortization mortgage loans of $95.4 million at June 30, 2006, consisting of $42.5 million in multi-family loans, $32.2 million in commercial real estate loans and $20.7 million in single-family loans.  The amount of negative amortization included in loan balances increased to $341,000 at June 30, 2007 from $86,000 at June 30, 2006.  During fiscal 2007, approximately $255,000, or 0.28%, of loan interest income represented negative amortization, up from $108,000, or 0.14% in fiscal 2006.  Negative amortization involves a greater risk to the Bank, because during a period of high interest rates, the loan principal balance may increase by up to 115% of the original loan amount.  Also, the Bank has invested in interest-only ARM loans, which typically have a fixed interest rate for the first two to five years coupled with an interest only payment, followed by a periodic adjustable interest rate and a fully amortizing loan payment.  As of June 30, 2007 and 2006, the interest-only ARM loans were $619.7 million and $638.5 million, or 45.4% and 50.1% of loans held for investment, respectively.
The following table sets forth information at June 30, 2007 regarding the dollar amount of loans held for investment that are contractually repricing during the periods indicated, segregated between adjustable interest rate loans and fixed interest rate loans.  Adjustable interest rate loans having no stated repricing dates and overdrafts are reported as repricing within one year.  The table does not include any estimate of prepayments which may cause the Bank's actual repricing experience to differ materially from that shown below.

|                                        |  | **Adjustable Rate** |                                 |                               
|--------------------------------------- |  | ------------------- | ------------------------------- | ------------------------------
|(In Thousands)                          |  | **WithinOne Year**  | **AfterOne YearThrough3 Years** | **After3 YearsThrough5 Years**
|                                        |  |                     |                                 |                               
|Mortgage loans:                         |  |                     |                                 |                               
|Single-family                           |  | $ 116,349           | $ 268,726                       | $ 427,441                     
|Multi-family                            |  | 95,009              | 95,546                          | 99,345                        
|Commercial real estate                  |  | 30,731              | 57,098                          | 40,241                        
|Construction                            |  | 59,702              | -                               | -                             
|Commercial business loans               |  | 6,234               | 447                             | -                             
|Consumer loans                          |  | 503                 | -                               | -                             
|Other loans                             |  | 7,282               | -                               | -                             
|                                        |  |                     |                                 |                               
|Total loans held for         investment |  | $ 315,810           | $ 421,817                       | $ 567,027                     

The following summarizes the components of the net change in the allowance for loan losses:

|                             | **Year Ended June 30,**
|---------------------------- | -----------------------
|(In Thousands)               | **2007**               
|                             |                        
|Balance, beginning of period | $ 10,307               
|Provision for losses         | 5,078                  
|Recoveries                   | 1                      
|Charge-offs                  | (541                   
|Balance, end of period       | $ 14,845               

90

---

<PAGE>

**Notes to Consolidated Financial Statements**

---

Non-accrual loans were $15.9 million and $2.5 million at June 30, 2007 and 2006, respectively.  The effect of non-accrual and restructured loans on interest income for the years ended June 30, 2007, 2006 and 2005 is presented below:

|                         | **Year Ended June 30,**
|------------------------ | -----------------------
|(In Thousands)           | **2007**               
|Contractual interest due | $ 1,162                
|Interest recognized      | (173                   
|Net interest foregone    | $    989               

The following tables identify the Corporation's total recorded investment in impaired loans by type, net of specific allowances, at June 30, 2007 and 2006:

|                                |                   |  |                           |  |                                   |   |                         
|------------------------------- | ----------------- |  | ------------------------- |  | --------------------------------- | - | ------------------------
|                                | **June 30, 2007**
|(In Thousands)                  |                   |  | **Recorded   Investment** |  | **Allowance  For Loan    Losses** |   | **Net       Investment**
|Mortgage loans:                 |                   |  |                           |  |                                   |   |                         
|Single-family:                  |                   |  |                           |  |                                   |   |                         
|With a related allowance        |                   |  | $   2,651                 |  | $     (621                        | ) | $   2,030               
|Without a related allowance     |                   |  | 11,241                    |  | -                                 |   | 11,241                  
|Total single-family loans       |                   |  | 13,892                    |  | (621                              | ) | 13,271                  
|                                |                   |  |                           |  |                                   |   |                         
|Construction:                   |                   |  |                           |  |                                   |   |                         
|With a related allowance        |                   |  | 4,981                     |  | (2,624                            | ) | 2,357                   
|Total construction loans        |                   |  | 4,981                     |  | (2,624                            | ) | 2,357                   
|                                |                   |  |                           |  |                                   |   |                         
|Commercial business loans:      |                   |  |                           |  |                                   |   |                         
|With a related allowance        |                   |  | 252                       |  | (81                               | ) | 171                     
|Total commercial business loans |                   |  | 252                       |  | (81                               | ) | 171                     
|                                |                   |  |                           |  |                                   |   |                         
|Other loans:                    |                   |  |                           |  |                                   |   |                         
|Without a related allowance     |                   |  | 108                       |  | -                                 |   | 108                     
|Total other loans               |                   |  | 108                       |  | -                                 |   | 108                     
|Total impaired loans            |                   |  | $ 19,233                  |  | $ (3,326                          | ) | $ 15,907                

91

---

<PAGE>

**Notes to Consolidated Financial Statements**

---

|                                |                   |  |                           |  |                                   |   |                         
|------------------------------- | ----------------- |  | ------------------------- |  | --------------------------------- | - | ------------------------
|                                | **June 30, 2006**
|(In Thousands)                  |                   |  | **Recorded   Investment** |  | **Allowance  For Loan    Losses** |   | **Net       Investment**
|Mortgage loans:                 |                   |  |                           |  |                                   |   |                         
|Single-family:                  |                   |  |                           |  |                                   |   |                         
|With a related allowance        |                   |  | $    508                  |  | $ (106                            | ) | $    402                
|Without a related allowance     |                   |  | 812                       |  | -                                 |   | 812                     
|Total single-family loans       |                   |  | 1,320                     |  | (106                              | ) | 1,214                   
|                                |                   |  |                           |  |                                   |   |                         
|Construction:                   |                   |  |                           |  |                                   |   |                         
|With a related allowance        |                   |  | 462                       |  | (76                               | ) | 386                     
|Without a related allowance     |                   |  | 1,313                     |  | -                                 |   | 1,313                   
|Total construction loans        |                   |  | 1,775                     |  | (76                               | ) | 1,699                   
|                                |                   |  |                           |  |                                   |   |                         
|Commercial business loans:      |                   |  |                           |  |                                   |   |                         
|With a related allowance        |                   |  | 60                        |  | (56                               | ) | 4                       
|Total commercial business loans |                   |  | 60                        |  | (56                               | ) | 4                       
|Total impaired loans            |                   |  | $ 3,155                   |  | $ (238                            | ) | $ 2,917                 

At June 30, 2007 and 2006, there were no commitments to lend additional funds to those borrowers whose loans were classified as impaired.
During the years ended June 30, 2007, 2006 and 2005, the Corporation's average investment in impaired loans was $10.2 million, $1.8 million and $1.4 million, respectively.  Interest income of $646,000, $192,000 and $328,000 was recognized, based on cash receipts, on impaired loans during the years ended June 30, 2007, 2006 and 2005, respectively.  The Corporation records interest on non-accrual loans utilizing the cash basis method of accounting during the periods when the loans are on non-accrual status.
In the ordinary course of business, the Bank makes loans to its directors, officers and employees at substantially the same terms prevailing at the time of origination for comparable transactions with unaffiliated borrowers.  The following is a summary of related-party loan activity:

|                             | **Year Ended June 30,**
|---------------------------- | -----------------------
|(In Thousands)               | **2007**               
|                             |                        
|Balance, beginning of period | $  5,497               
|Originations                 | 3,157                  
|Sales/payments               | (5,531                 
|Balance, end of period       | $  3,123               

92

---

<PAGE>

**Notes to Consolidated Financial Statements**

---

**4.   Mortgage Loan Servicing and Loans Originated for Sale:**

The following summarizes the unpaid principal balance of loans serviced for others by the Corporation:

|                                                 | **Year Ended June 30,**
|------------------------------------------------ | -----------------------
|(In Thousands)                                   | **2007**               
|                                                 |                        
|Loans serviced for Freddie Mac                   | $   6,315              
|Loans serviced for Fannie Mae                    | 21,206                 
|Loans serviced for FHLB - San Francisco          | 173,239                
|Loans serviced for other institutional investors | 5,028                  
|Total loans serviced for others                  | $ 205,788              

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures.  Loan servicing income includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees.  As of June 30, 2007 and 2006, the Corporation held borrowers' escrow balances related to loans serviced for others of $493,000 and $559,000, respectively. 
The following table summarizes the estimated aggregate amortization expense for servicing assets as of June 30, 2007:

|**Year Ended June 30,**              |  | **Amount**        (In Thousands)
|------------------------------------ |  | --------------------------------
|                                    
|2008                                 |  | $ 353                           
|2009                                 |  | 265                             
|2010                                 |  | 150                             
|2011                                 |  | 125                             
|2012                                 |  | 98                              
|Thereafter                           |  | -                               
|Total estimated amortization expense |  | $ 991                           

Loans sold consisted of the following:

|                     |                        
|-------------------- | -----------------------
|                     | **Year Ended June 30,**
|(In Thousands)       | **2007**               
|                     |                        
|Loans sold:          |                        
|Servicing - released | $ 1,119,330            
|Servicing - retained | 4,108                  
|Total loans sold     | $ 1,123,438            

93

---

<PAGE>

**Notes to Consolidated Financial Statements**

---

Loans held for sale consisted of the following:

|                          | **June 30,**
|------------------------- | ------------
|(In Thousands)            | **2007**    
|                          |             
|Fixed rate                | $ 1,337     
|Adjustable rate           | -           
|Total loans held for sale | $ 1,337     

**5.   Real Estate Held for Investment and Real Estate Owned:**Real estate held for investment consisted of the following:

|                                           |             
|------------------------------------------ | ------------
|                                           | **June 30,**
|(In Thousands)                             | **2007**    
|                                           |             
|Real estate held for investment            | $  -        
|Less accumulated depreciation              | -           
|Total real estate held for investment, net | $  -        

The Corporation sold land located in Riverside, California on July 28, 2006, resulting in a pretax gain of $2.3 million (approximately $1.3 million net of taxes). 
Real estate owned consisted of the following:

|                                      | **June 30,**
|------------------------------------- | ------------
|(In Thousands)                        | **2007**    
|                                      |             
|Real estate owned                     | $  3,804    
|Less allowance for real estate losses | -           
|Total real estate owned, net          | $  3,804    

Real estate owned was primarily the result of real estate acquired in the settlement of loans during fiscal 2007.   As of June 30, 2007, real estate owned was comprised of 10 properties, primarily single-family residences located in Southern California.  During fiscal 2007, the Bank sold five properties for a net loss of $32,000,
inclusive of expenses for the sold properties.

94

---

<PAGE>

**Notes to Consolidated Financial Statements**

---

**6.   Premises and Equipment:**Premises and equipment consisted of the following:

|                                               | **June 30,**
|---------------------------------------------- | ------------
|(In Thousands)                                 | **2007**    
|                                               |             
|Land                                           | $    3,051  
|Buildings                                      | 8,416       
|Leasehold improvements                         | 1,525       
|Furniture and equipment                        | 7,030       
|Automobiles                                    | 81          
|                                               | 20,103      
|Less accumulated depreciation and amortization | (12,980)    
|Total premises and equipment, net              | $    7,123  

Depreciation and amortization expense for the years ended June 30, 2007, 2006 and 2005 amounted to $972,000, $1.2 million and $1.1 million, respectively.

**7.   Deposits:**

|                                           | **June 30, 2007** |  | **June 30, 2006**
|------------------------------------------ | ----------------- |  | -----------------
|(Dollars in Thousands)                     | **Interest Rate** |  | **Amount**       
|                                           |                   |  |                  
|Checking deposits - non interest-bearing   | -                 |  | $   43,694       
|Checking deposits - interest-bearing (1)   | 0% - 3.92%        |  | 122,588          
|Savings deposits (1)                       | 0% - 5.11%        |  | 153,036          
|Money market deposits (1)                  | 0% - 5.12%        |  | 30,647           
|Time deposits                              |                   |  |                  
|Under $100                                 | 0.40% - 5.84%     |  | 302,738          
|$100 and over (2)                          | 2.47% - 5.70%     |  | 345,869          
|Total deposits                             |                   |  | $ 998,572        
|Weighted average interest rate on deposits |                   |  | 3.63%            

(1)   Certain interest-bearing checking, savings and money market accounts require a minimum balance to earn interest.(2)   Includes a single depositor with balances of $100.0 million.

95<PAGE>
**Notes to Consolidated Financial Statements**

The aggregate annual maturities of time deposits are as follows:

|                         | **June 30,**
|------------------------ | ------------
|(In Thousands)           | **2007**    
|                         |             
|One year or less         | $ 434,463   
|Over one to two years    | 162,722     
|Over two to three years  | 46,985      
|Over three to four years | 1,912       
|Over four to five years  | 2,525       
|Total time deposits      | $ 648,607   

Interest expense on deposits is summarized as follows:

|                                     | **Year Ended June 30,**
|------------------------------------ | -----------------------
|(In Thousands)                       | **2007**               
|                                     |                        
|Checking deposits - interest-bearing | $      961             
|Savings deposits                     | 2,823                  
|Money market deposits                | 510                    
|Time deposits                        | 26,867                 
|Total interest expense on deposits   | $ 31,161               

The Corporation is required to maintain cash and reserve balances with the Federal Reserve Bank.  Such reserves are calculated based on deposit balances and are offset by the cash balances maintained by the Bank.  The cash balances maintained by the Bank at June 30, 2007 and 2006 were sufficient to cover the reserve requirements.**8.   Borrowings:**Advances from the FHLB - San Francisco, which mature on various dates through 2021, are collateralized by pledges of certain real estate loans with an aggregate principal balance at June 30, 2007 and 2006 of $875.2 million and $737.3 million, respectively.  In addition, the Bank pledged investment securities totaling $24.9 million at June 30, 2007 to collateralize its FHLB - San Francisco advances under the Securities-Backed Credit ("SBC") program as compared to $54.6 million at June 30, 2006.  At June 30, 2007, the Bank's FHLB - San Francisco borrowing capacity, which is limited to 50% of total assets reported on the Bank's quarterly thrift financial report, is approximately $885.2 million as compared to 40%, its previous limit, of total assets or $624.7 million at June 30, 2006.  In addition, the Bank has a borrowing arrangement in the form of a federal funds facility with its correspondent bank for $60.0 million which matures on November 30, 2007.  As of June 30, 2007 and 2006, the Bank has no borrowings outstanding under this facility.

96<PAGE>
**Notes to Consolidated Financial Statements**

Borrowings consisted of the following:

|                                  | **June 30,**
|--------------------------------- | ------------
|(In Thousands)                    | **2007**    
|                                  |             
|FHLB - San Francisco advances     | $ 478,774   
|SBC FHLB - San Francisco advances | 24,000      
|Total borrowings                  | $ 502,774   

As a member of the FHLB - San Francisco, the Bank is required to maintain a minimum investment in FHLB - San Francisco stock.  The Bank held the required investment of $32.2 million and an excess investment of $11.7 million at June 30, 2007, as compared to the required investment of $35.6 million and an excess investment of $2.0 million at June 30, 2006.  Any excess may be redeemed at par by the Bank or returned by FHLB - San Francisco.The following tables set forth certain information regarding borrowings by the Bank at the dates and for the periods indicated:

|                                                                                   | **At or For the Year Ended June 30,**
|---------------------------------------------------------------------------------- | -------------------------------------
|(Dollars In Thousands)                                                             | **2007**                             
|                                                                                   |                                      
|Balance outstanding at the end of period:                                          |                                      
|FHLB - San Francisco advances                                                      | $ 502,774                            
|Correspondent bank advances                                                        | -                                    
|                                                                                   |                                      
|Weighted average rate at the end of period:                                        |                                      
|FHLB - San Francisco advances                                                      | 4.55%                                
|Correspondent bank advances                                                        | -                                    
|                                                                                   |                                      
|Maximum amount of borrowings outstanding at any month end:                         |                                      
|FHLB - San Francisco advances                                                      | $ 689,443                            
|Correspondent bank advances                                                        | $     1,000                          
|                                                                                   |                                      
|Average short-term borrowings during the period (1)  with respect to:              |                                      
|FHLB - San Francisco advances                                                      | $ 281,267                            
|Correspondent bank advances                                                        | $        168                         
|                                                                                   |                                      
|Weighted average short-term borrowing rate during the period (1)  with respect to: |                                      
|FHLB - San Francisco advances                                                      | 4.89%                                
|Correspondent bank advances                                                        | 5.34%                                

(1) Borrowings with a remaining term of 12 months or less.

97<PAGE>
**Notes to Consolidated Financial Statements**

The aggregate annual contractual maturities of borrowings are as follows:

|                               | **June 30,**
|------------------------------ | ------------
|(In Thousands)                 | **2007**    
|                               |             
|Within one year                | $ 246,000   
|Over one to two years          | 30,000      
|Over two to three years        | 72,000      
|Over three to four years       | 88,000      
|Over four to five years        | 65,000      
|Over five years                | 1,774       
|Total borrowings               | $ 502,774   
|Weighted average interest rate | 4.55%       

**9.   Income Taxes:**

The provision (benefit) for income taxes consisted of the following:

|                           | **Year Ended June 30,**
|-------------------------- | -----------------------
|(In Thousands)             | **2007**               
|                           |                        
|Current:                   |                        
|Federal                    | $ 6,568                
|State                      | 2,392                  
|                           | 8,960                  
|Deferred:                  |                        
|Federal                    | 233                    
|State                      | (69                    
|                           | 164                    
|Provision for income taxes | $ 9,124                

The Corporation's tax benefit from non-qualified equity compensation in fiscal 2007, fiscal 2006 and fiscal 2005 was approximately $81,000, $2.6 million and $322,000, respectively. The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pre-tax income from continuing operations as a result of the following differences:

|                                       | **Year Ended June 30,**
|-------------------------------------- | -----------------------
|(In Thousands)                         | **2007**               
|                                       |                        
|Federal statutory income tax rate      | 35.0                   
|State taxes, net of federal tax effect | 7.5                    
|Other                                  | 2.2                    
|Effective income tax rate              | 44.7                   

98<PAGE>
**Notes to Consolidated Financial Statements**

Deferred tax (assets) liabilities by jurisdiction were as follows:

|                              | **June 30,**
|----------------------------- | ------------
|(In Thousands)                | **2007**    
|                              |             
|Deferred taxes - federal      | $   105     
|Deferred taxes - state        | (133)       
|Total net deferred tax assets | $   (28)    

Deferred tax (assets) liabilities were comprised of the following:

|                                         | **June 30,**
|---------------------------------------- | ------------
|(In Thousands)                           | **2007**    
|                                         |             
|Depreciation                             | $     156   
|FHLB - San Francisco stock dividends     | 5,067       
|Unrealized gain on investment securities | 343         
|Unrealized gain on interest-only strips  | 159         
|Deferred loan costs                      | 3,038       
|Total deferred tax liabilities           | 8,763       
|                                         |             
|State taxes                              | (757        
|Loss reserves                            | (6,387      
|Deferred compensation                    | (1,486      
|Accrued vacation                         | (142        
|Unrealized loss on investment securities | -           
|Other                                    | (19         
|Total deferred tax assets                | (8,791      
|Net deferred tax assets                  | $      (28  

The net deferred tax (assets) liabilities are included in Other Assets or Other Liabilities in the accompanying Consolidated Statements of Financial Condition.Retained earnings at June 30, 2007 included approximately $9.0 million for which federal income tax of $3.1 million had not been provided.  If the amounts that qualify as deductions for federal income tax purposes are later used for purposes other than for bad debt losses, including distribution in liquidation, they will be subject to federal income tax at the then-current corporate tax rate.  If those amounts are not so used, they will not be subject to tax even in the event the Bank were to convert its charter from a thrift to a bank.**10.   Capital:**Federal regulations require that institutions with investments in subsidiaries conducting real estate investment and joint venture activities maintain sufficient capital over the minimum regulatory requirements.  The Bank maintains capital in excess of the minimum requirements.The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions

99<PAGE>
**Notes to Consolidated Financial Statements**

by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 Capital (as defined in the regulations) to Risk-Weighted Assets (as defined), and of Core Capital (as defined) to Adjusted Tangible Assets (as defined).  Management believes, as of June 30, 2007 and 2006, that the Bank meets all capital adequacy requirements to which it is subject.As of June 30, 2007 and 2006, the most recent notification from the Office of Thrift Supervision categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action.  To be categorized as "well capitalized" the Bank must maintain minimum Total Risk-Based Capital (to risk-weighted assets), Core Capital (to adjusted tangible assets) and Tier 1 Risk-Based Capital (to risk-weighted assets) as set forth in the table.  There are no conditions or events since that notification the management believes have changed the Bank's category.The Bank may not declare or pay cash dividends on or repurchase any of its shares of common stock, if the effect would cause stockholders equity to be reduced below applicable regulatory capital maintenance requirements or if such declaration and payment would otherwise violate regulatory requirements.  In fiscal 2007, 2006 and 2005, the Bank declared and paid cash dividends of $20.0 million, $6.0 million and $8.3 million, respectively, to its parent, the Corporation. The Bank's actual capital amounts and ratios as of June 30, 2007 and 2006 are as follows:

|                          | Actual     |  | For Capital AdequacyPurposes |  | To Be Well CapitalizedUnder Prompt CorrectiveAction Provisions | 
|------------------------- | ---------- |  | ---------------------------- |  | -------------------------------------------------------------- | 
|(Dollars in Thousands)    | **Amount** |  | **Ratio**                    |  | **Amount**                                                     | 
|                          |            |  |                              |  |                                                                | 
|**As of June 30, 2007**   |            |  |                              |  |                                                                | 
|Total Risk-Based Capital  | $ 134,604  |  | 12.51%                       |  | $ 86,103                                                       | 
|Core Capital              | 125,698    |  | 7.63%                        |  | 65,884                                                         | 
|Tier 1 Risk-Based Capital | 122,721    |  | 11.40%                       |  | N/A                                                            | 
|Tangible Capital          | 125,698    |  | 7.63%                        |  | 24,707                                                         | 
|                          |            |  |                              |  |                                                                | 
|**As of June 30, 2006**   |            |  |                              |  |                                                                | 
|Total Risk-Based Capital  | $ 138,807  |  | 13.37%                       |  | $ 83,037                                                       | 
|Core Capital              | 131,308    |  | 8.08%                        |  | 64,974                                                         | 
|Tier 1 Risk-Based Capital | 128,403    |  | 12.37%                       |  | N/A                                                            | 
|Tangible Capital          | 131,308    |  | 8.08%                        |  | 24,365                                                         | 

**11.   Benefit Plans:**The Corporation has a 401(k) defined-contribution plan covering all employees meeting specific age and service requirements.  Under the plan, employees may contribute to the plan from their pretax compensation up to the limits set by the Internal Revenue Service.  The Corporation makes matching contributions up to 3% of participants'
pretax

100<PAGE>
**Notes to Consolidated Financial Statements**

compensation.  Participants vest immediately in their own contributions with 100% vesting in the
Corporation's contributions occurring after six years of credited service.  The Corporation's expense for the plan
was approximately $426,000, $411,000 and $379,000 for the years ended June 30, 2007, 2006 and 2005,
respectively.The Corporation has a multi-year employment agreement with one executive officer, which requires payments of certain benefits upon retirement.  The obligation was fully funded at June 30, 2007 and actuarially determined retirement costs are being accrued and expensed annually.**ESOP (Employee Stock Ownership Plan)**An ESOP was established on June 27, 1996 for all employees who are age 21 or older and have completed one year of service with the Corporation during which they have served a minimum of 1,000 hours.  The ESOP Trust borrowed $4.1 million from the Corporation to purchase 922,538 shares of the common stock issued in the conversion.  The loan is principally repaid from the Corporation's contributions to the ESOP over a period of 15 years.  In addition to the scheduled principal loan payments, the ESOP Trust has paid additional principal amounts, which came from cash dividends received on the unallocated ESOP shares.  The additional principal payment (loan prepayment) in fiscal 2007 and 2006 was $199,000 and $202,000, respectively.  At June 30, 2007 and 2006, the outstanding balance on the loan was $481,000 and $1.1 million, respectively.  Shares purchased with the loan proceeds are held in an unearned ESOP account and released on a pro rata basis based on the distribution schedule.  Contributions to the ESOP and shares released from the unearned ESOP account are allocated among participants on the basis of compensation, as described in the plan, in the year of allocation.  Benefits generally become 100% vested after six years of credited service.  Vesting accelerates upon retirement, death or disability of the participant or in the event of a change in control of the Corporation.  Forfeitures are reallocated among remaining participating employees in the same proportion as contributions.  Benefits are payable upon death, retirement, early retirement, disability or separation from service.  Since the annual contributions are discretionary, the benefits payable under the ESOP cannot be estimated.  The expense related to the ESOP was $1.7 million, $1.7 million and $1.7 million for the years ended June 30, 2007, 2006 and 2005, respectively.  At June 30, 2007 and 2006, the unearned ESOP account of $175,000 and $644,000, respectively, was reported as a reduction to stockholders' equity.The table below reflects ESOP activity for the year indicated (in number of shares):

|                                        | **June 30,**
|--------------------------------------- | ------------
|                                        | **2007**    
|Unallocated shares at beginning of year | 289,118     
|Allocated                               | (60,867     
|Unallocated shares at end of year       | 228,251     

The fair value of unallocated ESOP shares was $5.7 million, $8.7 million and $9.8 million at June 30, 2007, 2006 and 2005, respectively.**12.   Incentive Plans:**As of June 30, 2007, the Corporation had four share-based compensation plans, which are described below.  These plans include the 2006 Equity Incentive Plan, 2003 Stock Option Plan, 1996 Stock Option Plan and 1997
Management Recognition Plan.  The compensation cost that has been charged against income for these plans was
$511,000, $324,000 and $455,000 for fiscal years ended June 30, 2007, 2006 and 2005, respectively.  The income
tax benefit recognized in the Consolidated Statements of Operations for share-based compensation plans was
$81,000, $2.6 million and $322,000 for fiscal years ended June 30, 2007, 2006 and 2005, respectively.

101<PAGE>
**Notes to Consolidated Financial Statements**

**Equity Incentive Plan.**  The Corporation established and the shareholders approved the 2006 Equity Incentive Plan ("2006 Plan") for directors, advisory directors, directors emeriti, officers and employees of the Corporation and its subsidiary.  The 2006 Plan authorizes 365,000 stock options and 185,000 shares of restricted stock.  The 2006 Plan also provides that no person may be granted more than 73,000 stock options or 27,750 shares of restricted stock in any one year. **a) Equity Incentive Plan - Stock Options.**  Under the 2006 Plan, options may not be granted at a price less than the fair market value at the date of the grant.  Options typically vest over a five-year period on a pro-rata basis as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation.  The options are exercisable after vesting for up to the remaining term of the original grant.  The maximum term of the options granted is 10 years.  The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option valuation model with the assumptions noted in the following table.  The expected volatility is based on implied volatility from historical common stock closing prices for the last 84 months.  The expected dividend yield is based on the most recent quarterly dividend on an annualized basis.  The expected term is based on the historical experience of all fully vested stock option grants and is reviewed annually.  The risk-free interest rate is based on the U.S. Treasury note rate with a term similar to the underlying stock option on the particular grant date.

|**Fiscal 2007**            
|---------------------------
|Expected volatility range  
|Weighted-average volatility
|Expected dividend yield    
|Expected term (in years)   
|Risk-free interest rate    
|                           

A total of 187,300 options were granted in the third quarter of fiscal 2007.  The weighted-average grant-date fair value of options granted during the quarter ended March 31, 2007 was $6.49 per share.  There was no other activity.   As of June 30, 2007, there were 177,700 options available for future grants under the 2006 Plan.The following is a summary of stock option activity since the inception of the 2006 Plan and changes during the fiscal year ended June 30, 2007 is presented below:

|Options                      | Shares  |  | **Weighted-AverageExercisePrice** |  | **Weighted-AverageRemainingContractualTerm (Years)** |  | **AggregateIntrinsicValue($000)** | 
|---------------------------- | ------- |  | --------------------------------- |  | ---------------------------------------------------- |  | --------------------------------- | 
|Outstanding at July 1, 2006  | -       |  | -                                 |  |                                                      |  |                                   | 
|Granted                      | 187,300 |  | $ 28.31                           |  |                                                      |  |                                   | 
|Exercised                    | -       |  | -                                 |  |                                                      |  |                                   | 
|Forfeited                    | -       |  | -                                 |  |                                                      |  |                                   | 
|Outstanding at June 30, 2007 | 187,300 |  | $ 28.31                           |  | 9.61                                                 |  | NIL                               | 
|Exercisable at June 30, 2007 | -       |  | -                                 |  | -                                                    |  | -                                 | 

As of June 30, 2007, there was $895,000 of unrecognized compensation expense related to unvested share-based compensation arrangements granted under the 2006 Plan.  The expense is expected to be recognized over a weighted-average period of 4.6 years.  The forfeiture rate during fiscal 2007 was 20 percent and was calculated by using the historical forfeiture experience of all fully vested stock option grants and is reviewed annually.

102<PAGE>
**Notes to Consolidated Financial Statements**

**b) Equity Incentive Plan - Restricted Stock.**  The Corporation will use 185,000 shares of its treasury stock to fund the 2006 Plan.  Awarded shares typically vest over a five-year period as long as the director, advisory director, director emeriti, officer or employee remains in service to the Corporation.  Once vested, a recipient of restricted stock will have all the rights of a shareholder, including the power to vote and the right to receive dividends.  The Corporation recognizes compensation expense for the restricted stock awards based on the fair value of the shares at the award date.  A total of 62,750 shares of restricted stock were awarded in the third quarter of fiscal 2007.  At June 30, 2007, the value of the unearned restricted stock was $1.6 million, and reported as a reduction to stockholders' equity (included in the Consolidated Statements of Financial Condition under additional paid-in capital, as per SFAS No.
123(R)).  As of June 30, 2007, there were 122,250 shares of restricted stock available for future awards.A summary of the status of the Corporation's unvested restricted stock since the inception of the plan and changes during the fiscal year ended June 30, 2007 is presented below:

|**Unvested Restricted Stock** | Shares |  | **Weighted-Average Grant Date     Fair Value** | 
|----------------------------- | ------ |  | ---------------------------------------------- | 
|Unvested at July 1, 2006      | -      |  | -                                              | 
|Granted                       | 62,750 |  | $26.49                                         | 
|Vested                        | -      |  | -                                              | 
|Forfeited                     | -      |  | -                                              | 
|Unvested at June 30, 2007     | 62,750 |  | $26.49                                         | 

As of June 30, 2007, the unvested share-based compensation awarded under the 2006 Plan is expected to be recognized over a weighted-average period of 4.6 years.  Similar to options, a forfeiture rate of 20 percent is used for the restricted stock compensation expense calculations.**Stock Option Plans.**The Corporation established the 1996 Stock Option Plan and the 2003 Stock Option Plan (collectively, the "Stock Option Plans") for key employees and eligible directors under which options to acquire up to 1.15 million shares and 352,500 shares of common stock, respectively, may be granted.  Under the Stock Option Plans, options may not be granted at a price less than the fair market value at the date of the grant.  Options vest over a five-year period on a pro-rata basis as long as the employee or director remains an employee or director of the Corporation.  The options are exercisable after vesting for up to the remaining term of the original grant.  The maximum term of the options granted is 10 years.  On April 28, 2005, the Board of Directors accelerated the vesting of 136,950 unvested stock options, which were previously granted to directors, officers and key employees who had three or more continuous years of service with the Corporation or an affiliate of the Corporation.  The Board believed that it was in the best interest of the
shareholders to accelerate the vesting of these options, which were granted prior to January 1, 2004, since it will
have a positive impact on the future earnings of the Corporation.  This action was taken as a result of SFAS No.
123(R) which the Corporation adopted on July 1, 2005.As a result of accelerating the vesting of these options, the Corporation recorded a $320,000 charge to compensation expense during the quarter ended June 30, 2005.  This charge represents a new measurement of compensation cost for these options as of the modification date.  The modification introduced the potential for an
effective renewal of the awards as some of these options may have been forfeited by the holders.  This charge will
require quarterly adjustment in future periods for actual forfeiture experience.  For the fiscal year ended June 30,
2007, a recovery of $116,000 was realized; and since inception, a $278,000 recovery has been realized.  The
Corporation estimates that

103<PAGE>
**Notes to Consolidated Financial Statements**

the compensation expense related to these options that would have been recognized over
their remaining vesting period pursuant to the transition provisions of SFAS No. 123(R) was $1.7 million.  Because
these options are now fully vested, they are not subject to the provisions of SFAS No. 123(R).The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option valuation model with the assumptions noted in the following table.  The expected volatility is based on implied volatility from historical common stock closing prices for the last 30 months.  The expected dividend yield is based on the most recent quarterly dividend on an annualized basis.  The expected term is based on the historical experience of all fully vested stock option grants and is reviewed annually.  The risk-free interest rate is based on the U.S. Treasury
note rate with a term similar to the underlying stock option on the particular grant date.

|                            | **Fiscal 2007** |  | **Fiscal 2006** |  | **Fiscal 2005** | 
|--------------------------- | --------------- |  | --------------- |  | --------------- | 
|Expected volatility range   | 23%             |  | 20% - 21%       |  | 14% - 18%       | 
|Weighted-average volatility | 23%             |  | 20%             |  | 16%             | 
|Expected dividend yield     | 2.0%            |  | 1.9% - 2.0%     |  | 1.3% - 2.0%     | 
|Expected term (in years)    | 7.4             |  | 7.6 - 7.8       |  | 7.8 - 10.0      | 
|Risk-free interest rate     | 4.5% - 5.0%     |  | 4.1% - 4.7%     |  | 4.0% - 4.5%     | 

In fiscal 2007, the total options (under both plans) granted and exercised were 64,000 shares and 51,393 shares, respectively.  No shares were forfeited in fiscal 2007.  In fiscal 2006, the total options (under both plans) granted, exercised and forfeited were 19,000 shares, 403,632 shares and 37,000 shares, respectively.  As of June 30, 2007 and 2006, the number of options available for future grants under the Stock Option Plans were 42,000 and 107,200 shares, respectively.

104<PAGE>
**Notes to Consolidated Financial Statements**

The following is a summary of stock option activity under the 1996 and 2003 Plans:

|Options                      | Shares    |   | **Weighted-AverageExercisePrice** |  | **Weighted-AverageRemainingContractualTerm (Years)** |  | **AggregateIntrinsicValue($000)** | 
|---------------------------- | --------- | - | --------------------------------- |  | ---------------------------------------------------- |  | --------------------------------- | 
|Outstanding at July 1, 2004  | 1,024,850 |   | $ 13.49                           |  |                                                      |  |                                   | 
|Granted                      | 68,000    |   | 26.91                             |  |                                                      |  |                                   | 
|Exercised                    | (74,775   | ) | 7.96                              |  |                                                      |  |                                   | 
|Forfeited                    | (43,450   | ) | 18.81                             |  |                                                      |  |                                   | 
|Outstanding at June 30, 2005 | 974,625   |   | $ 14.62                           |  | 5.52                                                 |  | $13,148                           | 
|Exercisable at June 30, 2005 | 686,125   |   | $ 10.41                           |  | 4.13                                                 |  | $12,144                           | 
|                             |           |   |                                   |  |                                                      |  |                                   | 
|Outstanding at July 1, 2005  | 974,625   |   | $ 14.62                           |  |                                                      |  |                                   | 
|Granted                      | 19,000    |   | 30.03                             |  |                                                      |  |                                   | 
|Exercised                    | (403,632  | ) | 7.27                              |  |                                                      |  |                                   | 
|Forfeited                    | (37,000   | ) | 25.83                             |  |                                                      |  |                                   | 
|Outstanding at June 30, 2006 | 552,993   |   | $ 19.77                           |  | 6.92                                                 |  | $5,657                            | 
|Exercisable at June 30, 2006 | 344,793   |   | $ 16.66                           |  | 6.30                                                 |  | $4,600                            | 
|                             |           |   |                                   |  |                                                      |  |                                   | 
|Outstanding at July 1, 2006  | 552,993   |   | $ 19.77                           |  |                                                      |  |                                   | 
|Granted                      | 64,000    |   | 30.02                             |  |                                                      |  |                                   | 
|Exercised                    | (51,393   | ) | 19.80                             |  |                                                      |  |                                   | 
|Forfeited                    | -         |   | -                                 |  |                                                      |  |                                   | 
|Outstanding at June 30, 2007 | 565,600   |   | $ 20.93                           |  | 6.28                                                 |  | $2,822                            | 
|Exercisable at June 30, 2007 | 357,500   |   | $ 17.64                           |  | 5.48                                                 |  | $2,689                            | 

The weighted-average grant-date fair value of options granted during the fiscal years ended June 30, 2007, 2006 and 2005 was $8.43, $7.77 and $7.22 per share, respectively.  The total intrinsic value of options exercised during the years ended June 30, 2007, 2006 and 2005 was $411,000, $8.3 million and $1.5 million, respectively. As of June 30, 2007, there was $1.4 million of unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the 1996 and 2003 Stock Option Plans.  This expense is expected to be recognized over a weighted-average period of 2.6 years.  The forfeiture rate during fiscal 2007 and 2006 were both 20%, which were calculated based on the historical experience of all fully vested stock option grants and is reviewed annually.**Management Recognition Plan ("MRP").**The Corporation established the MRP to provide key employees and eligible directors with a proprietary interest in the growth, development and financial success of the Corporation through the award of restricted stock.  The Corporation acquired 461,250 shares of its common stock in the open market to fund the MRP in 1997.  All of the MRP shares have been awarded.  Awarded shares vest over a five-year period as long as the employee or director remains an employee or director of the Corporation.  The Corporation recognizes compensation expense for the MRP based on the fair value of the shares at the award date.  MRP compensation expense was $58,000, $92,000 and $135,000 for the years ended June 30, 2007, 2006 and 2005, respectively.105<PAGE>
**Notes to Consolidated Financial Statements**



 A summary of the activity of the Corporation's unvested MRP stock is presented below:




**Unvested Stock**
Shares

**Weighted-Average Grant Date     Fair Value**Unvested at July 1, 2004
36,526

$ 10.74Granted
-

-Vested
(13,468
)
10.00Forfeited
-

-Unvested at June 30, 2005
23,058

$ 11.17Granted
-

-Vested
(13,470
)
10.00Forfeited
-

-Unvested at June 30, 2006
9,588

$ 12.81Granted
-

-Vested
(5,820
)
12.26Forfeited
-

-Unvested at June 30, 2007
3,768

$13.67As of June 30, 2007 and 2006, the unrecognized compensation expense related to non-vested share-based compensation arrangements granted under the MRP (included in the Consolidated Statements of Financial Condition under Additional paid-in capital, pursuant to SFAS No. 123(R)) was $4,000 and $62,000, respectively.    The unrecognized compensation expense at June 30, 2007 is expected to be recognized in July 2007 when the remaining MRP will be distributed (3,768 shares), which will complete the plan.  The forfeiture rate during fiscal 2007 was 0%, which was based on the full retention of the remaining participants.  The fair value of shares vested during the years ended June 30, 2007, 2006 and 2005, was $174,000, $366,000 and $362,000, respectively.




 
**13.   Earnings Per Share:**
Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then share in the earnings of the Corporation.  No shares have been excluded from the diluted EPS computations.


**For the Year Ended June 30, 2007**(Dollars in Thousands, Except Share Amount)


**Income(Numerator)**



**Shares(Denominator)**



**Per-ShareAmount**Basic EPS


$ 11,286



6,448,127



$ 1.75Effect of dilutive shares:Stock options






114,274Restricted stock






3,893Diluted EPS


$ 11,286



6,566,294



$ 1.72106<PAGE>
**Notes to Consolidated Financial Statements**


**For the Year Ended June 30, 2006**(Dollars in Thousands, Except Share Amount)
**Income(Numerator)**

**Shares(Denominator)**

**Per-ShareAmount**Basic EPS
$ 20,540

6,627,546

$ 3.10Effect of dilutive shares:Stock options


249,048Restricted stock


6,409Diluted EPS
$ 20,540

6,883,003

$ 2.98**For the Year Ended June 30, 2005**(Dollars in Thousands, Except Share Amount)
**Income(Numerator)**

**Shares(Denominator)**

**Per-ShareAmount**Basic EPS
$ 18,699

6,592,652

$ 2.84Effect of dilutive shares:Stock options


489,510Restricted stock


12,842Diluted EPS
$ 18,699

7,095,004

$ 2.64**14.   Commitments and Contingencies:**


The Corporation is involved in various legal matters associated with its normal operations.  In the opinion of management, these matters will be resolved without material effect on the Corporation's financial position, results of operations or cash flows.


The Corporation conducts a portion of its operations in leased facilities under non-cancelable agreements classified as operating leases. The following is a schedule of minimum rental payments under such operating leases, which expire in various years:



**Year Ended June 30,**


**Amount**(In Thousands)2008




$ 1,0672009




9602010




6672011




3792012




194Thereafter




134Total minimum payments required




$ 3,401Lease expense under operating leases was approximately $1.2 million, $1.0 million and $797,000 for the years ended June 30, 2007, 2006 and 2005, respectively.107<PAGE>
**Notes to Consolidated Financial Statements**



**15.   Derivatives and Other Financial Instruments with Off-Balance Sheet Risks:**
  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, and forward loan sale agreements to third parties.  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.  The Corporation's exposure to credit loss, in the event of non-performance by the counterparty 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.**June 30,****Commitments**
**2007**
**2006**(In Thousands)Undisbursed loan funds - Construction loans
$ 25,484
$   84,024Undisbursed lines of credit - Single-family loans
3,326
6,824Undisbursed lines of credit - Commercial business loans
14,532
10,545Undisbursed lines of credit - Consumer loans
1,637
1,633Commitments to extend credit on loans held for investment
9,387
20,858$ 54,366
$ 123,884Commitments to extend credit are agreements to lend money to a customer at some future date as long as all conditions have been met in the agreement.  These commitments generally have expiration dates within 60 days of the commitment date and may require the payment of a fee.  Since some of these commitments are expected to expire, the total commitment amount outstanding does not necessarily represent future cash requirements.  The Corporation evaluates each customer's creditworthiness on a case-by-case basis prior to issuing a commitment.  At June 30, 2007 and 2006, interest rates on commitments to extend credit ranged from 5.88% to 12.00% and 5.88% to 10.00%, respectively.



In an effort to minimize its exposure to interest rate fluctuations on commitments to extend credit where the underlying loan will be sold, the Corporation enters into forward loan sale agreements to sell certain dollar amounts of fixed rate and adjustable rate loans to third parties.  These agreements specify the minimum maturity of the loans, the yield to the purchaser, the servicing spread to the Corporation (if servicing is retained), the maximum principal amount of all loans to be delivered and the maximum principal amount of individual loans to be delivered.  The Corporation typically satisfies these forward loan sale agreements with its current loan production; at June 30, 2007 and 2006 the aggregate amount of loans held for sale and of commitments to extend credit on loans to be held for sale exceeded the Corporation's forward loan sale agreements.  At June 30, 2007 and 2006, interest rates on forward loan sale agreements ranged from 6.00% to 6.50% and 6.00% to 6.50%, respectively. 
In addition to the instruments described above, the Corporation also purchases
over-the-counter put option contracts (with expiration dates that generally
coincide with the terms of the commitments to extend credit), which mitigates
the interest rate risk inherent in commitments to extend credit. In addition to
put option contracts, the Corporation may purchase call option contracts to
adjust its risk positions. The contract amounts of these instruments reflect the
extent of involvement the Corporation has in this particular class of financial
instruments. The Corporation's exposure to loss on these financial instruments
is limited to the premiums paid for the put and call option contracts. Put and
call options are adjusted to market in accordance with SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended. As of June 30,
2007, the notional value of put option contracts were $11.5 million with a fair
value of $112,000 and the notional value of call option contracts were $1.0
million with a fair value of $4,000. As of June 30, 2006, the notional value of
put option contracts were $9.0 million with a fair value of $53,000. There were
no call option contracts at June 30, 2006. The Corporation may also enter into



108<PAGE>
**Notes to Consolidated Financial Statements**

forward commitments to purchase MBS (commonly referred to as a "synthetic call") to lock in profits (losses) from its put option contracts.  As of June 30, 2007, total forward commitments to purchase MBS were $6.5 million with a fair value of $23,000.  The Corporation did not have forward commitments to purchase MBS at June 30, 2006.In accordance with SFAS No. 133 and interpretations of the FASB's Derivative Implementation Group, the fair value of the commitments to extend credit on loans to be held for sale, forward loan sale agreements, forward commitments to purchase MBS, put option and call option contracts are recorded at fair value on the balance sheet, and are included in other assets or other liabilities.  The Corporation does not apply hedge accounting to its
derivative financial instruments; therefore, all changes in fair value are recorded in earnings.  The net impact of
derivative financial instruments on the Consolidated Statements of Operations during the years ended June 30,
2007, 2006 and 2005 was a gain of $212,000, a gain of $71,000 and a loss of $264,000, respectively.



**June 30, 2007**

**June 30, 2006****Derivative Financial Instruments**
**Amount**

**FairValue**

**Amount**

**FairValue**(In Thousands)Commitments to extend credit on loans to be held  for sale (1)
$ 35,130

$   24

$   65,970

$ (192
)Forward loan sale agreements
27,012

(51
)
35,500

(94
)Forward commitments to purchase MBS
(6,500
)
23

-

-Put option contracts
11,500

112

9,000

53Call option contracts
(1,000
)
4

-

-Total
$ 66,142

$ 112

$ 110,470

$ (233
)(1)   Net of an estimated 34.7% of commitments at June 30, 2007 and 31.0% of commitments at June 30, 2006, which may not fund.


**16.   Fair Values of Financial Instruments:**The reported fair values of financial instruments are based on various factors. In some cases, fair values represent quoted market prices for identical or comparable instruments. In other cases, fair values have been estimated based on assumptions concerning the amount and timing of estimated future cash flows, assumed discount rates and other factors reflecting varying degrees of risk. The estimates are subjective in nature and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Accordingly, the reported fair values may not represent actual values of the financial instruments that could have been realized as of year-end or that will be realized in the future. The following methods and assumptions were used to estimate fair value of each class of significant financial instrument:
Cash and cash equivalents: The carrying amount of these financial assets approximates the fair value.
Investment securities: The fair value of investment securities is based on quoted market prices or dealer quotes.
Loans held for investment: For loans that reprice frequently at market rates, the carrying amount approximates the fair value.  For fixed-rate loans, the fair value is determined by either (i) discounting the estimated future cash flows of such loans over their estimated remaining contractual maturities using a current interest rate at which such loans would be made to borrowers, or (ii) quoted market prices. The allowance for loan losses is subtracted as an estimate of the underlying credit risk.


109<PAGE>
**Notes to Consolidated Financial Statements**



Loans held for sale: Fair values for loans are based on quoted market prices.  Forward loan sale agreements have been considered in the determination of the estimated fair value of loans held for sale.Receivable from sale of loans: The carrying value for the receivable from sale of loans approximates fair value because of the short-term nature of the financial instruments.Accrued interest receivable/payable: The carrying value for accrued interest receivable/payable approximates fair value because of the short-term nature of the financial instruments.FHLB - San Francisco stock: The carrying amount reported for FHLB - San Francisco stock approximates fair value.   If redeemed, the Corporation will receive an amount equal to the par value of the stock.Deposits: The fair value of the deposits is estimated using a discounted cash flow calculation. The discount rate on such deposits is based upon rates currently offered for borrowings of similar remaining maturities.Borrowings: The fair value of borrowings has been estimated using a discounted cash flow calculation.  The discount rate on such borrowings is based upon rates currently offered for borrowings of similar remaining maturities.Commitments: Commitments to extend credit on existing obligations are discounted in a manner similar to loans held
for investment.
Derivative Financial Instruments: The fair value of the derivative financial instruments are based upon quoted market prices, current market bids, outstanding forward loan sale commitments and estimates from independent pricing sources.


110<PAGE>
**Notes to Consolidated Financial Statements**



The carrying amount and fair values of the Corporation's financial instruments were as follows:



**June 30, 2007**

**June 30, 2006**(In Thousands)
**CarryingAmount**

**FairValue**

**CarryingAmount**

**FairValue****Financial assets:**Cash and cash equivalents
$   12,824

$     12,824

$   16,358

$     16,358Investment securities
150,843

150,679

177,189

176,072Loans held for investment, net
1,349,289

1,343,574

1,262,997

1,241,662Loans held for sale
1,337

1,337

4,713

4,767Receivable from sale of loans
60,513

60,513

99,930

99,930Accrued interest receivable
7,235

7,235

6,774

6,774FHLB - San Francisco stock
43,832

43,832

37,585

37,585**Financial liabilities:**Deposits
998,572

998,081

917,582

859,282Borrowings
502,774

497,636

546,211

534,263Accrued interest payable
2,307

2,307

2,019

2,019**Derivative Financial Instruments:**Commitments to extend credit on loans to be held  for sale
24

24

(192
)
(192
)Forward loan sale agreements
(51
)
(51
)
(94
)
(94
)Forward commitments to purchase MBS
23

23

-

-Put option contracts
112

112

53

53Call option contracts
4

4

-

-111<PAGE>
**Notes to Consolidated Financial Statements**
**17.   Operating Segments:**


The following tables illustrate the Corporation's operating segments for the years ended June 30, 2007, 2006 and 2005, respectively.


**Year Ended June 30, 2007**(In Thousands)
**ProvidentBank**

**ProvidentBankMortgage**

**ConsolidatedTotal**Net interest income (loss), after provision for loan losses
$ 36,933

$    (235
)
$ 36,698Non-interest income:Loan servicing and other fees
(311
)
2,443

2,132Gain on sale of loans, net
210





9,108





9,318Deposit account fees
2,087

-

2,087Net gain on sale of real estate
2,359

-

2,359Other
1,686

(21
)
1,665Total non-interest income
6,031

11,530

17,561Non-interest expense:Salaries and employee benefits
13,702

8,330

22,032Premises and occupancy
2,152

1,162

3,314Operating and administrative expenses
4,192

4,311

8,503Total non-interest expenses
20,046

13,803

33,849Income (loss) before income taxes
22,918

(2,508
)
20,410Provision for income taxes
10,245

(1,121
)
9,124Net income (loss)
$ 12,673

$ (1,387
)
$ 11,286Total assets, end of period
$ 1,582,604

$ 64,912

$ 1,647,516112<PAGE>
**Notes to Consolidated Financial Statements**


**Year Ended June 30, 2006**(In Thousands)
**ProvidentBank**

**ProvidentBankMortgage**

**ConsolidatedTotal**Net interest income, after provision for loan losses
$ 40,818

$   2,102

$ 42,920Non-interest income:Loan servicing and other fees
(1,504
)
4,076

2,572Gain on sale of loans, net
491

12,990

13,481Deposit account fees
2,093

-

2,093Net gain on sale of real estate
6,355

-

6,355Other
1,707

1

1,708Total non-interest income
9,142

17,067

26,209Non-interest expense:Salaries and employee benefits
12,856

7,624

20,480Premises and occupancy
2,041

995

3,036Operating and administrative expenses
5,337

4,060

9,397Total non-interest expenses
20,234

12,679

32,913Income before income taxes
29,726

6,490

36,216Provision for income taxes
12,866

2,810

15,676Net income
$16,860

$3,680

$ 20,540Total assets, end of period
$ 1,516,353

$ 106,117

$ 1,622,470**Year Ended June 30, 2005**(In Thousands)
**ProvidentBank**

**ProvidentBankMortgage**

**ConsolidatedTotal**Net interest income, after provision for loan losses
$ 37,132

$   3,740

$ 40,872Non-interest income:Loan servicing and other fees
(4,705
)
6,380

1,675Gain on sale of loans, net
579

18,127

18,706Deposit account fees
1,789

-

1,789Net gain on sale of investment securities
384

-

384Other
1,860

4

1,864Total non-interest (loss) income
(93
)
24,511

24,418Non-interest expense:Salaries and employee benefits
13,667

7,966

21,633Premises and occupancy
1,972

763

2,735Operating and administrative expenses
4,540

3,606

8,146Total non-interest expenses
20,179

12,335

32,514Income before income taxes
16,860

15,916

32,776Provision for income taxes
7,219

6,858

14,077Net income
$   9,641

$   9,058

$ 18,699Total assets, end of period
$ 1,460,533

$ 171,589

$ 1,632,122113<PAGE>
**Notes to Consolidated Financial Statements**



The information above was derived from the internal management reporting system used by management to measure performance of the segments. The Corporation's internal transfer pricing arrangements determined by management primarily consist of the following:


1.
Borrowings for PBM are indexed monthly to the higher of the three-month FHLB - San Francisco advance rate on the first Friday of the month plus 50 basis points or the Bank's cost of funds for the prior month.2.
PBM receives servicing released premiums for new loans transferred to the Bank's loans held for investment.   The servicing released premiums in the years ended June 30, 2007, 2006 and 2005 were $2.1 million, $3.3 million and $5.1 million, respectively.3.
PBM receives a premium (gain on sale of loans) or a discount (loss on sale of loans) for the loans transferred to the Bank's loans held for investment.  The (loss) gain on sale of loans in the years ended June 30, 2007, 2006 and 2005 was $(192,000), $(128,000) and $489,000, respectively.4.
PBM receives fees for loans sold on a servicing retained basis from the Bank.  The fees in the years ended June 30, 2007, 2006 and 2005 were $14,000, $145,000 and $517,000, respectively.5.
Loan servicing costs are charged to PBM by the Bank based on the number of loans held for sale multiplied by a fixed fee which is subject to management's review.  The loan servicing costs in the years ended June 30, 2007, 2006 and 2005 were $65,000, $80,000 and $104,000, respectively.6.
The Bank allocates quality assurance costs to PBM for its loan production, subject to management's review.   Quality assurance costs allocated to PBM in the years ended June 30, 2007, 2006 and 2005 were $129,000, $165,000 and $148,000, respectively.7.
The Bank allocates loan vault service costs to PBM for its loan production, subject to management's review.   The loan vault service costs allocated to PBM in the years ended June 30, 2007, 2006 and 2005 were $72,000, $70,000 and $78,000, respectively.8.
Office rents for PBM offices, which are located at the Bank offices, are internally charged based on the square footage used.  Office rents allocated to PBM in the years ended June 30, 2007, 2006 and 2005 were $151,000, $189,000 and $142,000, respectively.9.
A management fee, which is subject to regular review, is charged to PBM for services provided by the Bank.   The management fee in the years ended June 30, 2007, 2006 and 2005 was $1.1 million, $1.1 million and
$771,000, respectively.**18.   Holding Company Condensed Financial Information:**This information should be read in conjunction with the other notes to the consolidated financial statements. The following are the condensed statements of financial condition for Provident Financial Holdings (Holding Company only) as of June 30, 2007 and 2006 and condensed statements of operations and cash flows for each of the three years for the period ended June 30, 2007.

114<PAGE>
**Notes to Consolidated Financial Statements**




**Condensed Statements of Financial Condition**



**June 30,**(In Thousands)
**2007**
**2006****Assets**Cash and cash equivalents
$     1,405
$     3,332Investment in subsidiary
127,064
131,813Other assets
496
1,104$ 128,965
$ 136,249**Liabilities and Stockholders' Equity**Other liabilities
$          38
$          39Stockholders' equity
128,927
136,210$ 128,965
$ 136,249**Condensed Statements of Operations**



**Year Ended June 30,**(In Thousands)


**2007**





**2006**





**2005**Interest and other income


$      112





$      143





$      238General and administrative expenses


630





657





574Loss before equity in net earnings of the subsidiary
(518
)
(514
)
(336
)Equity in net earnings of the subsidiary
11,586

20,838

18,894Income before income taxes
11,068

20,324

18,558Provision for income taxes
(218
)
(216
)
(141
)Net income

$ 11,286





$ 20,540





$ 18,699115<PAGE>
**Notes to Consolidated Financial Statements**




**Condensed Statements of Cash Flows**


**Year Ended June 30,**(In Thousands)
**2007**

**2006**

**2005**Cash flows from operating activities:Net income
$  11,286

$  20,540

$  18,699Adjustments to reconcile net income to net cash     provided by operating activities:Equity in net earnings of the subsidiary
(11,586
)
(20,838
)
(18,894
)Tax benefit from non-qualified equity compensation
(81
)
(2,572
)
322Decrease in other assets
690

4,920

246(Decrease) increase in other liabilities
(1
)
35

(40
)Net cash provided by operating activities
308

2,085

333Cash flow from investing activities:Cash dividend received from the Bank
20,000

6,000

8,250Capital contribution to the Bank
-

-

(3,000
)Net cash provided by investing activities
20,000

6,000

5,250Cash flow from financing activities:Exercise of stock options
1,017

2,933

595Tax benefit from non-qualified equity compensation
81

2,572

-Treasury stock purchases
(18,703
)
(10,478
)
(5,293
)Cash dividends
(4,630
)
(4,054
)
(3,647
)Net cash used for financing activities
(22,235
)
(9,027
)
(8,345
)Net decrease in cash and cash equivalents
(1,927
)
(942
)
(2,762
)Cash and cash equivalents at beginning of year
3,332

4,274

7,036Cash and cash equivalents at end of year
$   1,405

$   3,332

$   4,274116<PAGE>
**Notes to Consolidated Financial Statements**



**19.   Quarterly Results of Operations (Unaudited):**The following tables set forth the quarterly financial data, which was derived from the consolidated financial statements presented in the quarterly reports on Form 10-Q, for the fiscal years ended June 30, 2007 and 2006.


**For Fiscal Year 2007****For theYear EndedJune 30,2007**

**FourthQuarter**

**ThirdQuarter**

**SecondQuarter**

**FirstQuarter**(Dollars in Thousands, Except Per Share Amount)Interest income
$ 100,968

$ 25,148

$ 26,164

$ 25,469

$ 24,187Interest expense
59,192

15,298

15,497

14,966

13,431Net interest income
41,776

9,850

10,667

10,503

10,756Provision (recovery) for loan losses
5,078

(490
)
1,185

3,746

637Net interest income, after provision  (recovery) for loan losses
36,698

10,340

9,482

6,757

10,119Non-interest income
17,561

2,214

3,679

4,274

7,394Non-interest expense
33,849

8,782

8,592

8,241

8,234Income before income taxes
20,410

3,772

4,569

2,790

9,279Provision for income taxes
9,124

1,777

2,031

1,295

4,021Net income
$   11,286

$  1,995

$  2,538

$  1,495

$  5,258Basic earnings per share
$ 1.75

$ 0.32

$ 0.40

$ 0.23

$ 0.79Diluted earnings per share
$ 1.72

$ 0.32

$ 0.39

$ 0.22

$ 0.77117<PAGE>
**Notes to Consolidated Financial Statements**


**For Fiscal Year 2006****For theYear EndedJune 30,2006**

**FourthQuarter**

**ThirdQuarter**

**SecondQuarter**

**FirstQuarter**(Dollars in Thousands, Except Per Share Amount)Interest income
$ 86,627

$ 22,692

$ 21,406

$ 21,228

$ 21,301Interest expense
42,573

11,765

10,215

10,262

10,331Net interest income
44,054

10,927

11,191

10,966

10,970Provision (recovery) for loan losses
1,134

(205
)
1,301

(27
)
65Net interest income, after provision  (recovery) for loan losses
42,920

11,132

9,890

10,993

10,905Non-interest income
26,209

4,625

4,218

11,411

5,955Non-interest expense
32,913

8,949

8,042

7,769

8,153Income before income taxes
36,216

6,808

6,066

14,635

8,707Provision for income taxes
15,676

2,984

2,666

6,252

3,774Net income
$ 20,540

$  3,824

$  3,400

$  8,383

$  4,933Basic earnings per share
$     3.10

$    0.57

$    0.51

$    1.28

$    0.75Diluted earnings per share
$     2.98

$    0.56

$    0.49

$    1.23

$    0.71**20.   Subsequent Events:****Cash dividend**On July 26, 2007, the Corporation announced a cash dividend of $0.18 per share on the Corporation's outstanding shares of common stock for shareholders of record at the close of business on August 20, 2007, which was paid on September 10, 2007.



118<PAGE>
Shareholder InformationANNUAL MEETING


The annual meeting of shareholders will be held at the Riverside Art Museum at 3425
Mission Inn Avenue, Riverside, California on Tuesday, November 27, 2007 at
11:00 a.m. Pacific time.  A formal notice of the meeting, together with a proxy statement and proxy form, will be mailed
to shareholders.

CORPORATE OFFICEProvident Financial Holdings, Inc.
3756 Central Avenue
Riverside, CA  92506
(951)686-6060

INTERNET ADDRESS

www.myprovident.com

SPECIAL COUNSEL

Breyer & Associates PC
8180 Greensboro Drive, Suite 785
McLean, VA  22102
(703)883-1100

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Deloitte & Touche LLP
350 South Grand Avenue
Los Angeles, CA  90071
(213)688-0800

TRANSFER AGENT

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ  07016
(908)497-2300

MARKET INFORMATION

Provident Financial Holdings, Inc. is traded on The NASDAQ Stock Market LLC under the symbol PROV.



<PAGE>
Shareholder Information
FINANCIAL INFORMATION

Requests for copies of the Form 10-K and Forms 10-Q filed with the Securities and
Exchange Commission should be directed in writing to:

Donavon P. Ternes
Chief Financial Officer
Provident Financial Holdings, Inc.
3756 Central Avenue
Riverside, CA  92506

CORPORATE PROFILE

Provident Financial Holdings, Inc. (the "Corporation"), a Delaware corporation, was
organized in January 1996 for the purpose of becoming the holding company for
Provident Savings Bank, F.S.B. (the "Bank") upon the Bank's conversion from a
federal mutual to a federal stock savings bank ("Conversion").  The Conversion was completed on June 27,
1996.  The Corporation does not engage in any significant activity other than holding the stock of the Bank.  The Bank serves the banking needs of select communities in Riverside and San Bernardino Counties and has mortgage lending
operations in Southern and Northern California.


<PAGE>


Board of Directors and Senior Officers
Board of Directors
    Senior OfficersJoseph P. Barr, CPA
    Provident Financial Holdings, Inc.PrincipalSwenson Accountancy Corporation
    Craig G. BlundenChairman, President and CEOBruce W. BennettPresident
    Donavon P. TernesCommunity Care & Rehabilitation
    Chief Financial OfficerCorporate SecretaryCraig G. BlundenChairman, President and CEOProvident Bank
    Provident BankDebbi H. Guthrie
    Craig G. BlundenPrivate Investor
    Chairman, President and CEORobert G. Schrader
    Richard L. GaleRetired Executive Vice President and COO
    Senior Vice PresidentProvident Bank
    Provident Bank MortgageRoy H. Taylor
    Kathryn R. GonzalesPresident
    Senior Vice PresidentHub International of California
    Retail BankingInsurance Services, Inc.Lilian SalterWilliam E. Thomas
    Senior Vice PresidentPrincipal
    Chief Information OfficerWilliam E. Thomas, Inc.,A Professional Law Corporation
    Donavon P. TernesExecutive Vice PresidentChief Financial OfficerDavid S. WeiantSenior Vice PresidentChief Lending Officer<PAGE>

Provident Locations
PROVIDENT BANK
    PROVIDENT BANK MORTGAGERETAIL BANKING CENTERS
    WHOLESALE OFFICESBlythe
    Pleasanton350 E. Hobson Way
    5934 Gibraltar Drive, Suite 102Blythe, CA 92225
    Pleasanton, CA 94588Canyon Crest
    Rancho Cucamonga5225 Canyon Crest Drive, Suite 86
    10370 Commerce Center Drive, Suite 200Riverside, CA 92507
    Rancho Cucamonga, CA 91730Corona
    San Diego487 Magnolia Avenue, Suite 101
    591 Camino De La Reina, Suite 929Corona, CA 92879
    San Diego, CA 92108Corporate Office
    RETAIL OFFICES3756 Central AvenueRiverside, CA 92506
    Diamond Bar21700 E. Copley Drive, Suite 280Downtown Business Center
    Diamond Bar, CA 917654001 Main StreetRiverside, CA 92501
    Glendora1200 E. Route 66, Suite 102Hemet
    Glendora, CA 917401690 E. Florida AvenueHemet, CA 92544
    La Quinta77-935 Calle Tampico, Suite 202La Sierra
    La Quinta, CA 922533312 La Sierra Avenue, Suite 105Riverside, CA 92503
    Riverside6529 Riverside Avenue, Suite 160Moreno Valley I
    Riverside, CA 9250612460 Heacock StreetMoreno Valley, CA 92553
    Temecula40325 Winchester RoadMoreno Valley II(Spring 2008)
    Temecula, CA 9259116110 Perris BoulevardMoreno Valley, CA 92553
    Torrance22805 Hawthorne BoulevardOrangecrest
    Torrance, CA 9050519345 Van Buren Boulevard, Suite 119Riverside, CA 92508
    Vista221 Main Street, Suite 205Rancho Mirage
    Vista, CA 9208471-991 Highway 111Ranch Mirage, CA 92270Redlands125 E. Citrus AvenueRedlands, CA 92373Sun City27010 Sun City BoulevardSun City, CA 92586Temecula40325 Winchester RoadTemecula, CA 92591Customer Information 1-800-442-5201 or www.myprovident.com

<PAGE>



Provident Financial Holdings, Inc.
Corporate Office3756 Central Avenue, Riverside, CA 92506
(951) 686-6060 www.myprovident.com
NASDAQ STOCK MARKET - PROV
<PAGE>EXHIBIT 14

**Code of Ethics for Directors, Officers and Employees**


<PAGE>


**PROVIDENT FINANCIAL HOLDINGS, INC.**



**PROVIDENT SAVINGS BANK**





**CODE OF ETHICS**





**Reviewed and Revised by Board of Directors on June 21, 2007**

<PAGE>

**PROVIDENT'S CODE OF ETHICS**

---

This policy has been adopted by Provident's Board of Directors and is intended to cover all employees, including the Board of Directors, Chief Executive Officer, Chief Financial Officer, Senior Management
and Controller.



**I.     YOUR RESPONSIBILITIES**

As a Provident employee, you are obliged to monitor your personal and professional affairs so as not to discredit Provident.  Your personal conduct should reflect the highest professional standards of behavior.  In this regard, you are expected to:

|* | Obey all applicable laws and regulations.                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                             
|* | Avoid activities that could create conflicts of
interest or even the appearance of conflicts of interest with Provident.                                    
|  |                                                                                                                                                             
|* | Respect the confidentiality of information about those with whom Provident has business relationships.                                                      
|  |                                                                                                                                                             
|* | Provide full, fair, accurate, timely and understandable disclosures in documents submitted to the Securities and
Exchange Commission and all public filings.

Details of the above obligations are presented in the remainder of this Code of Ethics.  Violation of any provision of
this Code may result in disciplinary action up to and including dismissal.  Provident must report all suspected violations
of criminal laws to the appropriate authorities for possible prosecution.

**II.     LAWS AND REGULATIONS WITH WHICH EMPLOYEES MUST BE THOROUGHLY FAMILIAR**

**A.     Criminal Laws**

A number of criminal statutes apply to employees of all financial institutions.  These laws forbid activities such
as:

|* | Soliciting or receiving anything of value for or in connection with any transaction or business of Provident                     
|- | ---------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                  
|* | Stealing, embezzling or misapplying Bank funds or assets                                                                         
|  |                                                                                                                                  
|* | Using illegal threats, physical force or other unauthorized means to collect money                                               
|  |                                                                                                                                  
|* | Issuing unauthorized obligations (such as certificates of deposit, notes or mortgages) or recording false entries in
Bank records
|  |                                                                                                                                  
|* | Using corporate funds or assets to finance campaigns for political office                                                        
|  |                                                                                                                                  
|* | Lending trust funds to an officer, director or employee                                                                          
|  |                                                                                                                                  
|* | Certifying a check drawn on an account with insufficient funds                                                                   

<PAGE>



|* | Making a loan or giving a gift to a bank examiner who has the authority to examine Provident                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|* | Disclosing the contents of examination reports compiled by regulatory agencies (see Section IV.A)                                                                                                                                                                                                                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | B.**Anti-Competitive Activities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | The antitrust laws prohibit any combination, conspiracy or agreement among competitors to restrict or prevent
competition.  An example of conduct that would violate the antitrust laws is a formal or informal agreement
between you and a competitor of Provident to fix prices, allocate markets or refuse to deal with particular
suppliers or customers.                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | In addition,
    employees are prohibited from participating in certain "tying arrangements."
    A tying arrangement is one in which a seller conditions its sale of product
    or service on a buyer's purchase of a separate product or service. For
    example, you may not condition the extension of credit on a customer's
    rental of a safe deposit box. These prohibitions, however, do not apply to
    traditional banking practices such as requiring a compensating balance in
    connection with a loan.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | **C.      
    Illegal Use of Corporate Funds**                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|* | You may not record or participate in the recording of incorrect or fictitious entries in the books or records of
Provident.                                                                                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|* | You may not make any payment for an expressed purpose on Provident's behalf to any individual who intends to
use the money for a different purpose.                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|* | You may not use corporate funds or assets for political contributions in connection with federal elections.  Your
time during regular working hours, corporate equipment and supplies, office space, clerical help and
advertising facilities all are considered corporate assets.                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|* | You may not make payments, whether corporate or personal, of cash or other items of value that are intended to
influence the judgment or actions of political candidates, government officials or businesses in connection with
any activity of Provident.                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | **D.      
    Equal Opportunity Laws**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  | Several equal opportunity laws apply to Provident.  Provident strongly supports the principles of these laws
and expects all employees to comply with them.  Provident is extremely proud of its record as an equal
opportunity employer and lender.                                                                                                                                                                                                                                                                        

**III.     AVOIDING CONFLICTS OF INTEREST**

You should not participate in any activity that could cause a conflict of interest or give the appearance of a conflict of
interest.  A conflict of interest is generally defined as a clash between an employee's personal interests and his or her
duties to his or her employer.  A conflict of interest occurs when you allow any outside interest, activity or influence
to:

|* | Influence your judgment when acting on behalf of Provident.        
|- | -------------------------------------------------------------------
|  |                                                                    
|* | Compete against Provident in any business activity.                
|  |                                                                    
|* | Diminish the efficiency with which you perform your regular duties.

<PAGE>

|*                                                                                                                                                                                                                                                                                                                                                                                          | Harm or impair Provident's financial or professional reputation.                                                                                                                                                                                                                                                                                                                                                   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|You should promptly report to your Supervisor all potential conflicts of interest, including those in which you have been
inadvertently placed because of business or personal relationships with customers, suppliers, business associates or
competitors of Provident.  Areas in which conflicts of interest frequently arise and examples of prohibited activities are
described below.
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           | **A.        Investment Decisions**                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           | You may not invest (directly or indirectly) in a publicly held security whenever:                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | Such transaction would place Provident under an obligation (financial or other) to any investment banking or
brokerage firm or to the seller or issuer of the security;                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | You know Provident is in the process of buying or selling the security for its own account or for the account of
others;                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | You possess information not available to the general public (inside information) that is likely to affect the price of
the security;                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | You are considering granting or renewing a loan or acting as advisor to the issuer of the security;                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | You are recommending to Provident or a customer the sale or purchase of the security.                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           | The New York Stock Exchange, the American Stock Exchange and other national stock exchanges have rules
that prohibit member firms from entering into margin transactions with employees of financial institutions
without prior written consent from the financial institution.  Whenever an employee desires to enter into such
an arrangement, he or she must receive written consent from his or her Supervisor.
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           | **B.       
    Self-Dealing**                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           | To further avoid conflicts or interest, you should not:                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | Directly or indirectly buy assets from or sell assets to Provident or any account for which Provident acts as
fiduciary unless you have prior consent from your Supervisor and any required court of regulatory approval.                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | Represent Provident in any transaction requiring our judgment or discretion with a person or organization in which
you have a financial or material interest.  For example, lending money to a relative or close personal friend
might impair or appear to impair your professional judgment or the performance of your duties.                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           | **C.        Monitoring Outside Activities**                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                           | You are expected to avoid any outside interest or activity that will interfere with your duties.  Generally, your
outside interests:                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | Should not significantly encroach on time or attention you devote to your duties                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | Should not adversely affect the quality of your work                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                    
|*                                                                                                                                                                                                                                                                                                                                                                                          | Should not compete with the activities of Provident                                                                                                                                                                                                                                                                                                                                                                

<PAGE>

|  |                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Should not involve any significant use of corporate equipment, facilities or supplies                                                                              
|  |                                                                                                                                                                    
|* | Should not imply Provident's sponsorship or support (for example, through the use of corporate stationery for
personal purposes)                                   
|  |                                                                                                                                                                    
|* | Should not adversely affect the reputation of Provident                                                                                                            
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|* | As an employee of an organization that is primarily engaged in the issue, flotation, underwriting, public sale or
distribution of stocks, bonds or other securities
|  |                                                                                                                                                                    
|* | As a director, officer or employee of any commercial bank, banking association, trust company or savings bank                                                      
|  |                                                                                                                                                                    
|* | As a director or officer of a registered public utility holding company or subsidiary thereof                                                                      
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|* | Purchase commercial real estate from or sell it to a present or known potential customer of Provident                                                              
|  |                                                                                                                                                                    
|* | Purchase any real estate whose mortgage Provident is foreclosing or is planning to foreclose                                                                       
|  |                                                                                                                                                                    
|* | Bid on or purchase any real estate that Provident is considering or is likely to consider purchasing                                                               
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|  |                                                                                                                                                                    
|* | Avoid any representations that you are performing (or have access to) the same professional services that are
performed by a bank                                  

<PAGE>

|* | Do not permit your appointment to interfere with the time and attention you devote to your duties.                                                                                                                                                                                                                                                                                                                                                                                         
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  | **D.        Dealing with Customers and Suppliers**                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  | In your dealings with customers and suppliers, situations sometimes occur that may create a conflict or the
appearance of a conflict of interest.                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Gifts of reasonable value (not more than $200) related to commonly recognized events or occasions such as a
promotion, new job, wedding, retirement or Christmas, so long as the gift is unsolicited and the customer is
not trying to exert any influence over you in connection with a transaction.                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Advertising or promotional material of nominal value such as pens, pencils, note pads, key chains, calendars and
similar items.                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Acceptance of gifts, gratuities, amenities or favors based on obvious family or personal relationships when the
circumstances make it clear that it is those relationships rather than the business of Provident that are the
motivating factors.                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Customer- or supplier-paid meals, refreshments, travel arrangements or accommodations, or entertainment, all of
reasonable value, in the course of a meeting or other occasion, the purpose of which is to hold bona fide
business discussion and provided that the expenses are of a type that would be paid for by Provident if not paid
for by the other party.  Customer- or supplier-paid trips must be approved in advance by your Supervisor and
reported to the Compliance Officer.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Loans from other banks or financial institutions on customary terms to finance proper and usual credit needs such
as home mortgage loans.  Executive Officers, as defined under Regulation O, must report such loans to the
Secretary within 10 days.                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Awards of reasonable value from charitable, civic, religious, educational or similar organizations for recognition
of service.                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Non-cash gifts of reasonable value (not more than $100) that you give to customers or suppliers for holidays or
special occasions.                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|* | Salary, wages, fees or other compensation paid in the usual course of business.                                                                                                                                                                                                                                                                                                                                                                                                            

<PAGE>

| |  | If you are offered or receive something of value beyond what is authorized above or under
circumstances not described above, you are required to report that fact in writing to the Compliance
Officer.  If you feel that an exception to Provident's policy is warranted, your written report should
include supporting reasons.  All such reports will be responded to in writing.  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                                                                       
| |  | **2.        Bequests by Customers**                                                                                                                                                                                                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Employees are not permitted to accept bequests of any kind from a customer to whom the employee
has provided banking services.  If a customer advises you that he or she intends to name you as a
beneficiary in his or her will, you should explain Provident's policy to the customer and report the
matter to your Supervisor.                                                     
| |  |                                                                                                                                                                                                                                                                                                                                                                                       
| |  | **3.        Borrowing from Customers**                                                                                                                                                                                                                                                                                                                                                
| |  |                                                                                                                                                                                                                                                                                                                                                                                       
| |  | You are not permitted to borrow from or lend your personal funds to customers, brokers or suppliers
of Provident.  Credit transactions in the normal course of business (for example, transacting business
with a recognized lending institution or charging items at a department store) and transactions with
members of your immediate family are not included in this restriction.
| |  |                                                                                                                                                                                                                                                                                                                                                                                       
| |  | **4.        Giving Advice to Customers**                                                                                                                                                                                                                                                                                                                                              
| |  |                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Unless your regular duties specifically permit, you are not allowed to give personal, tax or investment
advice to a customer.                                                                                                                                                                                                                                                         

**IV.     RESPECTING CONFIDENTIAL INFORMATION**

As a Provident employee, you may have access to information, reports or statements about Provident business, or
possess confidential information about the private or business affairs of customers and suppliers.  Such information is
privileged and must be held in strictest confidence.

Confidential information about those with whom we have business relations, if released, could have a significant effect
on their operations, business reputation or the market price of their securities.  Disclosing such information could expose
both you and Provident to civil and criminal liability.

Financial information about Provident is confidential unless it has been made available to the public.  Except as required
by law or approved by Provident's Chief Financial Officer, financial information is not to be released to any person.
If you have any questions about disclosing financial information, consult Provident's Chief Executive Officer or Chief
Financial Officer.

Confidential information is to be used only for corporate purposes.  Under no circumstances may you use such
information for personal gain or pass it on to any person outside of Provident, including family or friends, or even to
other employees who do not need such information to carry out their duties.

| | **A.        Examination Information**                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                            
| | Provident is periodically examined by regulatory agencies.  Any reports made by those regulatory agencies are
the property of those agencies and are strictly confidential.  Giving information from those reports to anyone
not officially connected with Provident is a criminal offense.                                                
| |                                                                                                                                                                                                                                                                                                                                            
| | **B.        Proprietary Information**                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                            
| | Certain
    non-financial information developed by Provident such as business plans,
    marketing strategies and customer lists, is considered proprietary to
    Provident. Unless such information has previously been published by
    Provident, you are not to disclose such information to anyone outside of
    Provident or use it

<PAGE>

|  | directly or
    indirectly for your personal benefit or the benefit of any third party who
    is not entitled to such information.                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | **C.        Insider Information**                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | Insider information is material non-public information relating to securities issued by a corporation.
Information is considered "material" if it is important enough:                                                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|* | To affect the judgment of investors about whether to buy, sell or hold stock; or                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|* | To influence the market price of the stock                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | Insider information about securities issued by public companies must be made public before anyone possessing
it can trade on it or recommend the purchase or sale of the securities concerned.  Under federal and state
securities laws, you, Provident, and the person who received the information could be held legally responsible
for misusing insider information.                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | The insider information rules are very difficult to apply in given circumstances.  Employees must be extremely
cautious in discussing corporate affairs with any person outside of Provident.  If you have any doubts about
whether or not an item is insider information or whether or not it has been or should be revealed, consult
Provident's Chief Executive Officer or Chief Financial Officer.
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | **D.       	Intra-Departmental Use of Information**                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | Confidential information available to one unit of Provident may be communicated to other units of Provident
when there exists a legitimate business need to know such information.                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | **E.       	Information Subject to Copyright Laws**                                                                                                                                                                                                                                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                       
|  | The U.S. Copyright laws and various licensing agreements entered into by Provident with providers of
computer software prohibit the unauthorized duplication, reproduction or use of certain software.  Employees
should discuss these restrictions with their Supervisor or the Information Security Officer to insure that these
guidelines are followed.                                           

<PAGE>

**CERTIFICATION**



**Reviewed and Revised by Board of Directors on June 21, 2007**

I hereby certify that I have received and read a copy of Provident's Code of Ethics and that I
understand that the standards of behavior explained therein apply to me.



___________________________________
                                                                                                           
Signature



____________________________________
                                                                                                           
Title/Position

DATE: ________________________



<PAGE>

**EXHIBIT 21.1**

**Subsidiaries of the Registrant**



<PAGE>

|**Parent Company:**                |                             |                                           
|---------------------------------- | --------------------------- | ------------------------------------------
|Provident Financial Holdings, Inc. |                             |                                           
|                                   |                             |                                           
|                                   |                             |                                           
|Subsidiaries:                      | **Percentage of ownership** | **Jurisdiction or State of Incorporation**
|Provident Savings Bank, F.S.B.     | 100%                        | United States of America                  
|Provident Financial Corp (1)       | 100%                        | California                                
|Profed Mortgage, Inc. (1) (2)      | 100%                        | California                                
|First Service Corporation (1) (2)  | 100%                        | California                                
|_____________________________      |                             |                                           

|(1)    This corporation is a wholly owned subsidiary of Provident Savings Bank, F.S.B.
|--------------------------------------------------------------------------------------
|(2)    Currently inactive.                                                            

<PAGE>

EXHIBIT 23.1

**Consent of Independent Registered Public Accounting Firm**





We consent to the incorporation by reference in Registration
Statement Nos. 333-30935, 333-112700, and 333-140229 on Form S-8 of our reports
dated September 11, 2007, relating to the consolidated financial statements of
Provident Financial Holdings, Inc. and management's report on the effectiveness
of internal control over financial reporting, appearing in this Annual Report on
Form 10-K of Provident Financial Holdings, Inc. for the year ended June 30,
2007.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
September 11, 2007

<PAGE>

EXHIBIT 31.1

**Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**



<PAGE>

**CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER 
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

|I, Craig G. Blunden, certify that:
|----------------------------------
|                                  
|1.                                
|                                  
|2.                                
|                                  
|3.                                
|                                  
|4.                                
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|                                  
|5.                                
|                                  
|                                  
|                                  
|                                  

Date: September 12, 2007                                                		/s/ Craig G. BlundenCraig G. BlundenChairman, President and Chief Executive Officer

<PAGE>



EXHIBIT 31.2

**Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**

<PAGE>

**CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER 
PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**

|I, Donavon P. Ternes, certify that:
|-----------------------------------
|                                   
|1.                                 
|                                   
|2.                                 
|                                   
|3.                                 
|                                   
|4.                                 
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|                                   
|5.                                 
|                                   
|                                   
|                                   
|                                   

Date: September 12, 2007                                                    		                    /s/ Donavon P. TernesDonavon P. TernesChief Financial Officer



<PAGE>

EXHIBIT 32

**Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-
Oxley Act of 2002**

<PAGE>

**CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C.  SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

In connection with the accompanying Annual Report on Form 10-K of Provident Financial Holdings, Inc.
(the "Corporation") for the fiscal year ended June 30, 2007 (the "Report"), I, Craig G. Blunden, Chairman,
President and Chief Executive Officer of the Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

|1. | The Report fully complies with
    the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
    1934, as amended; and                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                          
|2. | The information contained in
    the Report fairly presents, in all material respects, the financial
    condition and results of operations of the Corporation as of the dates and
    for the periods presented in the financial statements included in the
    Report.

Date: September 12, 2007                                                                		/s/ Craig G. Blunden
Craig G. BlundenChairman, President and Chief Executive Officer

<PAGE>

**CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER 
PURSUANT TO 18 U.S.C.  SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002**

In connection with the accompanying Annual Report on Form 10-K of Provident Financial Holdings, Inc.
(the "Corporation") for the fiscal year ended June 30, 2007 (the "Report"), I, Donavon P. Ternes, Chief Financial
Officer of the Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

|1. | The Report fully complies with
    the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
    1934, as amended; and                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                          
|2. | The information contained in
    the Report fairly presents, in all material respects, the financial
    condition and results of operations of the Corporation as of the dates and
    for the periods presented in the financial statements included in the
    Report.

Date: September 12, 2007                                                    		                    /s/ Donavon P. TernesDonavon P. TernesChief Financial Officer



<PAGE>