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PROVIDENT FINANCIAL HOLDINGS INC - Quarter Report: 2005 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

    (Mark One)

[ Ö ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended                    March 31, 2005
 
[    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ________________ to _________________

Commission File Number 000-28304

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

Delaware               
(State or other jurisdiction of
incorporation or organization)
       33-0704889
(I.R.S. Employer
Identification No.)

3756 Central Avenue, Riverside, California 92506
(Address of principal executive offices and zip code)


(951) 686-6060
(Registrant's telephone number, including area code)


                                                                                  .
(Former name, former address and former fiscal year, if changed since last report)


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    Ö  .          No        .

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes    Ö  .          No        .

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of class:
Common stock, $ 0.01 par value, per share
As of May 4, 2005
6,973,715 shares*
 
* Includes 365,202 shares held by the Employee Stock Ownership Plan ("ESOP") that have not been released, committed to be released, or allocated to participant accounts; and 23,058 shares held by the Management Recognition Plan ("MRP") that have been committed to be released and allocated to participant accounts.


<PAGE>




PROVIDENT FINANCIAL HOLDINGS, INC.

Table of Contents

PART 1 -

FINANCIAL INFORMATION

 

ITEM 1 -

Financial Statements. The Unaudited Interim Condensed Consolidated Financial Statements of Provident Financial Holdings, Inc. filed as a part of the report are as follows:

 

Page

Condensed Consolidated Statements of Financial Condition

as of March 31, 2005 and June 30, 2004

1

Condensed Consolidated Statements of Operations

for the quarters and nine months ended March 31, 2005 and 2004

2

Condensed Consolidated Statements of Changes in Stockholders' Equity

for the quarters and nine months ended March 31, 2005 and 2004

3

Condensed Consolidated Statements of Cash Flows

for the nine months ended March 31, 2005 and 2004

5

Selected Notes to Unaudited Interim Condensed Consolidated Financial Statements

6

 

ITEM 2 -

Management's Discussion and Analysis of Financial Condition and Results of

Operations:

 

General

13

Safe Harbor Statement

14

Critical Accounting Policies

14

Off-Balance Sheet Financing Arrangements and Contractual Obligations

15

Comparison of Financial Condition at March 31, 2005 and June 30, 2004

15

Comparison of Operating Results

for the quarters and nine months ended March 31, 2005 and 2004

17

Loan Volume Activities

26

Asset Quality

27

Liquidity and Capital Resources

27

Commitments and Derivative Financial Instruments

29

Stockholders' Equity

29

Incentive Plans

29

Supplemental Information

30

 

ITEM 3 -

Quantitative and Qualitative Disclosures about Market Risk

30

 

ITEM 4 -

Controls and Procedures

32

 

PART II -

OTHER INFORMATION

ITEM 1 -

Legal Proceedings

32

ITEM 2 -

Unregistered Sales of Equity Securities and Use of Proceeds

33

ITEM 3 -

Defaults Upon Senior Securities

33

ITEM 4 -

Submission of Matters to Vote of Security Holders

33

ITEM 5 -

Other Information

33

ITEM 6 -

Exhibits

33

 

SIGNATURES

34

 



<PAGE>




PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
Dollars In Thousands


 

March 31,
2005

 

June 30,
2004

 
 
 

(Unaudited)

       

Assets

         

   Cash and cash equivalents

$ 25,903

$ 38,349

   Investment securities - held to maturity, at amortized cost

         

      (fair value $53,987 and $61,250, respectively)

55,227

   

62,200

 

   Investment securities - available for sale at fair value

193,621

   

190,380

 

   Loans held for investment, net of allowance for loan losses of

         

      $8,879 and $7,614, respectively

1,098,414

   

862,535

 

   Loans held for sale, at lower of cost or market

7,260

   

20,127

 

   Receivable from sale of loans

173,981

   

86,480

 

   Accrued interest receivable

5,689

   

4,961

 

   Real estate held for investment, net

9,975

   

10,176

 

   Federal Home Loan Bank stock

36,229

   

27,883

 

   Premises and equipment, net

7,570

   

7,912

 

   Prepaid expenses and other assets

8,813

8,032

 

      Total assets

$ 1,622,682

   

$ 1,319,035

 
 
 

       

Liabilities and Stockholders' Equity

         

Liabilities:

         

   Non-interest bearing deposits

$ 49,635

$ 41,551

   Interest bearing deposits

893,845

   

809,488

 
 

      Total deposits

943,480

   

851,039

 
           

   Borrowings

530,353

   

324,877

 

   Accounts payable, accrued interest and other liabilities

29,321

   

33,137

 
 

      Total liabilities

1,503,154

   

1,209,053

 
           

Commitments and Contingencies

           

Stockholders' equity:

         

   Preferred stock, $.01 par value; authorized 2,000,000 shares;
      none issued and outstanding

-

-

   Common stock, $.01 par value; authorized 15,000,000 shares;
      issued 11,943,215 and 11,898,565 shares, respectively;
      outstanding 6,993,590 and 7,091,719 shares, respectively

119

119

   Additional paid-in capital

58,695

   

57,186

 

   Retained earnings

122,528

   

111,329

 

   Treasury stock at cost (4,949,625 and 4,806,846 shares,
      respectively)

(60,222

)

(56,753

)

   Unearned stock compensation

(1,426

)

(1,889

)

   Accumulated other comprehensive loss, net of tax

(166

)

 

(10

)

 

 

      Total stockholders' equity

119,528

   

109,982

 
 
           

      Total liabilities and stockholders' equity

$ 1,622,682

   

$ 1,319,035

 
 

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



1

<PAGE>




PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations

(Unaudited)
Dollars In Thousands, Except Earnings Per Share


  Quarter Ended
March 31,

  Nine Months Ended
March 31,

 

2005

 

2004

 

2005

 

2004

 
 

Interest income:

    Loans receivable, net

$ 17,057

 

$ 13,643

 

$ 47,506

 

$ 39,449

 

    Investment securities

2,089

 

2,204

 

6,293

 

6,065

 

    Federal Home Loan Bank stock

367

 

237

 

1,040

 

670

 

    Interest-earning deposits

7

 

1

 

18

 

11

 
 

    Total interest income

19,520

 

16,085

 

54,857

 

46,195

 
                 

Interest expense:

               

    Checking and money market deposits

290

 

335

 

879

 

1,074

 

    Savings deposits

1,076

 

1,358

 

3,483

 

3,989

 

    Time deposits

2,777

 

1,562

 

7,264

 

5,001

 

    Borrowings

4,346

3,188

11,873

9,318

 

    Total interest expense

8,489

 

6,443

 

23,499

 

19,382

 
                 

Net interest income

11,031

 

9,642

 

31,358

 

26,813

 

Provision for loan losses

404

 

420

 

1,306

 

689

 
 

Net interest income after provision for loan losses

10,627

9,222

30,052

26,124

                 

Non-interest income

               

    Loan servicing and other fees

326

 

533

 

1,175

 

1,599

 

    Gain on sale of loans, net

4,187

 

3,604

 

13,648

 

9,497

 

    Real estate operations, net

101

 

19

 

372

 

222

 

    Deposit account fees

455

 

507

 

1,330

 

1,491

 

    Gain on sale of investment securities

-

 

-

 

384

 

-

 

    Other

301

 

243

 

1,051

 

938

 
 

    Total non-interest income

5,370

4,906

17,960

13,747

                 

Non-interest expense

               

    Salaries and employee benefits

5,289

 

4,781

 

15,680

 

14,028

 

    Premises and occupancy

661

 

607

 

1,965

 

1,830

 

    Equipment

364

 

430

 

1,155

 

1,279

 

    Professional expenses

270

 

217

 

775

 

604

 

    Sales and marketing expenses

227

 

170

 

678

 

707

 

    Other

1,136

 

795

 

3,343

 

2,733

 
 

    Total non-interest expense

7,947

 

7,000

 

23,596

 

21,181

 
                 
 

Income before taxes

8,050

 

7,128

 

24,416

 

18,690

 

Provision for income taxes

3,470

 

3,014

 

10,547

 

7,904

 
 

    Net income

$ 4,580

 

$ 4,114

 

$ 13,869

 

$ 10,786

 
 
                 

Basic earnings per share

$ 0.69

 

$ 0.61

 

$ 2.10

 

$ 1.60

 

Diluted earnings per share

$ 0.64

 

$ 0.57

 

$ 1.95

 

$ 1.49

 

Cash dividends per share

$ 0.14

 

$ 0.10

 

$ 0.38

 

$ 0.23

 
 

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



2

<PAGE>




PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Dollars In Thousands
For the Quarters Ended March 31, 2005 and 2004


 

Common
Stock


Additional
Paid-In



Retained



Treasury


Unearned
Stock
Accumulated
Other
Comprehensive
Income(Loss),
 
  Shares   Amount Capital Earnings Stock Compensation net of tax Total
 

Balance at December 31, 2004

7,011,935

 

$ 119

$58,177

$118,931

 

$(59,427

)

$ (1,581

)

$ 213

 

$ 116,432

 
                             

Comprehensive income:

                           

    Net income

       

4,580

             

4,580

 

    Unrealized holding loss on
      securities available for sale,

      net of tax

                   

(379

)

 

(379


)

Total comprehensive income

                       

4,201

 
                             

Purchase of treasury stock

(28,470

)

(795

)

(795

)

Exercise of stock options

10,125

 

-

88

               

88

 

Amortization of MRP

               

34

     

34

 

Tax benefit from non-qualified

    equity compensation

61

61

Allocations of contribution to
    ESOP


369


68


437

Prepayment of ESOP loan

53

53

Cash dividends

(983

)

(983

)

 
                             

Balance at March 31, 2005

6,993,590

 

$ 119

$ 58,695

$122,528

 

$(60,222

)

$ ( 1,426

)

$ (166

)

$ 119,528

 
 

 

 

Common
Stock


Additional
Paid-In



Retained



Treasury


Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
  Shares   Amount Capital Earnings Stock Compensation net of tax Total
 

Balance at December 31, 2003

7,226,888

 

$ 119

$ 56,392

$103,649

 

$(53,358

)

$ (2,180

)

$ 527

 

$ 105,149

 
                             

Comprehensive income:

                           

    Net income

       

4,114

             

4,114

 

    Unrealized holding gain on
      securities available for sale,

      net of tax

                   

694

   

694


 

Total comprehensive income

                       

4,808

 
                             

Purchase of treasury stock

(25,000

)

(592

)

(592

)

Exercise of stock options

4,500

   

44

               

44

 

Amortization of MRP

               

34

     

34

 

Tax benefit from non-qualified

    equity compensation

134

134

Allocations of contribution
    to ESOP


296


67


363

Prepayment of ESOP loan

44

44

 
                             

Balance at March 31, 2004

7,206,388

 

$ 119

$ 56,866

$107,763

 

$(53,950

)

$ (2,035

)

$ 1,221

 

$ 109,984

 
 

 

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



3

<PAGE>




PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
Dollars In Thousands
For the Nine Months Ended March 31, 2005 and 2004

 

Common
Stock


Additional
Paid-In



Retained



Treasury


Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
  Shares   Amount Capital Earnings Stock Compensation net of tax Total
 

Balance at June 30, 2004

7,091,719

 

$ 119

$ 57,186

$111,329

 

$(56,753

)

$ (1,889

)

$ (10

)

$109,982

 
                             

Comprehensive income:

                           

    Net income

       

13,869

             

13,869

 

    Unrealized holding loss on
      securities available for sale,

      net of tax

                   

(156

)

 

(156


)

Total comprehensive income

                       

13,713

 
                             

Purchase of treasury stock (1)

(142,779

)

(3,469

)

(3,469

)

Exercise of stock options

44,650

 

-

381

               

381

 

Amortization of MRP

               

101

     

101

 

Tax benefit from non-qualified

    equity compensation

90

90

Allocations of contribution
    to ESOP


1,038


203


1,241

Prepayment of ESOP loan

159

159

Cash dividends

(2,670

)

(2,670

)

 
                             

Balance at March 31, 2005

6,993,590

 

$ 119

$ 58,695

$122,528

 

$(60,222

)

$ ( 1,426

)

$ (166

)

$119,528

 
 

  (1) Includes the repurchase of 4,309 shares of distributed restricted stock.

 

 

 

Common
Stock


Additional
Paid-In



Retained



Treasury


Unearned
Stock
Accumulated
Other
Comprehensive
Income (Loss),
 
  Shares   Amount Capital Earnings Stock Compensation net of tax Total
 

Balance at June 30, 2003

7,479,671

 

$ 118

$ 54,691

$98,660

 

$(45,801

)

$ (2,450

)

$ 1,660

 

$106,878

 
                             

Comprehensive income:

                           

    Net income

       

10,786

             

10,786

 

    Unrealized holding loss on
      securities available for sale,

      net of tax

                   

(439

)

 

(439


)

Total comprehensive income

                       

10,347

 
                             

Purchase of treasury stock (1)

(399,958

)

(8,149

)

(8,149

)

Exercise of stock options

126,675

 

1

1,026

               

1,027

 

Amortization of MRP

               

102

     

102

 

Tax benefit from non-qualified

    equity compensation

348

348

Allocations of contribution
    to ESOP


801


203


1,004

Prepayment of ESOP loan

110

110

Cash dividends

(1,683

)

(1,683

)

 
                             

Balance at March 31, 2004

7,206,388

 

$ 119

$ 56,866

$107,763

 

$(53,950

)

$ ( 2,035

)

$ 1,221

 

$109,984

 
 

  (1) Includes the repurchase of 3,858 shares of distributed restricted stock.





4

<PAGE>




PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Dollars In Thousands

Nine Months Ended
March 31,

 
2005     2004  

Cash flows from operating activities:

         

Net income

$ 13,869

$ 10,786

Adjustments to reconcile net income to net cash (used for) provided
    by operating activities:

         

    Depreciation and amortization

2,312

   

3,052

 

    Amortization of servicing assets

359

   

200

 

    Provision for loan losses

1,306

   

689

 

    Valuation reserve of servicing assets

99

   

-

 

    Gain on sale of loans

(13,648

)

 

(9,497

)

    Gain on sale of investment securities

(384

)

 

-

 

    Tax benefit from non-qualified compensation

90

348

(Decrease) increase in accounts payable and other liabilities

(3,702

)

1,312

(Increase) decrease in prepaid expense and other assets

(1,534

)

985

Loans originated for sale

(943,706

)

(788,435

)

Proceeds from sale of loans and net change in receivable from sale of loans

882,720

   

792,003

 

Stock based compensation

1,501

   

1,216

 

       Net cash (used for) provided by operating activities

(60,718

)

 

12,659

 

 

 

 

Cash flows from investing activities:

         

    Net increase in loans held for investment

(237,039

)

 

(137,275

)

    Maturity and call of investment securities held to maturity

6,975

   

84,885

 

    Maturity and call of investment securities available for sale

-

   

49,955

 

    Principal payments from mortgage-backed securities

44,732

   

71,432

 

    Purchase of investment securities held to maturity

-

   

(70,380

)

    Purchase of investment securities available for sale

(49,345

)

 

(119,025

)

    Proceeds from sales of investment securities available for sale

390

   

-

 

    Purchase of Federal Home Loan Bank stock

(8,346

)

 

(6,661

)

    Addition to servicing assets

(487

)

 

(1,282

)

    Net (additions) sales of real estate

(258

)

 

423

 

    Net purchases of premises and equipment

(509

)

 

(878

)


       Net cash used for investing activities

(243,887

)

 

(128,806

)

           

Cash flows from financing activities:

         

    Net increase in deposits

92,441

   

91,021

 

    Proceeds from Federal Home Loan Bank advances, net

205,476

   

17,447

 

    Exercise of stock options

381

   

1,027

 

    Cash dividends

(2,670

)

(1,683

)

    Treasury stock purchases

(3,469

)

(8,149

)


       Net cash provided by financing activities

292,159

   

99,663

 
           

Net decrease in cash and cash equivalents

(12,446

)

 

(16,484

)

Cash and cash equivalents at beginning of period

38,349

   

48,851

 

           

Cash and cash equivalents at end of period

$ 25,903

   

$ 32,367

 

           

Supplemental information:

         

    Cash paid for interest

$ 22,791

   

$ 19,146

 

    Cash paid for income taxes

11,700

   

6,070

 

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

 



5

<PAGE>




PROVIDENT FINANCIAL HOLDINGS, INC.
SELECTED NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2005

Note 1: Basis of Presentation

The unaudited interim condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, necessary to present a fair statement of the financial condition and results of operations for the interim periods presented. All such adjustments are of a normal, recurring nature. The balance sheet data at June 30, 2004 is derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. (the "Corporation"). Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") with respect to interim financial reporting. It is recommended that these unaudited interim condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation's Annual Report on Form 10-K for the year ended June 30, 2004 (SEC File No. 000-28304). Certain amounts in the prior periods' financial statements have been reclassified to conform to the current period's presentation. The results of operations for the quarter and nine months ended March 31, 2005 are not necessarily indicative of results for the fiscal year ending June 30, 2005.


Note 2: Earnings Per Share and Stock-Based Compensation

Earnings Per Share:

Basic earnings per share ("EPS") excludes dilution and is computed by dividing income available to common shareholders 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 entity. The following table provides the basic and diluted EPS computations for the quarters and nine months ended March 31, 2005 and 2004, respectively.


  For the Quarter
Ended
March 31,

  For the Nine Months
Ended
March 31,

 

2005

 

2004

 

2005

 

2004

 

Numerator for basic earnings per share and

             

   diluted earnings per share:

      Net income available to common

      stockholders

$ 4,579,498

$ 4,113,878

$ 13,868,772

$ 10,785,559

 
               

Denominator for basic earnings per share:

             

      Weighted-average shares

6,604,160

6,740,983

6,594,077

6,741,098

               

   Effect of dilutive securities:

             

      Stock option dilution

505,321

 

457,879

 

493,983

 

457,076

      Stock award dilution

10,544

 

14,751

 

12,538

 

16,253

 
               

Denominator for diluted earnings per share:

             

   Adjusted weighted-average shares
    and assumed conversions

7,120,025

 

7,213,613

 

7,100,598

 

7,214,427

 
               

Basic earnings per share

$ 0.69

 

$ 0.61

 

$ 2.10

 

$ 1.60

Diluted earnings per share

$ 0.64

 

$ 0.57

 

$ 1.95

 

$ 1.49

 





6

<PAGE>




Stock-Based Compensation:

Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Corporation has been accounting for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Corporation's common stock at the date of grant over the grant (exercise) price. For further details, see "SFAS No. 123R" narrative on page 11.

The Corporation has adopted the disclosure-only provisions of SFAS No. 123. Had compensation cost for the Corporation's stock-based compensation plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Corporation's net income and earnings per share would have been reduced to the pro forma amounts as follows (dollars in thousands, except earnings per share):


  For the Quarter
Ended March 31,

  For the Nine Months
Ended March 31,

 

2005

2004

 

2005

2004

 

Net income, as reported

$ 4,580

 

$ 4,114

   

$ 13,869

 

$ 10,786

 

Add:

                 

   Stock-based compensation expense included
    in the reported net income, net of tax

20

 

20

   

58

 

58

 

Deduct:

                 

   Total stock-based compensation expense, net
    of tax

( 121

)

( 77

)

 

( 364

)

( 213

)

 

Pro forma net income

$ 4,479

 

$ 4,057

   

$ 13,563

 

$ 10,631

 
 
                   

Earnings per share:

                 

Basic - as reported

$ 0.69

 

$ 0.61

   

$ 2.10

 

$ 1.60

 

Basic - pro forma

$ 0.68

 

$ 0.60

   

$ 2.06

 

$ 1.58

 
                   

Diluted - as reported

$ 0.64

 

$ 0.57

   

$ 1.95

 

$ 1.49

 

Diluted - pro forma

$ 0.63

 

$ 0.56

   

$ 1.91

 

$ 1.47

 
 






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Note 3: Operating Segment Reports

The Corporation operates in two business segments: community banking (Provident Savings Bank, F.S.B. ("Bank")) and mortgage banking (Provident Bank Mortgage ("PBM"), a division of the Bank). The following tables set forth condensed income statements and total assets for the Corporation's operating segments for the quarters and nine months ended March 31, 2005 and 2004, respectively (in thousands).


  For the Quarter Ended March 31, 2005
 
Provident
Bank
Provident
Bank
Mortgage

Consolidated
Totals
 
           

Net interest income

$ 9,791

 

$ 836

 

$ 10,627

           

Non-interest income:

         

    Loan servicing and other fees (1)

(1,064

)

1,390

 

326

    Gain on sale of loans, net (2)

154

 

4,033

 

4,187

    Real estate operations, net

101

 

-

 

101

    Deposit account fees

455

 

-

 

455

    Other

300

 

1

 

301

 

      Total non-interest income

(54

)

5,424

 

5,370

           

Non-interest expense:

         

   Salaries and employee benefits

3,313

 

1,976

 

5,289

   Premises and occupancy

474

 

187

 

661

   Operating and administrative expenses

1,092

 

905

 

1,997

 

      Total non-interest expense

4,879

 

3,068

 

7,947

 

Income before taxes

$ 4,858

$ 3,192

$ 8,050

 

Total assets, end of period

$ 1,441,715

 

$ 180,967

 

$ 1,622,682

 

(1) Includes an inter-company charge of $1.2 million credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
 
(2) Includes an inter-company charge of $152,000 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.

 

 

  For the Quarter Ended March 31, 2004
 
Provident
Bank
Provident
Bank
Mortgage

Consolidated
Totals
 

Net interest income

$ 8,608

 

$ 614

 

$ 9,222

           

Non-interest income:

         

   Loan servicing and other fees (1)

(453

)

986

 

533

   Gain on sale of loans, net (2)

151

 

3,453

 

3,604

   Real estate operations, net

19

 

-

 

19

   Deposit account fees

507

 

-

 

507

   Other

241

 

2

 

243

 

      Total non-interest income

465

 

4,441

 

4,906

           

Non-interest expense:

         

   Salaries and employee benefits

3,181

 

1,600

 

4,781

   Premises and occupancy

454

 

153

 

607

   Operating and administrative expenses

963

 

649

 

1,612

 

      Total non-interest expense

4,598

 

2,402

 

7,000

 

Income before taxes

$ 4,475

$ 2,653

$ 7,128

 

Total assets, end of period

$ 1,248,688

 

$ 125,399

 

$ 1,374,087

 

(1) Includes an inter-company charge of $768,000 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
 
(2) Includes an inter-company charge of $104,000 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.


8

<PAGE>




  For the Nine Months Ended March 31, 2005
 
Provident
Bank
Provident
Bank
Mortgage

Consolidated
Totals
 

Net interest income

$ 27,133

 

$ 2,919

 

$ 30,052

           

Non-interest income:

         

   Loan servicing and other fees (1)

(3,850

)

5,025

 

1,175

   Gain on sale of loans, net (2)

412

 

13,236

 

13,648

   Real estate operations, net

372

 

-

 

372

   Deposit account fees

1,330

 

-

 

1,330

   Gain on sale of investment securities

384

 

-

 

384

   Other

1,047

 

4

 

1,051

 

      Total non-interest income

(305

)

18,265

 

17,960

           

Non-interest expense:

         

   Salaries and employee benefits

9,852

 

5,828

 

15,680

   Premises and occupancy

1,443

 

522

 

1,965

   Operating and administrative expenses

3,274

 

2,677

 

5,951

 

      Total non-interest expense

14,569

 

9,027

 

23,596

 

Income before taxes

$ 12,259

$ 12,157

$ 24,416

 

Total assets, end of period

$ 1,441,715

 

$ 180,967

 

$ 1,622,682

 

(1) Includes an inter-company charge of $4.4 million credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
 
(2) Includes an inter-company charge of $431,000 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.

  For the Nine Months Ended March 31, 2004
 
Provident
Bank
Provident
Bank
Mortgage

Consolidated
Totals
 

Net interest income

$ 24,209

 

$ 1,915

 

$ 26,124

           

Non-interest income:

         

   Loan servicing and other fees (1)

(2,669

)

4,268

 

1,599

   Gain on sale of loans, net (2)

(3

)

9,500

 

9,497

   Real estate operations, net

149

 

73

 

222

   Deposit account fees

1,491

 

-

 

1,491

   Other

918

 

20

 

938

 

      Total non-interest income

(114

)

13,861

 

13,747

           

Non-interest expense:

         

   Salaries and employee benefits

9,343

 

4,685

 

14,028

   Premises and occupancy

1,365

 

465

 

1,830

   Operating and administrative expenses

3,174

 

2,149

 

5,323

 

      Total non-interest expense

13,882

 

7,299

 

21,181

 

Income before taxes

$ 10,213

$ 8,477

$ 18,690

 

Total assets, end of period

$ 1,248,688

 

$ 125,399

 

$ 1,374,087

 

(1) Includes an inter-company charge of $3.6 million credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
 
(2) Includes an inter-company charge of $368,000 credited to PBM by the Bank during the period to compensate PBM for servicing fees on loans sold on a servicing retained basis.




9

<PAGE>




Note 4: Commitments and Derivative Financial Instruments

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 entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments.


Commitments
March 31,
2005

June 30,
2004
 

(In Thousands)

 

 

Undisbursed loan funds - Construction loans

$ 91,401

$ 78,137

Undisbursed lines of credit - Single-family loans

9,637

7,342

Undisbursed lines of credit - Commercial business loans

9,244

9,625

Undisbursed lines of credit - Consumer loans

1,724

1,794

Commitments to extend credit on loans held for investment

8,304

23,170

 

Total

$ 120,310

$ 120,068

 

In accordance with SFAS No. 133 and interpretations of the Derivative Implementation Group of the Financial Accounting Standards Board ("FASB"), the fair value of the commitments to extend credit on loans to be held for sale, forward loan sale agreements and put 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, under gain on sale of loans, during the quarters ended March 31, 2005 and 2004 was a loss of $436,000 and a loss of $379,000, respectively. For the nine months ended March 31, 2005 and 2004, the net impact of derivative financial instruments on the consolidated statements of operations was a loss of $263,000 and a loss of $1.3 million, respectively.

March 31, 2005
June 30, 2004

March 31, 2004


Derivative Financial Instruments

Amount

Fair
Value


Amount

Fair
Value


Amount

Fair
Value

 

(In Thousands)

 

 

Commitments to extend credit

  on loans to be held for sale (1)

$ 75,303

$ (92

)

$ 63,750

$ 167

$ 70,674

$ (99

)

Forward loan sale agreements

25,500

(123

)

37,500

(317

)

59,000

47

Put option contracts

12,000

135

10,000

41

19,000

110

 

Total

$ 112,803

$ (80

)

$ 111,250

$ (109

)

$ 148,674

$ 58

 

(1) Net of estimated commitments of 22.3 percent at March 31, 2005, 26.6 percent at June 30, 2004 and 26.2 percent at March 31, 2004, which may not fund (fallout ratio).

In the third quarter of fiscal 2004, the Corporation adopted the SEC guidance regarding loan commitments that are recognized as derivatives pursuant to SFAS No. 133. As a result of implementing the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," the Corporation excludes the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. The Corporation's previous practice had been to recognize, at the inception of the rate lock, the anticipated servicing released premiums on the underlying loans. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1,




10

<PAGE>




2004. This action results in a delay in the recognition of servicing released premiums until the underlying loans are funded and sold.

Note 5: Off-Balance Sheet Financing Arrangements and Contractual Obligations

As discussed in Note 4, 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. As of March 31, 2005 and June 30, 2004, the Corporation had commitments to extend credit of $83.6 million and $86.9 million, respectively.


Note 6: Recent Accounting Pronouncements

SFAS No. 123R:
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This Statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance and is a revision of SFAS No. 123, "Accounting for Stock-based Compensation." This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement requires a public entity to measure the cost of employee services received in exchange for award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. A public entity will initially measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for unique characteristics of those instruments (unless observable market prices for the same or similar instruments are available). If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The revised accounting for stock-based compensation requirements must be adopted by the Corporation no later than the beginning of the annual reporting period that begins after June 15, 2005. Management does not anticipate that this will have a material effect on the Corporation's results of operations, financial position or cash flows. Had the Corporation adopted SFAS No. 123R in prior periods, the impact of the net income and earnings per share would have been approximately similar to the pro forma net income and earnings per share in accordance with SFAS No. 123 as disclosed in the table on page 7.

FIN No. 46R:
In December 2003, the FASB issued FIN No. 46R, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51. FIN No. 46R requires that variable interest entities be consolidated by a company if that company is subject to a majority of the expected losses from the variable interest entity's activities or is entitled to receive a majority of the entity's expected residual returns or both. FIN No. 46R also requires disclosure about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements were required to be adopted no later than the beginning of the first fiscal year or interim period beginning after March 15, 2004. The adoption of FIN No. 46R did not have a material impact on the Corporation's results of operations, financial position or cash flows.

SOP 03-3:
In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position No. 03-3 ("SOP 03-3"), "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt




11

<PAGE>




securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows were subsequently expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. The adoption of this statement did not have a material impact on the Corporation's financial position, results of operations, or cash flows.

EITF No. 03-1:
In March 2004, the Emerging Issues Task Force ("EITF") reached consensus on the guidance provided in EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments" ("EITF 03-1") as applicable to debt and equity securities that are within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and equity securities that are accounted for using the cost method specified in Accounting Policy Board Opinion No. 18 "The Equity Method of Accounting for Investments in Common Stock." An investment is impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. Although not presumptive, a pattern of selling investments prior to the forecasted recovery of fair value may call into question the investor's intent. The severity and duration of the impairment should also be considered in determining whether the impairment is other-than-temporary. In September 2004 the FASB staff issued a proposed Board-directed FASB Staff Position, FSP EITF Issue 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1". The proposed FSP would provide implementation guidance with respect to debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The FASB also issued FSP EITF Issue 03-1-b, which delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay does not suspend the requirement to recognize other-than-temporary impairments as required by existing authoritative literature. The impact, if any, of the recognition and measurement provisions of EIFT 03-1 will not be known until the FASB issues its guidance.


Note 7: Subsequent Events

On April 21, 2005, the Board of Directors of Provident Financial Corp, a wholly owned subsidiary of the Bank, declared a cash dividend of $500,000 to the Bank, which was paid on April 22, 2005.

On April 28, 2005, the Board of Directors of the Corporation approved a capital contribution of $3.0 million to the Bank, which was paid on April 29, 2005.

On April 28, 2005, the Board of Directors of the Corporation approved the acceleration of the vesting of outstanding stock options in the 1996 Stock Option Plan. The options that were accelerated were issued prior to January 1, 2004 to directors, officers and key employees who have three or more continuous years of service with the Corporation or an affiliate of the Corporation. The Board believes that it is in the best interest of the shareholders to accelerate the vesting of these options, as it will have a positive impact on the future earnings of the Corporation. The current expense recognized as a result of this action is approximately 19 percent of the estimated future expense that would have been recognized had the vesting not been accelerated. This action has been taken as a result of SFAS No. 123R issued by the Financial Accounting Standards Board, which the Corporation must adopt on July 1, 2005. Options to purchase 136,950 shares of the Corporation's common stock became exercisable on April 28, 2005, which will result in compensation expense of approximately $320,000 during the quarter ending June 30, 2005. The Corporation estimates that the total compensation expense which will not be recognized in future periods, approximately three years, will be $1.4 million as a result of this action. The other terms of each of the option grants will remain unchanged.



12

<PAGE>




On April 28, 2005, the Corporation announced a cash dividend of $0.14 per share on the Corporation's outstanding shares of common stock for shareholders of record at the close of business on May 20, 2005, payable on June 10, 2005.

ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Provident Financial Holdings, Inc., a Delaware corporation, was organized in January 1996 for the purpose of becoming the holding company for Provident Savings Bank, F.S.B. 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 March 31, 2005, the Corporation had total assets of $1.6 billion, total deposits of $943.5 million and total stockholders' equity of $119.5 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 report, 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 under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1956.

The Bank's business consists of community banking activities and mortgage banking activities. Community banking activities primarily consist of accepting deposits from customers within the communities surrounding the Bank's full service offices and investing these funds in single-family loans, multi-family loans, commercial real estate loans, construction loans, commercial business loans, consumer loans and other real estate loans. In addition, the Bank also offers business checking accounts and other business banking services, and services loans for others. Mortgage banking activities consist of the origination and sale of mortgage and consumer loans secured primarily by single-family residences. The Bank's revenues are derived principally from interest on its loan and investment portfolios and fees generated through its community banking and mortgage banking activities. There are various risks inherent in the Bank's business including, among others, interest rate changes and the prepayment of loans and investments.

The Corporation, from time to time, may repurchase its common stock as a way to enhance the Corporation's earnings per share. The Corporation entertains the repurchase of its common stock if the market price of the stock is lower than its book value and/or the Corporation believes that the current market price is not commensurate with its current and future earnings potential. Consideration is also given to the Corporation's liquidity, regulatory capital requirements and future capital needs based on the Corporation's current business plan. The Corporation's Board of Directors authorizes each stock repurchase program, the duration of which is typically one year. Once the stock repurchase program is authorized, management may repurchase the Corporation's common stock from time to time in the open market or in privately negotiated transactions, depending upon market conditions and the factors described above. On June 28, 2004, the Corporation announced that its Board of Directors authorized the repurchase of up to five percent of its common stock, or approximately 354,585 shares, over a one-year period. As of March 31, 2005, 39 percent of the authorized shares under the June 2004 stock repurchase plan were purchased, leaving approximately 216,115 shares available for future repurchase. For further details on the Corporation's repurchase activity during the quarter, see "Unregistered Sales of Equity Securities and Use of Proceeds" disclosure on page 33.

The Corporation began to distribute quarterly cash dividends in the quarter ended September 30, 2002. On January 25, 2005, the Corporation announced a quarterly cash dividend of $0.14 per share for the Corporation's shareholders of record at the close of the business day on February 18, 2005, which was paid on March 14, 2005. 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



13

<PAGE>




Corporation. Under Delaware law, dividends may be paid either out of surplus or, if there is no surplus, out of net profits for the fiscal year and/or the preceding fiscal year in which the dividend is declared.

Management's discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Corporation. The information contained in this section should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements and accompanying Selected Notes to Unaudited Interim Condensed Consolidated Financial Statements.


Safe-Harbor Statement

Certain matters in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, 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 as a result of a wide range of factors including, but not limited to, the general business environment, interest rates, the California real estate market, the demand for loans, competitive conditions between banks and non-bank financial services providers, regulatory changes, and other risks detailed in the Corporation's reports filed with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended June 30, 2004. Forward-looking statements are effective only as of the date that they are made and the Corporation assumes no obligation to update this information.


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 and conform to prevailing practices within the banking industry. 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. Management considers the accounting for the allowance for loan losses and accounting for derivatives to be critical accounting policies.

Accounting for the allowance for loan losses involves significant judgments and assumptions by management, which have a material impact on the carrying value of net loans. 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 three components: (i) a formula allowance for groups of homogeneous loans; (ii) a specific allowance for identified problem loans; and (iii) an unallocated allowance. 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 fair market value of collateral. The use of these values is inherently subjective, and the actual losses could be greater or less than the estimates. For further details, see the "Provision for Loan Losses" narrative on page 23.

Interest is generally not accrued on any loan when its contractual payments are more than 90 days delinquent. In addition, interest is not recognized on any loan for which management has determined that



14

<PAGE>




collection is not reasonably assured. A non-accrual loan may be restored to accrual status either when delinquent principal and interest payments are brought current, the loan is paying in accordance with its payment terms for a minimum six-month period, or future monthly principal and interest payments are expected to be collected.

Properties acquired through foreclosure or deed in lieu of foreclosure are transferred to the real estate owned portfolio and carried at the lower of cost or estimated fair value less the estimated costs to sell the property. The fair values of the properties are based upon current appraisals. The difference between the fair value of the real estate collateral and the loan balance at the time of the transfer is recorded as a loan charge-off if fair value is lower. Subsequent to foreclosure, management periodically performs additional valuations, and the properties are adjusted, if necessary, to the lower of carrying value or fair value less estimated selling costs. The determination of a property's estimated fair value includes revenues projected to be realized from disposal of the property, construction and renovation costs.

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. 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 and option contracts to hedge 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. In the third quarter of fiscal 2004, the Corporation adopted the SEC guidance regarding loan commitments that are recognized as derivatives pursuant to SFAS No. 133. As a result of implementing the SEC Staff Accounting Bulletin No. 105, "Application of Accounting Principles to Loan Commitments," the Corporation excludes the recognition of servicing released premiums in the valuation of commitments to extend credit on loans to be held for sale. The Corporation's previous practice had been to recognize, at the inception of the rate lock, the anticipated servicing released premiums on the underlying loans. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1, 2004. This action results in a delay in the recognition of servicing released premiums until the underlying loans are funded and sold.


Off-Balance Sheet Financing Arrangements and Contractual Obligations

The following table summarizes the Corporation's contractual obligations at March 31, 2005 and the effect these obligations are expected to have on the Corporation's liquidity and cash flows in future periods (in thousands):

  Payments Due by Period
  1 year
or less
  Over 1 to
3 years
  Over 3 to
5 years
  Over
5 years
  Total
 

Operating lease obligations

$ 692

 

$ 1,080

 

$ 598

 

$ 196

 

$ 2,566

Time deposits

250,708

 

155,717

 

38,114

 

170

 

444,709

FHLB borrowings

201,769

 

128,839

 

119,975

 

148,211

 

598,794

 

Total

$ 453,169

 

$ 285,636

 

$ 158,687

 

$ 148,577

 

$ 1,046,069

 

The expected obligation for time deposits and FHLB borrowings include anticipated interest accruals based on respective contractual terms.

For a discussion of the Corporation's commitments and derivative financial instruments, see Note 4 on page 10.


Comparison of Financial Condition at March 31, 2005 and June 30, 2004

Total assets increased $303.7 million, or 23 percent, to $1.6 billion at March 31, 2005 from $1.3 billion at June 30, 2004. This increase was primarily the result of an increase in loans held for investment and receivable from sale of loans.



15

<PAGE>




Cash and cash equivalents decreased $12.4 million, or 32 percent, to $25.9 million at March 31, 2005 from $38.3 million at June 30, 2004. The decrease was primarily the result of a decline in excess liquidity, resulting from unfunded loans and/or funds received late in the day, approximately $18.0 million at June 30, 2004 as compared to $5.0 million at March 31, 2005.

Total investment securities decreased $3.8 million, or two percent, to $248.8 million at March 31, 2005 from $252.6 million at June 30, 2004. As of March 31, 2005, there were no investment securities with an other-than-temporary impairment. For the nine months of fiscal 2005, $49.3 million of investment securities were purchased, while $7.0 million of investment securities matured or were called by the issuers and $44.1 million of reductions were the result of mortgage-backed securities principal prepayments.

Loans held for investment, net of allowance for loan losses, increased $235.9 million, or 27 percent, to $1.1 billion at March 31, 2005 from $862.5 million at June 30, 2004. In the nine months of fiscal 2005, the Bank originated $615.4 million of loans held for investment, of which $197.7 million, or 32 percent, were "preferred loans" (multi-family, commercial real estate, construction and commercial business loans), including the purchase of $47.7 million of preferred loans during the period. Total loan prepayments during the nine months of fiscal 2005 were $356.3 million. Preferred loans increased to $307.4 million, or 28 percent of loans held for investment at March 31, 2005, as compared to $240.6 million, or 28 percent of loans held for investment, at June 30, 2004. Purchased loans serviced by others at March 31, 2005 were $54.9 million or five percent of loans held for investment, compared to $43.6 million, or five percent of loans held for investment at June 30, 2004.

Loans held for sale decreased $12.8 million, or 64 percent, to $7.3 million at March 31, 2005 from $20.1 million at June 30, 2004. The decrease was the result of the timing differences between loan funding and loan sale dates.

Receivable from the sale of loans increased $87.5 million, or 101 percent, to $174.0 million at March 31, 2005 from $86.5 million at June 30, 2004. The increase was the result of the timing differences between loan sale and loan sale settlement dates.

FHLB stock increased $8.3 million, or 30 percent, to $36.2 million at March 31, 2005 from $27.9 million at June 30, 2004. The increase was the result of an increase in FHLB stock requirements, resulting from an increase in FHLB borrowings.

Total deposits increased $92.5 million, or 11 percent, to $943.5 million at March 31, 2005 from $851.0 million at June 30, 2004. This increase was primarily attributable to an increase of $135.0 million in time deposits, partly offset by a decrease of $42.5 million in transaction accounts. The increase in time deposits and the decrease in transaction accounts was attributable primarily to the increase in interest rates and the Bank's marketing campaign to lock-in time deposits during a rising rate environment in the first nine months of fiscal 2005.

Borrowings, which consisted entirely of FHLB advances, increased $205.5 million, or 63 percent, to $530.4 million at March 31, 2005 from $324.9 million at June 30, 2004. The increase in borrowings and deposits funded the increase in loans held for investment and receivable from the sale of loans. The weighted-average maturity of the Bank's FHLB advances was approximately 35 months (29 months, based on put dates) at March 31, 2005 as compared to the weighted-average maturity of 45 months (33 months, based on put dates) at June 30, 2004.

Total stockholders' equity increased $9.5 million, or nine percent, to $119.5 million at March 31, 2005, from $110.0 million at June 30, 2004, primarily as a result of the net income during the nine months of fiscal 2005, which was partly offset by common stock repurchases. During the nine months of fiscal 2005, a total of 138,470 shares were repurchased at an average price of $24.20 per share.



16

<PAGE>




Comparison of Operating Results for the Quarters and Nine Months Ended March 31, 2005 and 2004

The Corporation's net income for the third quarter ended March 31, 2005 was $4.6 million, an increase of $466,000, or 11 percent, from $4.1 million during the same quarter of fiscal 2004. This increase was primarily attributable to increases in net interest income and gain on sale of loans, partly offset by an increase in non-interest expense. For the nine months ended March 31, 2005, the Corporation's net income was $13.9 million, up $3.1 million or 29 percent from $10.8 million during the same period of fiscal 2004. This increase was primarily attributable to increases in net interest income, gain on sale of loans and gain on sale of investment securities, partially offset by an increase in non-interest expense.
The Corporation's net interest income before loan loss provisions increased by $1.4 million, or 15 percent, to $11.0 million for the quarter ended March 31, 2005 from $9.6 million during the comparable period of fiscal 2004. This increase was the result of higher average earning assets, partially offset by a lower net interest margin. The average balance of earning assets increased $232.1 million, or 19 percent, to $1.5 billion in the third quarter of fiscal 2005 from $1.2 billion in the comparable period of fiscal 2004. The net interest margin decreased to 2.98 percent in the third quarter of fiscal 2005, down 11 basis points from 3.09 percent during the same period of fiscal 2004. The decrease in the net interest margin during the third quarter of fiscal 2005 was primarily attributable to an increase in the average cost of funds, which was more than the increase in the average yield of earning assets. For the nine months ended March 31, 2005, the net interest income before loan loss provisions was $31.4 million, up $4.6 million, or 17 percent, from $26.8 million during the same period of fiscal 2004. This increase was the result of higher average earning assets. The average balance of earning assets increased $205.5 million, or 17 percent, to $1.4 billion in the first nine months of fiscal 2005 from $1.2 billion in the comparable period of fiscal 2004. The net interest margin remained unchanged at 2.98 percent in the first nine months of fiscal 2005 as compared to the same period of fiscal 2004.

The Corporation's efficiency ratio remained unchanged at 48 percent in the third quarter of fiscal 2005 as compared to the same period of fiscal 2004. For the nine months ended March 31, 2005, the efficiency ratio improved to 48 percent from 52 percent in the comparable period in fiscal 2004.

Return on average assets for the quarter ended March 31, 2005 decreased 5 basis points to 1.20 percent from 1.25 percent in the same period last year. For the nine months ended March 31, 2005 and 2004, the return on average assets was 1.27 percent and 1.13 percent, respectively, an increase of 14 basis points.

Return on average equity for the quarter ended March 31, 2005 increased 15 basis points to 15.48 percent from 15.33 percent in the same period last year. For the nine months ended March 31, 2005 and 2004, the return on average equity was 16.16 percent and 13.65 percent, respectively.

Diluted earnings per share for the quarter ended March 31, 2005 were $0.64, an increase of 12 percent from $0.57 for the quarter ended March 31, 2004. For the nine months ended March 31, 2005 and 2004, diluted earnings per share were $1.95 and $1.49, respectively, an increase of 31 percent.

Interest Income. Total interest income increased by $3.4 million, or 21 percent, to $19.5 million for the third quarter of fiscal 2005 from $16.1 million in the same quarter of fiscal 2004. This increase was primarily the result of a higher average earning assets balance and a higher average earning asset yield. The average yield on earning assets during the third quarter of fiscal 2005 was 5.28 percent, 12 basis points higher than the average yield of 5.16 percent during the same period of fiscal 2004. Increases in the average yield on investment securities and FHLB stock were partly offset by a decrease in the average yield on loans.

Loan interest income increased $3.5 million, or 26 percent, to $17.1 million in the quarter ended March 31, 2005 from $13.6 million for the same quarter of fiscal 2004. This increase was attributable to a higher average loan balance, partially offset by a lower average loan yield. The average balance of loans outstanding, including loans held for sale, increased $242.2 million, or 26 percent, to $1.2 billion during the third quarter of fiscal 2005 from $945.3 million during the same quarter of fiscal 2004. The average loan yield during the third quarter of fiscal 2005 decreased to 5.75 percent from 5.77 percent during the same quarter last year. The decline in the average loan yield was primarily attributable to the prepayment of higher yielding loans and adjustable portfolio loans adjusting to lower interest rates.



17

<PAGE>




Interest income from investment securities decreased $115,000, or five percent, to $2.1 million during the quarter ended March 31, 2005 from $2.2 million during the same quarter of fiscal 2004. This decrease was primarily a result of a decrease in average balance, partly offset by an increase in average yield. The average balance of investment securities decreased $19.9 million, or seven percent, to $256.9 million in the third quarter of fiscal 2005 from $276.8 million in the same quarter of fiscal 2004. The average yield on the investment securities portfolio increased 7 basis points to 3.25 percent during the quarter ended March 31, 2005 from 3.18 percent during the quarter ended March 31, 2004. The increase in the average yield of investment securities was primarily the result of a reduction of the mortgage-backed securities ("MBS") principal prepayments with a corresponding reduction to the MBS premium amortization. The decline in principal prepayments was due primarily to the general increase in short-term interest rates during the previous 12 months. The MBS premium/discount amortization is comprised of a scheduled amortization based on the estimated average life of the MBS at the time of purchase and an accelerated amortization resulting from a shorter average life of the MBS. The accelerated amortization in the third quarter of fiscal 2005 declined by $78,000 to $127,000 as compared to $205,000 in the same quarter of fiscal 2004. The decline in the accelerated amortization resulted in a 12-basis point increase in the investment yield.

FHLB stock dividends increased by $130,000, or 55 percent, to $367,000 in the third quarter of fiscal 2005 from $237,000 in the same period of fiscal 2004. This increase was attributable to a higher average balance and a higher average yield. The average balance of FHLB stock increased $9.1 million to $34.3 million during the third quarter of fiscal 2005 from $25.2 million during the same period of fiscal 2004. The increase in FHLB stock was in accordance with the borrowing requirements of the FHLB. The average yield on FHLB stock increased 52 basis points to 4.28 percent during the third quarter of fiscal 2005 from 3.76 percent during the same period last year. The increase in the average yield was primarily a result of higher dividend accruals based upon the actual dividends received in the prior periods and estimates provided by the FHLB.

For the nine months ended March 31, 2005, total interest income increased $8.7 million, or 19 percent, to $54.9 million as compared to $46.2 million for the same period of fiscal 2004. This increase was primarily attributable to increases in the average balance and the average yield on earning assets. The average yield on earning assets increased 7 basis points to 5.21 percent during the nine months ended March 31, 2005 from 5.14 percent during the same period of fiscal 2004.

Interest income from loans increased by $8.1 million, or 21 percent, to $47.5 million during the nine months of fiscal 2005 from $39.4 million during the same period of fiscal 2004. This increase was primarily attributable to an increase in the average balance, partly offset by a decrease in the average yield on loans. The average loans outstanding increased $214.9 million, or 24 percent, to $1.1 billion during the nine months ended March 31, 2005 from $894.7 million during the same period of fiscal 2004. The average yield on loans decreased 17 basis points to 5.71 percent during the nine months of fiscal 2005 as compared to 5.88 percent during the same period of fiscal 2004. The decline in the average loan yield was primarily attributable to loan prepayments and portfolio loans adjusting to lower interest rates as a result of the significant decline in mortgage interest rates, in addition to new mortgage loans originated with lower interest rates.

Interest income from investment securities increased $228,000, or four percent, to $6.3 million during the nine months ended March 31, 2005 from $6.1 million during the same period of fiscal 2004. This increase was primarily a result of an increase in the average yield, which was partially offset by a decrease in the average balance. The yield on the investment securities increased 32 basis points to 3.20 percent during the nine months ended March 31, 2005 from 2.88 percent during the nine months ended March 31, 2004. The average balance of investment securities decreased $18.2 million to $262.1 million in the nine months of fiscal 2005 from $280.3 million in the same period of fiscal 2004. The increase in the average yield of investment securities was primarily the result of a reduction of the mortgage-backed securities ("MBS") principal prepayments with a corresponding reduction to the MBS premium amortization. The decline in principal prepayments was due primarily to the general increase in short-term interest rates during the previous 12 months. The accelerated amortization in the nine months of fiscal 2005 declined by $769,000 to $470,000 as compared to $1.2 million in the same period of fiscal 2004. The decline in the accelerated amortization resulted in a 39-basis point increase in the investment yield.



18

<PAGE>




FHLB stock dividends increased $370,000, or 55 percent, to $1.0 million in the nine months of fiscal 2005 from $670,000 in the same period of fiscal 2004. The increase was attributable to a higher average balance and a higher average yield. The average balance of FHLB stock increased $8.7 million, or 38 percent, to $31.5 million during the nine months of fiscal 2005 from $22.8 million during the same period of fiscal 2004. The average yield on FHLB stock increased 49 basis points to 4.41 percent during the nine months of fiscal 2005 from 3.92 percent during the same period of fiscal 2004.

Interest Expense. Total interest expense for the quarter ended March 31, 2005 was $8.5 million as compared to $6.4 million for the same period of fiscal 2004, an increase of $2.1 million, or 33 percent. This increase was primarily attributable to a higher average balance of interest-bearing liabilities and an increase in the average cost. The average balance of interest-bearing liabilities increased $216.3 million, or 19 percent, to $1.4 billion during the third quarter of fiscal 2005 from $1.2 billion during the same period of fiscal 2004. The average cost of interest-bearing liabilities was 2.49 percent during the quarter ended March 31, 2005, up 28 basis points from 2.21 percent during the same period of fiscal 2004.

Interest expense on deposits for the quarter ended March 31, 2005 was $4.1 million as compared to $3.3 million for the same period of fiscal 2004, an increase of $888,000, or 27 percent. The increase in interest expense on deposits was primarily attributable to a higher average balance and a higher average cost. The average balance of deposits increased $103.4 million, or 12 percent, to $931.7 million during the quarter ended March 31, 2005 from $828.3 million during the same period of fiscal 2004. The average balance of time deposits to total deposits in the third quarter of fiscal 2005 was 44 percent, compared to 32 percent in the same period of fiscal 2004. The average cost of deposits increased to 1.80 percent during the quarter ended March 31, 2005 from 1.58 percent during the same quarter of fiscal 2004, an increase of 22 basis points. The increase in the average cost of deposits was attributable to the increase in the average cost of time deposits and the change in composition of deposits, which was partially offset by the lower average cost of transaction accounts.

Interest expense on borrowings for the quarter ended March 31, 2005 increased $1.1 million, or 34 percent, to $4.3 million from $3.2 million for the same period of fiscal 2004. The increase in interest expense on borrowings was primarily a result of a higher average balance and a higher average cost. The average balance of borrowings increased $112.9 million, or 33 percent, to $452.1 million during the quarter ended March 31, 2005 from $339.2 million during the same period of fiscal 2004. The average cost of borrowings increased to 3.90 percent for the quarter ended March 31, 2005 from 3.77 percent in the same quarter of fiscal 2004, an increase of 13 basis points. The increase in the average cost of borrowings was primarily attributable to increases in short-term interest rates during the quarter and an additional $45.0 million in long-term borrowings.

For the nine months ended March 31, 2005, total interest expense increased $4.1 million, or 21 percent, to $23.5 million as compared to $19.4 million for the same period of fiscal 2004. The increase in total interest expense was primarily attributable to a higher average balance and a higher average cost. The average balance of interest-bearing liabilities during the nine months of fiscal 2005 increased $191.5 million, or 17 percent, to $1.3 billion as compared to $1.1 billion during the same period of fiscal 2004. The average cost of interest-bearing liabilities increased 9 basis points to 2.39 percent during the nine months of fiscal 2005 as compared to 2.30 percent during the same period of fiscal 2004.

For the nine months ended March 31, 2005, interest expense on deposits increased $1.5 million, or 15 percent, to $11.6 million as compared to $10.1 million for the same period of fiscal 2004. The increase in interest expense on deposits was primarily a result of a higher average balance and a higher average cost. The average balance of deposits increased $101.8 million, or 13 percent, to $905.0 million during the nine months of fiscal 2005 from $803.2 million during the same period of fiscal 2004. The average balance of time deposits increased to 40 percent of total deposits in the nine months of fiscal 2005, compared to 34 percent of total deposits in the same period of fiscal 2004. The average cost of deposits increased 5 basis points to 1.71 percent during the nine months of fiscal 2005 as compared to 1.66 percent during the same period of fiscal 2004. The increase in the average cost of deposits was attributable to the increase in the average cost of time deposits and the change in composition of deposits, which was partially offset by the lower average cost of transaction accounts.

For the nine months ended March 31, 2005, interest expense on borrowings increased $2.6 million to $11.9 million as compared to $9.3 million for the same period of fiscal 2004. The increase in interest expense on



19

<PAGE>




borrowings was primarily attributable to a higher average balance, partially offset by a slightly lower average cost. The average balance of borrowings increased $89.7 million, or 28 percent, to $407.4 million in the nine months of fiscal 2005 as compared to $317.7 million during the same period of fiscal 2004. The average cost of borrowings decreased 1 basis point to 3.88 percent during the nine months of fiscal 2005 as compared to 3.89 percent during the same period of fiscal 2004. The decline in the average cost of borrowings was primarily attributable to maturing higher cost borrowings replaced with new borrowings at lower costs and an increase in the utilization of overnight borrowings.

The following tables depict the average balance sheets for the quarters and nine months ended March 31, 2005 and 2004, respectively:

   Average Balance Sheets
   (Dollars in Thousands)

  Quarter Ended
March 31, 2005

  Quarter Ended
March 31, 2004

  Average
Balance
 
Interest
  Yield/
Cost
  Average
Balance
 
Interest
  Yield/
Cost
 

Interest-earning assets:

                     

Loans receivable, net (1)

$ 1,187,529

 

$ 17,057

 

5.75%

 

$ 945,349

 

$ 13,643

 

5.77%

Investment securities

256,916

 

2,089

 

3.25%

 

276,845

 

2,204

 

3.18%

FHLB stock

34,271

 

367

 

4.28%

 

25,191

 

237

 

3.76%

Interest-earning deposits

1,267

 

7

 

2.21%

 

502

 

1

 

0.72%

 
                       

Total interest-earning assets

1,479,983

 

19,520

 

5.28%

 

1,247,887

 

16,085

 

5.16%

                       

Non interest-earning assets

52,718

         

72,346

       
 

 

 

Total assets

$ 1,532,701

$ 1,320,233

 
                       

Deposits and borrowings:

                     

Checking and money market accounts (2)

$ 222,655

 

290

 

0.53%

 

$ 210,772

 

335

 

0.64%

Savings accounts

302,308

 

1,076

 

1.44%

 

354,170

 

1,358

 

1.54%

Time deposits

406,722

 

2,777

 

2.77%

 

263,325

 

1,562

 

2.38%

 
                       

Total deposits

931,685

 

4,143

 

1.80%

 

828,267

 

3,255

 

1.58%

                       

Borrowings

452,090

 

4,346

 

3.90%

 

339,186

 

3,188

 

3.77%

 

 

 

Total deposits and borrowings

1,383,775

 

8,489

 

2.49%

 

1,167,453

 

6,443

 

2.21%

                       

Other liabilities

30,616

45,444

 
                       

Total liabilities

1,414,391

         

1,212,897

       
                       

Stockholders' equity

118,310

         

107,336

       
 
Total liabilities and stockholders'
   equity


$ 1,532,701


$ 1,320,233

 
                       

Net interest income

   

$ 11,031

         

$ 9,642

   
 
                       

Interest rate spread (3)

       

2.79%

         

2.95%

Net interest margin (4)

       

2.98%

         

3.09%

Ratio of average interest-earning
   assets to average interest-bearing
   liabilities



106.95%



106.89%

Return on average assets

       

1.20%

         

1.25%

Return on average equity

       

15.48%

         

15.33%

 
                       
(1) The average balance includes loans held for sale, receivable from sale of loans and non-accrual loans. Interest includes the net deferred loan fee amortization of $56,000 and $209,000 for the quarter ended March 31, 2005 and 2004, respectively.
(2) Includes average balance of non-interest bearing checking accounts of $48.3 million and $43.6 million during the quarters ended March 31, 2005 and 2004, respectively.
(3) Represents the difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities.
(4) Represents net interest income before provision for loan losses as a percentage of average interest-earning assets.



20

<PAGE>




   Average Balance Sheets
   (Dollars in Thousands)


  Nine Months Ended
March 31, 2005

  Nine Months Ended
March 31, 2004

  Average
Balance
 
Interest
  Yield/
Cost
  Average
Balance
 
Interest
  Yield/
Cost
 

Interest-earning assets:

                     

Loans receivable, net (1)

$ 1,109,641

 

$ 47,506

 

5.71%

 

$ 894,690

 

$ 39,449

 

5.88%

Investment securities

262,077

 

6,293

 

3.20%

 

280,330

 

6,065

 

2.88%

FHLB stock

31,478

 

1,040

 

4.41%

 

22,766

 

670

 

3.92%

Interest-earning deposits

1,354

 

18

 

1.77%

 

1,277

 

11

 

1.15%

 
                       

Total interest-earning assets

1,404,550

 

54,857

 

5.21%

 

1,199,063

 

46,195

 

5.14%

                       

Non interest-earning assets

54,351

         

70,352

       
 

Total assets

$ 1,458,901

$ 1,269,415

 
                       

Deposits and borrowings:

                     

Checking and money market
   accounts(2)


$ 220,148

 


879

 


0.53%

 


$ 201,952

 


1,074

 


0.71%

Savings accounts

319,768

 

3,483

 

1.45%

 

332,185

 

3,989

 

1.59%

Time deposits

365,104

 

7,264

 

2.65%

 

269,092

 

5,001

 

2.47%

 
                       

Total deposits

905,020

 

11,626

 

1.71%

 

803,229

 

10,064

 

1.66%

                       

Borrowings

407,386

 

11,873

 

3.88%

 

317,659

 

9,318

 

3.89%

 

 

 

Total deposits and borrowings

1,312,406

 

23,499

 

2.39%

 

1,120,888

 

19,382

 

2.30%

                       

Other liabilities

32,057

43,207

 
                       

Total liabilities

1,344,463

         

1,164,095

       
                       

Stockholders' equity

114,438

         

105,320

       
 
Total liabilities and stockholders'
   equity


$ 1,458,901


$ 1,269,415

 
                       

Net interest income

   

$ 31,358

         

$ 26,813

   
 
                       

Interest rate spread (3)

       

2.82%

         

2.84%

Net interest margin (4)

       

2.98%

         

2.98%

Ratio of average interest-earning
   assets to average interest-bearing
   liabilities



107.02%



106.97%

Return on average assets

       

1.27%

         

1.13%

Return on average equity

       

16.16%

         

13.65%

 
                       
(1) The average balance includes loans held for sale, receivable from sale of loans and non-accrual loans. Interest includes the net deferred loan fee amortization of $146,000 and $613,000 for the nine months ended March 31, 2005 and 2004, respectively.
(2) Includes average balance of non-interest bearing checking accounts of $46.4 million and $45.3 million during the nine months ended March 31, 2005 and 2004, respectively.
(3) Represents the difference between weighted average yield on all interest-earning assets and weighted average rate on all interest-bearing liabilities.
(4) Represents net interest income before provision for loan losses as a percentage of average interest-earning assets.








21

<PAGE>




The following tables provide the rate/volume variances for the quarters and nine months ended March 31, 2005 and 2004, respectively:

Rate/Volume Variance
(In Thousands)

  Quarter Ended March 31, 2005 Compared
to Quarter Ended March 31, 2004
Increase (Decrease) Due to

 


Rate

 


Volume

 

Rate/
Volume

 


Net

 

Interest-earning assets:

                     

    Loans receivable (1)

$ (67

)

 

$ 3,493

   

$ (12

)

 

$ 3,414

 

    Investment securities

46

   

(158

)

 

(3

)

 

(115

)

    FHLB stock

33

   

85

   

12

   

130

 

    Interest-bearing deposits

2

   

1

   

3

   

6

 
 

Total net change in income
   on interest-earning assets


14


3,421


-


3,435

                     

Interest-bearing liabilities:

                     

    Checking and money market accounts

(61

)

 

19

   

(3

)

 

(45

)

    Savings accounts

(98

)

 

(197

)

 

13

   

(282

)

    Time deposits

235

   

842

   

138

   

1,215

 

    Borrowings

72

   

1,050

   

36

   

1,158

 
 

Total net change in expense on
   interest-bearing liabilities


148


1,714


184


2,046

 

Change in net interest income

$ (134

)

$ 1,707

$ (184

)

$ 1,389

 
               
(1) Includes loans held for sale and receivable from sale of loans. For purposes of calculating volume, rate and rate/volume variances, non-accrual loans were included in the weighted-average balance outstanding.


  Nine months Ended March 31, 2005 Compared
to Nine months Ended March 31, 2004
Increase (Decrease) Due to

 


Rate

 


Volume

 

Rate/
Volume

 


Net

 

Interest-earning assets:

                     

    Loans receivable (1)

$ (1,148

)

 

$ 9,479

   

$ (274

)

 

$ 8,057

 

    Investment securities

666

   

(394

)

 

(44

)

 

228

 

    FHLB stock

82

   

256

   

32

   

370

 

    Interest-bearing deposits

6

   

1

   

-

   

7

 
 

Total net change in income
   on interest-earning assets

(394

)

9,342

(286

)

8,662

                     

Interest-bearing liabilities:

                     

    Checking and money market accounts

(267

)

 

97

   

(25

)

 

(195

)

    Savings accounts

(371

)

 

(148

)

 

13

   

(506

)

    Time deposits

353

   

1,780

   

130

   

2,263

 

    Borrowings

(58

)

 

2,620

   

(7

)

 

2,555

 
 

Total net change in expense on
   interest-bearing liabilities


(343


)


4,349


111


4,117

 

Change in net interest income

$ (51

)

$ 4,993

$ (397

)

$ 4,545

 
               
(1) Includes loans held for sale and receivable from sale of loans. For purposes of calculating volume, rate and rate/volume variances, non-accrual loans were included in the weighted average balance outstanding.



22

<PAGE>




Provision for Loan Losses. A $404,000 loan loss provision was recorded during the third quarter of fiscal 2005, as compared to $420,000 during the same period of fiscal 2004. During the third quarter of fiscal 2005, specific valuation allowances of $102,000 were released to the general valuation allowance on five classified commercial business loans. The release was due primarily to one loan, which was paid-in-full and adequate collateral coverage on the four remaining loans. For the nine months ended March 31, 2005, the loan loss provision was $1.3 million, an increase of 90 percent from $689,000 in the comparable period last year. The loan loss provision was recorded primarily in response to loan growth during the third quarter and the nine months of fiscal 2005, particularly in "preferred" loans, which have a higher risk profile than single-family loans.

The allowance for loan losses was $8.9 million at March 31, 2005 as compared to $7.6 million at June 30, 2004. The allowance for loan losses as a percentage of gross loans held for investment was 0.80 percent at March 31, 2005 as compared to 0.88 percent at June 30, 2004. Management considers the allowance for loan losses sufficient to absorb probable incurred losses inherent in loans held for investment.

The allowance for loan losses is maintained at a level sufficient to provide for estimated probable losses based on evaluating known and inherent risks in the loan portfolio and upon management's continuing analysis of the factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the loan portfolio, 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 probable incurred losses inherent in the portfolio. Although management believes it uses the best information available to make such determinations, there can be no assurance that regulators, in reviewing the Corporation's loan portfolio, will not request the Corporation 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 due to economic, operating, regulatory, and other conditions beyond the control of the Corporation.











23

<PAGE>




The following table is provided to disclose additional details on the Corporation's allowance for loan losses and asset quality (dollars in thousands):

  For the Quarter Ended
March 31,

  For Nine months Ended
March 31,

 
 

2005

   

2004

 

2005

   

2004

 
 
                     

Allowance at beginning of period

$ 8,510

   

$ 7,480

 

$ 7,614

   

$ 7,218

 

Provision for loan losses

404

   

420

 

1,306

   

689

 

Recoveries:

                   

Consumer loans

-

   

1

 

-

   

1

 
 
                     

    Total recoveries

-

   

1

 

-

   

1

 
                     

Charge-offs:

                   

Commercial business loans

(32

)

 

-

 

(32

)

 

-

 

Consumer loans

(3

)

 

(2

)

(9

)

 

(9

)

Other loans

-

   

(15

)

-

   

(15

)

 
                     

    Total charge-offs

(35

)

 

(17

)

(41

)

 

(24

)

 
                     

    Net charge-offs

(35

)

 

(16

)

(41

)

 

(23

)

 

       Balance at end of period

$ 8,879

   

$ 7,884

 

$ 8,879

   

$ 7,884

 
 
                     
Allowance for loan and lease losses as a
    percentage of gross loans held for
    investment



0.80%



0.89%



0.80%



0.89%

                     
Net charge-offs as a percentage of
    average loans outstanding during
    the period



0.01%



0.01%



-



-

                     
Allowance for loan and lease losses as a
    percentage of non-performing loans
    at the end of the period



1,520.38%



522.47%



1,520.38%



522.47%

 

Non-Interest Income. Total non-interest income increased $464,000, or nine percent, to $5.4 million during the quarter ended March 31, 2005 from $4.9 million during the same period of fiscal 2004. The increase in non-interest income was primarily attributable to an increase in the gain on sale of loans. A $63,000 impairment reserve on the servicing asset was recorded in the third quarter of fiscal 2005. The servicing asset is evaluated quarterly for impairment and the impairment reserve is adjusted in response to accelerated or slower prepayments of the underlying loans serviced for others, which reduces or increases the value of the servicing asset.

The gain on sale of loans increased $583,000, or 16 percent, to $4.2 million for the quarter ended March 31, 2005 from $3.6 million during the same quarter of fiscal 2004. This increase was primarily the result of a higher volume of loans originated for sale, partly offset by a lower average loan sale margin. The gain on sale of loans includes an unfavorable adjustment of $436,000 on derivative financial instruments (SFAS No. 133) in the quarter ended March 31, 2005 as compared to an unfavorable adjustment of $379,000 in the same period of fiscal 2004. 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 $350.2 million in the third quarter of fiscal 2005 as compared to $294.1 million in the same quarter of fiscal 2004. The average loan sale margin for PBM during the third quarter of fiscal 2005 was 1.15 percent, down from 1.17 percent in the same period of fiscal 2004. The volume of loans originated for sale was $333.5 million in the third quarter of fiscal 2005, up 32 percent from $252.1 million during the same period last year, a result of relatively low mortgage interest rates and continued strength in the Southern California real estate market.



24

<PAGE>




In the third quarter of fiscal 2004, 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. The Corporation elected to prospectively apply this guidance to new loan commitments initiated after January 1, 2004. This action results in a delay in the recognition of servicing released premiums until the underlying loans are funded and sold.

The average profit margin for PBM in the third quarter of fiscal 2005 and 2004 was 68 basis points and 71 basis points, respectively. The average profit margin is defined as income before taxes divided by total loans funded during the period (including brokered loans) adjusted for the change in commitments to extend credit. The decrease in the profit margin was primarily attributable to the lower average gain on sale margin.

For the nine months ended March 31, 2005, total non-interest income increased $4.3 million, or 31 percent, to $18.0 million from $13.7 million during the same period of fiscal 2004. The increase in non-interest income was primarily attributable to an increase in the gain on sale of loans and the gain on sale of investment securities. The Corporation sold 6,000 shares of Freddie Mac common stock for a gain of $384,000 in the first quarter of fiscal 2005. A $99,000 impairment reserve on the servicing asset was recorded during the nine months of fiscal 2005.

For the nine months ended March 31, 2005, the gain on sale of loans increased $4.1 million, or 43 percent, to $13.6 million from $9.5 million during the same period of fiscal 2004. This increase was primarily the result of a higher volume of loans originated for sale and a higher average loan sale margin. The gain on sale of loans includes an unfavorable adjustment of $263,000 on derivative financial instruments (SFAS No. 133) in the nine months ended March 31, 2005 as compared to an unfavorable adjustment of $1.3 million in the same period of fiscal 2004. 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 $957.5 million in the nine months of fiscal 2005 as compared to $741.7 million in the same period of fiscal 2004. The average loan sale margin for PBM during the nine months of fiscal 2005 was 1.38 percent, up from 1.28 percent in the same period of fiscal 2004.

The average profit margin for PBM in the nine months of fiscal 2005 and 2004 was 87 basis points and 77 basis points, respectively.

Non-Interest Expense. Total non-interest expense increased $947,000, or 14 percent, to $7.9 million in the quarter ended March 31, 2005 from $7.0 million during the same quarter of fiscal 2004. The increase in non-interest expense was primarily the result of an increase in variable compensation expense related to loan production volume in the community banking business and the mortgage banking business. Although non-interest expense increased for the third quarter of fiscal 2005, the efficiency ratio remained unchanged at 48 percent as compared to the third quarter of fiscal 2004.

For the nine months ended March 31, 2005, total non-interest expense increased $2.4 million, or 11 percent, to $23.6 million from $21.2 million during the same period of fiscal 2004. The efficiency ratio improved to 48 percent from 52 percent during the same period of fiscal 2004.

Income taxes. Income tax expense was $3.5 million for the quarter ended March 31, 2005 as compared to $3.0 million during the same period of fiscal 2004. The effective tax rate for the quarters ended March 31, 2005 and 2004 was approximately 43.1 percent and 42.3 percent, respectively. The Corporation believes that the effective income tax rate applied in the third quarter of fiscal 2005 reflects its current income tax obligations.

For the nine months ended March 31, 2005, income tax expense was $10.5 million as compared to $7.9 million during the same period of fiscal 2004. The effective tax rate for the nine months ended March 31, 2005 and 2004 was approximately 43.2 percent and 42.3 percent, respectively. The Corporation believes that the effective income tax rate applied in the nine months of fiscal 2005 reflects its current income tax obligations and anticipates the effective tax rate for the remainder of the fiscal year to be approximately 43.2 percent.



25

<PAGE>




The following table is provided to disclose details related to the volume of loans originated, purchased and sold:

Loan Volume Activities
(In Thousands)


  For the Quarter Ended
March 31,

  For Nine months Ended
March 31,

 
 

2005

   

2004

 

2005

   

2004

 
 

Loans originated for sale:

                   

   Retail originations

$ 100,065

   

$ 110,316

 

$ 275,476

   

$ 355,331

 

   Wholesale originations

233,474

   

141,772

 

668,230

   

433,104

 
 

      Total loans originated for sale (1)

333,539

   

252,088

 

943,706

   

788,435

 
                     

Loans sold:

                   

   Servicing released

(315,428

)

 

(211,469

)

(900,802

)

 

(640,419

)

   Servicing retained

(26,685

)

 

(45,887

)

(65,891

)

 

(166,493

)

 

      Total loans sold (2)

(342,113

)

 

(257,356

)

(966,693

)

 

(806,912

)

                     

Loans originated for portfolio:

                   

   Mortgage loans:

                   

     Single-family

108,508

71,407

410,766

335,672

     Multi-family

7,579

   

6,875

 

22,501

   

21,977

 

     Commercial real estate

6,390

   

5,923

 

31,973

   

21,692

 

     Construction

30,853

   

35,781

 

89,854

   

92,994

 

   Commercial business loans

1,299

   

1,424

 

5,578

   

2,224

 

   Other loans

225

   

832

 

5,695

   

4,014

 
 
      Total loans originated for portfolio

154,854

   

122,242

 

566,367

   

478,573

 
                     

Loans purchased for portfolio:

                   

   Mortgage loans:

                   

     Multi-family

12,255

   

-

 

21,388

   

-

 

     Commercial real estate

-

   

-

 

2,375

   

1,198

 

     Construction

10,239

   

10,796

 

23,983

   

20,321

 

   Other loans

-

   

-

 

1,250

   

-

 
 

      Total loans purchased for portfolio

22,494

10,796

48,996

21,519

                     

Mortgage loan principal repayments

(101,201

)

 

(112,153

)

(356,284

)

 

(334,251

)

Decrease in other items, net (3)

(11,031

)

(2,094

)

(13,080

)

(7,310

)

 
Net increase in loans held for investment
   and loans held for sale


$ 56,542


$ 13,523


$ 223,012


$ 140,054

 

(1) Primarily comprised of PBM loans originated for sale, totaling $330.0 million, $246.9 million, $929.1 million and $779.0 million for the quarters and nine months ended March 31, 2005 and 2004, respectively.
(2) Primarily comprised of PBM loans sold, totaling $331.4 million, $248.0 million, $935.0 million and $788.0 million for the quarters and nine months ended March 31, 2005 and 2004, respectively.
(3) Includes net changes in undisbursed loan funds, deferred loan fees or costs, discounts or premiums on loans and allowance for loan losses.





26

<PAGE>




Asset Quality

Non-accrual loans, which primarily consisted of single-family loans, decreased $501,000, or 46 percent, to $584,000 at March 31, 2005 from $1.1 million at June 30, 2004. No interest accruals were made for loans that were past due 90 days or more.

The non-accrual and 90 days or more past due loans as a percentage of net loans held for investment was 0.05 percent at March 31, 2005, down from 0.13 percent at June 30, 2004. Non-performing assets as a percentage of total assets improved to 0.04 percent at March 31, 2005 from 0.08 percent at the June 30, 2004.

The following table is provided to disclose details on asset quality (dollars in thousands):

  At March 31,
2005
  At June 30,
2004
 

Loans accounted for on a non-accrual basis:

     

Mortgage loans:

     

    Single-family

$ 584

 

$ 1,044

Commercial business loans

-

 

41

 
       

    Total

584

 

1,085

       
Accruing loans which are contractually
   past due 90 days or more


-

 


-

 
       

Total of non-accrual and 90 days past due loans

-

 

1,085

       

Real estate owned

-

 

-

 
       

    Total non-performing assets

$ 584

 

$ 1,085

 
       
Non-accrual and 90 days or more past due loans
   as a percentage of loans held for
   investment, net



0.05%



0.13%

       
Non-accrual and 90 days or more past due loans
   as a percentage of total assets


0.04%


0.08%

       
Non-performing assets as a percentage of
   total assets


0.04%

 


0.08%

 

The Bank reviews loans individually to identify when impairment has occurred. A loan is identified as impaired when it is deemed probable that the borrower will be unable to meet the scheduled principal and interest payments under the terms of the loan agreement. Impairment is based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the Bank may measure impairment based on a loan's observable market price or the fair value of the collateral if the loan is collateral dependent. As of March 31, 2005, the impaired loan balance was $75,000 with specific valuation allowances of $75,000, compared to the impaired loan balance of $1.3 million with specific valuation allowances of $365,000 at June 30, 2004.

Liquidity and Capital Resources

The Corporation's primary sources of funding include deposits, proceeds from loan interest and scheduled principal payments, sales of loans, loan prepayments, interest income on investment securities, the maturity or principal payments on investment securities, and FHLB advances. While maturities and the scheduled




27

<PAGE>




amortization of loans and investment securities are predictable sources of funds, deposit flows, loan sales, and mortgage prepayments are greatly influenced by interest rates, economic conditions, and competition.

The Bank has a standard credit facility available from the FHLB of San Francisco equal to 40 percent of its total assets, collateralized by loans, securities and FHLB stock. As of March 31, 2005, the Bank's available credit facility from the FHLB was $607.5 million. In addition to the FHLB credit facility, the Bank has an unsecured line of credit in the amount of $45.0 million with its correspondent bank.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth, to cover deposit withdrawals, to satisfy financial commitments and take advantage of investment opportunities. The Bank generally maintains sufficient cash to meet short-term liquidity needs. At March 31, 2005, cash and cash equivalents totaled $25.9 million, or 1.6 percent of total assets. Depending on market conditions and the pricing of deposit products and FHLB borrowings, the Bank may rely on FHLB borrowings or unsecured lines of credit for its liquidity needs.

Although the OTS eliminated the minimum liquidity requirement for savings institutions in April 2001, regulation still requires thrifts to maintain adequate liquidity to assure safe and sound operation. The Bank's average liquidity ratio for the quarter ended March 31, 2005 decreased to 12.4 percent from 19.0 percent during the same period in 2004. This decrease was primarily a result of redeployment of available cash flows into loans held for investment.

The Bank is committed to changing the loan portfolio composition with more emphasis on preferred loans. These loans generally have higher yields than single-family loans. During the third quarter of fiscal 2005, the volume of loans generated for the portfolio increased $44.3 million, or 33 percent, to $177.3 million as compared to $133.0 million in the comparable period last year. Of the total loans generated for the portfolio in the third quarter of fiscal 2005, $68.6 million, or 39 percent were preferred loans. For the nine months ended March 31, 2005 and 2004, the volume of loans generated for the portfolio increased $115.3 million, or 23 percent, to $615.4 million as compared to $500.1 million in the comparable period last year. Of the total loans generated for the portfolio in the nine months of fiscal 2005, $197.7 million, or 32 percent were preferred loans.

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet certain 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 classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.






28

<PAGE>




The Bank's capital amounts and ratios as of March 31, 2005 and June 30, 2004 are as follows (dollars in thousands):

  March 31, 2005
  June 30, 2004
 

Amount

Percent

 

Amount

Percent

 
               

Tier 1 (core) capital

$ 97,517

6.05

%

 

$ 90,402

6.90

%

Requirement to be "Well Capitalized"

80,656

5.00

   

65,485

5.00

 
 

Excess over requirement

$ 16,861

1.05

%

 

$ 24,917

1.90

%

 
               

Total risk-based capital

$ 103,803

10.48

%

 

$ 94,983

12.39

%

Requirement to be "Well Capitalized"

99,049

10.00

   

76,677

10.00

 
 

Excess over requirement

$ 4,754

0.48

%

 

$ 18,306

2.39

%

 
               

Tier 1 risk-based capital

$ 94,821

9.57

%

 

$ 87,385

11.40

%

Requirement to be "Well Capitalized"

59,429

6.00

   

46,006

6.00

 
 

Excess over requirement

$ 35,392

3.57

%

 

$ 41,379

5.40

%

 

Commitments and Derivative Financial Instruments

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 counter party to these financial instruments, is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in entering into financial instruments with off-balance sheet risk as it does for on-balance sheet instruments. For discussion on commitments and derivative financial instruments, see Note 4 on page 10.

Stockholders' Equity

The ability of the Corporation to pay dividends depends > primarily on the >ability of the Bank to pay dividends to the Corporation. The >Bank may not declare or pay a cash dividend if the effect thereof >would cause its net worth to be reduced below either the amounts required >for the liquidation account established by the Bank in connection with the Conversion or the regulatory capital requirements imposed >by federal and state regulation. During the nine months of fiscal 2005, the Bank paid $5.5 million of cash dividends to the Corporation for the primary purpose of funding stock repurchases and cash dividends declared to shareholders. The Corporation paid $2.7 million of cash dividends to its shareholders in the nine months of fiscal 2005.

The Corporation repurchased 138,470 shares of its common stock under the existing authorized stock repurchase program during the nine months of fiscal 2005 at an average price of $24.20 per share. As of March 31, 2005, 39 percent of the authorized shares of the June 2004 stock repurchase plan were purchased, leaving approximately 216,115 shares available for future repurchase.

Incentive Plans

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



29

<PAGE>




recognizes compensation expense for the MRP based on the fair value of the shares at the award date. MRP compensation expense was $34,000 for the quarters ended March 31, 2005 and 2004. For the nine months ended March 31, 2005 and 2004, the MRP compensation expense was $101,000 and $102,000, respectively. As of March 31, 2005, a total of 23,058 shares were allocated and outstanding, pending their respective distribution schedules.

Stock Option Plan:
The Corporation established the 1996 Stock Option Plan ("1996 SOP") for certain of its directors and key employees under which options to acquire up to 1.15 million shares of common stock may be granted. On November 18, 2003, shareholders approved the 2003 Stock Option Plan ("2003 SOP") for certain of its directors and key employees under which options to acquire up to 352,500 shares of common stock 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 grant. Options vest over a five-year period 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 (see Note 7 on page 12). The maximum term of the options granted is 10 years. In the nine months of fiscal 2005, a total of 65,500 options were granted, 43,450 options were forfeited and 44,650 options were exercised. As of March 31, 2005, the number of options available for future grants (under both plans) were 91,700 shares. As of March 31, 2005, a total of 1,002,250 options were outstanding with an average exercise price of $14.36 per option and an average remaining life of 5.66 years.

Supplemental Information

  March 31,
2005
  June 30,
2004
  March 31,
2004
 
           

Loans serviced for others (in thousands)

$ 285,368

 

$ 269,385

 

$ 231,464

           

Book value per share

$ 17.09

 

$ 15.51

 

$ 15.26

 

ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk

The principal financial objective of the Corporation's interest rate risk management function is to achieve long-term profitability while limiting the Corporation's exposure to the fluctuation of interest rates. The Bank, through its Asset and Liability Committee seeks to reduce the exposure of its earnings to changes in market interest rates by managing the mismatch between asset and liability cash flows. The principal element in achieving this objective is to manage the interest-rate sensitivity of the Bank's assets by holding loans with interest rates subject to periodic market adjustments. In addition, the Bank maintains a liquid investment portfolio composed of government agency securities, including mortgage-backed securities, and investment grade securities. The Bank relies on retail deposits as its primary source of funding while using FHLB advances as a secondary source of funding. As part of its interest rate risk management strategy, the Bank promotes transaction accounts and certificates of deposit with terms up to five years.

Through the use of an internal interest rate risk model, the Bank is able to analyze its interest rate risk exposure by measuring the change in net portfolio value ("NPV") over a variety of interest rate scenarios. NPV is 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 at least 100 basis points with no effect given to any steps that management might take to counter the effect of the interest rate movement.

The results of the internal interest rate risk model are reconciled with the results provided by the OTS on a quarterly basis. Any significant deviations are researched and adjusted where applicable. Historically, the internal model has generally reflected a more conservative position than the OTS model.




30

<PAGE>




The following table is provided by the OTS and represents the NPV based on the indicated changes in interest rates as of March 31, 2005 (dollars in thousands).



Basis Points
("bp")
Change in Rates


Net
Portfolio
Value


NPV
Change
(1)


Portfolio
Value of
Assets

NPV as Percentage
of Portfolio Value
Assets
(2)


Sensitivity
Measure
(2)
 

+300 bp

$ 142,175

(32,840

)

$ 1,596,832

8.90%

-152 bp

+200 bp

158,161

(16,854

)

1,628,073

9.71%

-71 bp

+100 bp

169,736

(5,279

)

1,656,106

10.25%

-17 bp

0 bp

175,015

-

1,679,006

10.42%

-100 bp

172,603

(2,412

)

1,694,803

10.18%

-24 bp

 

 

 

(1) Represents the decrease of the NPV at the indicated interest rate change in comparison to the NPV at March 31, 2005 ("base case").
(2) Calculated as the NPV divided by the portfolio value of total assets.
(3) Calculated as the change in the NPV ratio from the base case amount assuming the indicated change in interest rates (expressed in basis points).

The following table is provided by the OTS and represents the change in the NPV at a +200 basis point rate shock at March 31, 2005 and a +200 basis point rate shock at June 30, 2004.

Risk measure: +200/+200 basis point rate shock

At March 31, 2005

At June 30, 2004

 

(+200 bp rate shock)

(+200 bp rate shock)

Pre-shock NPV ratio: NPV as a % of PV Assets

10.42

%

11.47

%

Post-shock NPV ratio: NPV as a % of PV Assets

9.71

%

10.48

%

Sensitivity measure: Change in NPV Ratio

71

bp

99

bp

 

As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets and liabilities may lag behind changes in market interest rates. Additionally, certain assets, such as adjustable rate mortgage ("ARM") loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates of deposit could likely deviate significantly from those assumed when calculating the tables above. It is also possible that, as a result of an interest rate increase, the higher mortgage payments required from ARM borrowers could result in an increase in delinquencies and defaults. Changes in market interest rates may also affect the volume and profitability of the Corporation'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 shareholders 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 others), and immediate, permanent and parallel movements in interest rates of plus 100, plus 200 and minus 100 basis points. The following table describes the results of the analysis for March 31, 2005 and June 30, 2004.




31

<PAGE>




March 31, 2005
  June 30, 2004
Basis Point (bp)
Change in Rates
  Change in
Net Interest Income
  Basis Point (bp)
Change in Rates
  Change in
Net Interest Income
 
   

+200 bp

 

-10.49%

 

+200 bp

 

-13.28%

+100 bp

 

-3.35%

 

+100 bp

 

-7.45%

-100 bp

 

+2.52%

 

-100 bp

 

+2.00%

 
   

In both of the periods described above, the Bank is liability sensitive. Therefore, in a rising interest rate environment, the results project a decline in net interest income over the subsequent 12-month period, and in a falling interest rate environment, the results project an increase in net interest income over the subsequent 12-month period.

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 our previous disclosures, over time, within the context of the actual performance of the treasury yield curve.

ITEM 4 - Controls and Procedures


(a) Evaluation of Disclosure Controls and Procedures. An evaluation of the Corporation's disclosure controls and procedure (as defined in Section 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934 (the "Act")) was carried out under the supervision and with the participation of the Corporation's Chief Executive Officer, Chief Financial Officer and the Corporation's Disclosure Committee as of the end of the period covered by this quarterly report. The Corporation's Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures as currently in effect are effective in ensuring that the information required to be disclosed by the Corporation in the reports it files or submits under the Act is (i) accumulated and communicated to the Corporation's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
 
(b) Changes in Internal Controls. In the quarter ended March 31, 2005, the Corporation did not make any significant changes in, nor were any corrective actions required, regarding its internal controls or other factors that could materially affect these controls. The Corporation intends to continually review and evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Corporation's business. While the Corporation believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Corporation to modify its disclosure controls and procedures.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Corporation or its subsidiaries are engaged in legal proceedings in the ordinary course of business, none of which are currently considered to have a material impact on the Corporation's financial position or results of operations.



32

<PAGE>




Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below represents the issuer purchases of equity securities for the third quarter of fiscal 2005.





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*
 

January 2005

-

-

110,000

244,585

February 2005

28,470

$ 27.94

138,470

216,115

March 2005

-

-

138,470

216,115

 

Total

28,470

$ 27.94

138,470

216,115

 

(*) On June 28, 2004 the Corporation announced a plan to repurchase up to five percent of its common stock, or approximately 354,585 shares, over a one-year period depending on market conditions and the capital requirements of the Corporation.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

a) Exhibits:
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.
 
b) Reports on Form 8-K:
(1) The Corporation filed Form 8-K dated January 20, 2005 regarding its earnings for the quarter ended December 31, 2004.
(2) The Corporation filed Form 8-K dated January 21, 2005 regarding an Investor Presentation on the Corporation's website.
(3) The Corporation filed Form 8-K dated January 25, 2005 regarding a quarterly cash dividend of $0.14 per share on the Corporation's outstanding shares of common stock with a record date on February 18, 2005, payable on March 14, 2005.


33

<PAGE>




SIGNATURES

Pursuant to the requirements 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.
 
 
May 6, 2005 /s/ Craig G. Blunden                         
Craig G. Blunden
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
 
 
May 6, 2005 /s/ Donavon P. Ternes                  
Donavon P. Ternes
Chief Financial Officer
(Principal Financial and Accounting Officer)










34

<PAGE>




Exhibit 31.1

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


I, Craig G. Blunden, Chairman, President and Chief Executive Officer of Provident Financial Holdings, Inc., certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of Provident Financial Holdings, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: May 6, 2005 /s/ Craig G. Blunden                    
Craig G. Blunden
Chairman, President and Chief Executive Officer


<PAGE>




Exhibit 31.2

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


I, Donavon P. Ternes, Chief Financial Officer of Provident Financial Holdings, Inc., certify that:
 
1. I have reviewed this Quarterly Report on Form 10-Q of Provident Financial Holdings, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: May 6, 2005 /s/ Donavon P. Ternes                    
Donavon P. Ternes
Chief Financial Officer


<PAGE>




Exhibit 32.1

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 Quarterly Report on Form 10-Q of Provident Financial Holdings, Inc. (the "Corporation") for the period ended March 31, 2005 (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.

Date: May 6, 2005 /s/ Craig G. Blunden                    
Craig G. Blunden
Chairman, President and Chief Executive Officer











<PAGE>




Exhibit 32.2

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 Quarterly Report on Form 10-Q of Provident Financial Holdings, Inc. (the "Corporation") for the period ended March 31, 2005 (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.

Date: May 6, 2005 /s/ Donavon P. Ternes                    
Donavon P. Ternes
Chief Financial Officer











<PAGE>