10-Q/A 1 q123107q.htm PROVIDENT FINANCIAL HOLDINGS, INC. FORM 10-Q/A q33108.htm

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

FORM 10-Q/A
 
 
(Mark One)  (Amendment No. 1) 
                                                    
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended ……………………………………....  December 31, 2007

[  ]
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                                                             
           33-0704889
(State or other jurisdiction of    
 (I.R.S. Employer
incorporation or organization) 
 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    X .      No          .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  [   ]  
Accelerated filer   [X] 
Non-accelerated filer   [   ] 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes       .     No       X  .

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: 
As of February 5, 2008
   
  Common stock, $ 0.01 par value, per share 
6,196,434 shares* 
 
* Includes 58,709 shares held by the Employee Stock Ownership Plan that have not been released, committed to be released, or allocated to participant
   accounts.

 
 

 

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”) to our Form 10-Q for the quarter ended December 31, 2007, initially filed with the Securities and Exchange Commission (“SEC”) on February 7, 2008 (“Original Form 10-Q”), is being filed to reflect the restatement of our Condensed Consolidated Statements of Financial Condition as of December 31, 2007 and June 30, 2007, the related Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the quarters and six months ended December 31, 2007 and 2006, and the notes related thereto.  For a more detailed description of the restatement, see Note 1, “Restatement of Condensed Consolidated Financial Statements” to the accompanying condensed consolidated financial statements.

On April 22, 2008, the Corporation’s Audit Committee determined that the financial statements should be restated after concluding that an error occurred in the accounting for the Corporation sponsored Employee Stock Ownership Plan (“ESOP”).  The error consisted of releasing fewer shares of common stock than required to be released commensurate with the repayment of the ESOP loan.  The restated financial statements reflect the additional compensation expense required as a result of releasing more shares.  For a description of the changes made in connection with the Restatement (“Restatement”) see Note 1, “Restatement of Condensed Consolidated Financial Statements” to the accompanying unaudited interim  condensed consolidated financial statements contained in this report.

This Form 10-Q/A only amends and restates Items 1, 2 and 4 of Part I in each case as a result of, and to reflect, the restatement of the Original Form 10-Q.  In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Form 10-Q has been amended to contain currently dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.  Except for the forgoing amended information, this Form 10-Q/A continues to speak as of the date of the Original Form 10-Q and we have not updated the disclosure contained herein to reflect events that have been or will be addressed in our quarterly report on Form 10-Q for the quarter ended March 31, 2008 and our current reports on Form 8-K filed subsequent to the original Form 10-Q and any reports filed with the SEC subsequent to the date of this filing.



 
 

 

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:
 
       
 
Condensed Consolidated Statements of Financial Condition (as restated)
 
   
as of December 31, 2007 and June 30, 2007
1
 
Condensed Consolidated Statements of Operations (as restated)
 
   
for the Quarters and Six Months ended December 31, 2007 and 2006
2
 
Condensed Consolidated Statements of Stockholders’ Equity (as restated)
 
   
for the Quarters and Six Months ended December 31, 2007 and 2006
3
 
Condensed Consolidated Statements of Cash Flows (as restated)
 
   
for the Six Months ended December 31, 2007 and 2006
5
 
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
 
Executive Summary and Operating Strategy
15
 
Off-Balance Sheet Financing Arrangements and Contractual Obligations
16
 
Comparison of Financial Condition at December 31, 2007 and June 30, 2007
16
 
Comparison of Operating Results
 
   
for the Quarters and Six Months ended December 31, 2007 and 2006
18
 
Asset Quality
28
 
Loan Volume Activities
31
 
Liquidity and Capital Resources
32
 
Commitments and Derivative Financial Instruments
33
 
Stockholders’ Equity
33
 
Incentive Plans
34
   
Equity Incentive Plan
 
   
Stock Option Plans
 
   
Management Recognition Plan
 
 
Supplemental Information
38
     
 ITEM 4  -       
Controls and Procedures  38 
       
PART II  -
OTHER INFORMATION
 
       
 ITEM 6  -
Exhibits
39
       
SIGNATURES
41
   


 
 

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Financial Condition
(Unaudited)
Dollars in Thousands

   
December 31,
   
June 30,
 
   
2007
(As Restated –
See Note 1)
   
2007
(As Restated –
See Note 1)
 
Assets
           
     Cash and due from banks
  $ 12,511     $ 11,024  
     Federal funds sold
    -       1,800  
                Cash and cash equivalents
    12,511       12,824  
                 
     Investment securities – held to maturity
               
          (fair value $4,969 and $18,837, respectively)
    5,000       19,001  
     Investment securities – available for sale, at fair value
    148,542       131,842  
     Loans held for investment, net of allowance for loan losses of
               
          $17,171 and $14,845, respectively
    1,395,404       1,350,696  
     Loans held for sale, at lower of cost or market
    -       1,337  
     Receivable from sale of loans
    19,148       60,513  
     Accrued interest receivable
    7,507       7,235  
     Real estate owned, net
    6,749       3,804  
     Federal Home Loan Bank (“FHLB”) – San Francisco stock
    31,256       43,832  
     Premises and equipment, net
    6,748       7,123  
     Prepaid expenses and other assets
    7,626       10,716  
                 
               Total assets
  $ 1,640,491     $ 1,648,923  
                 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
     Non interest-bearing deposits
  $ 42,582     $ 45,112  
     Interest-bearing deposits
    963,102       956,285  
               Total deposits
    1,005,684       1,001,397  
                 
     Borrowings
    494,384       502,774  
     Accounts payable, accrued interest and other liabilities
    14,300       15,955  
               Total liabilities
    1,514,368       1,520,126  
                 
Commitments and Contingencies
               
                 
Stockholders’ equity:
               
     Preferred stock, $.01 par value (2,000,000 shares authorized;
          none issued and outstanding)
               
    -       -  
     Common stock, $.01 par value (15,000,000 shares authorized;
          12,435,865 and 12,428,365 shares issued, respectively;
          6,196,434 and 6,376,945 shares outstanding, respectively)
               
               
    124       124  
     Additional paid-in capital
    74,180       72,935  
     Retained earnings
    145,587       146,194  
     Treasury stock at cost (6,239,431 and 6,051,420 shares,
          respectively)
               
    (94,797 )     (90,694 )
     Unearned stock compensation
    (261 )     (455 )
     Accumulated other comprehensive income, net of tax
    1,290       693  
                 
               Total stockholders’ equity
    126,123       128,797  
                 
               Total liabilities and stockholders’ equity
  $ 1,640,491     $ 1,648,923  


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

 
1

 


 
PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
In Thousands, Except Per Share Information
 
 
Quarter Ended
December 31,
 
Six Months Ended
December 31,
   
 
2007
(As Restated –
See Note 1)
 
2006
(As Restated –
See Note 1)
 
2007
(As Restated –
See Note 1)
 
2006
(As Restated –
See Note 1)
Interest income:
                     
     Loans receivable, net
$ 21,700 
   
$ 23,001
   
$ 43,214 
   
$ 44,959
 
     Investment securities
1,902 
   
1,857
   
3,646 
   
3,553
 
     FHLB – San Francisco stock
432 
   
593
   
901 
   
1,107
 
     Interest-earning deposits
   
18
   
14 
   
37
 
     Total interest income
24,039 
   
25,469
   
47,775 
   
49,656
 
                       
Interest expense:
                     
     Checking and money market deposits
499 
   
379
   
924 
   
732
 
     Savings deposits
804 
   
671
   
1,591 
   
1,315
 
     Time deposits
7,888 
   
6,437
   
15,946 
   
12,264
 
     Borrowings
5,280 
   
7,497
   
10,373 
   
14,121
 
     Total interest expense
14,471 
   
14,984
   
28,834 
   
28,432
 
                       
Net interest income, before provision for loan losses
9,568 
   
10,485
   
18,941 
   
21,224
 
Provision for loan losses
2,140 
   
3,746
   
3,659 
   
4,383
 
Net interest income, after provision for loan losses
7,428 
   
6,739
   
15,282 
   
16,841
 
                       
Non-interest income:
                     
     Loan servicing and other fees
513 
   
488
   
1,004 
   
964
 
     Gain on sale of loans, net
934 
   
2,919
   
1,056 
   
6,411
 
     Deposit account fees
785 
   
510
   
1,443 
   
1,032
 
     Net (loss) gain on sale of real estate
(229)
 
 
27
   
(168)
 
 
2,340
 
     Other
(56)
 
 
330
   
(13)
 
 
921
 
     Total non-interest income
1,947 
   
4,274
   
3,322 
   
11,668
 
                       
Non-interest expense:
                     
     Salaries and employee benefits
4,522 
   
5,619
   
9,646 
   
11,267
 
     Premises and occupancy
831 
   
745
   
1,538 
   
1,529
 
     Equipment
391 
   
384
   
791 
   
777
 
     Professional expenses
474 
   
278
   
793 
   
542
 
     Sales and marketing expenses
130 
   
216
   
303 
   
477
 
     Other
972 
   
1,241
   
2,017 
   
2,340
 
     Total non-interest expense
7,320 
   
8,483
   
15,088 
   
16,932
 
                       
Income before income taxes
2,055 
   
2,530
   
3,516 
   
11,577
 
Provision for income taxes
1,011 
   
1,295
   
1,860 
   
5,316
 
     Net income
$   1,044 
   
$   1,235
   
$   1,656 
   
$   6,261
 
                       
Basic earnings per share
$ 0.17 
   
$ 0.19
   
$ 0.27 
   
$ 0.94
 
Diluted earnings per share
$ 0.17 
   
$ 0.18
   
$ 0.27 
   
$ 0.92
 
Cash dividends per share
$ 0.18 
   
$ 0.18
   
$ 0.36 
   
$ 0.33
 


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


 
2

 

PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(As Restated – See Note 1)
 (Unaudited)
Dollars in Thousands
For the Quarters Ended December 31, 2007 and 2006

 
 
 
Common
Stock
 
Additional Paid-In
 
 
Retained
 
 
Treasury
 
Unearned Stock
Accumulated
Other Compre-
hensive
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Income
Total
Balance at October 1, 2007, as previously reported
6,232,803
 
$ 124
$ 70,010
 
$ 149,134
 
$ (94,097
)
$    (61
)
$ 1,017
 
$ 126,127
 
Adjustments to opening stockholders’ equity
-
 
-
3,617
 
(3,475
)
-
 
(297
)
-
 
(155
)
Balance at October 1, 2007, as restated
6,232,803
 
124
73,627
 
145,659
 
(94,097
)
(358
)
1,017
 
 125,972
 
                               
Comprehensive income:
                             
   Net income (1)
         
1,044
             
1,044
 
   Unrealized holding gain on securities available
                             
      for sale, net of tax expense of $197
                     
273
   
273
 
Total comprehensive income (1)
                         
1,317
 
                               
Purchase of treasury stock
(36,369
)
         
(700
)
       
(700
)
Amortization of restricted stock
     
63
                 
63
 
Stock options expense
     
136
                 
136
 
Allocation of contributions to ESOP (1) (2)
     
354
         
97
     
451
 
Cash dividends
         
(1,116
)
           
(1,116
)
                               
Balance at December 31, 2007
6,196,434
 
$ 124
$ 74,180
 
$ 145,587
 
$ (94,797
)
$ (261
)
$ 1,290
 
$ 126,123
 

(1)  
As restated, see Note 1.
(2)  
Employee Stock Ownership Plan (“ESOP”).


 
 
 
Common
Stock
 
Additional Paid-In
 
 
Retained
 
 
Treasury
 
Unearned Stock
Accumulated
Other Compre-
hensive
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Income
Total
Balance at October 1, 2006, as previously reported
6,886,345
 
$ 124
$ 67,419
$ 147,082
 
$ (75,922
)
$ (528
)
$  204
 
$ 138,379
 
Adjustments to opening stockholders’ equity
-
 
-
2,875
(2,726
)
-
 
(224
)
-
 
(75
)
Balance at October 1, 2006, as restated
6,886,345
 
124
70,294
144,356
 
(75,922
)
(752
)
204
 
138,304
 
                             
Comprehensive income:
                           
   Net income (1)  
       
1,235
             
1,235
 
   Unrealized holding gain on securities available
                           
      for sale,  net of tax expense of $194
                   
269
   
269
 
Total comprehensive income (1)
                       
1,504
 
                             
Purchase of treasury stock (2)
(191,222
)
       
(5,755
)
       
(5,755
)
Exercise of stock options
1,900
 
-
47
               
47
 
Amortization of restricted stock
     
14
               
14
 
Stock options expense
     
105
               
105
 
Tax benefit from non-qualified equity
                           
  compensation
     
9
               
9
 
Allocation of contributions to ESOP (1)
     
659
       
106
     
765
 
Cash dividends
       
(1,224
)
           
(1,224
)
                             
Balance at December 31, 2006
6,697,023
 
$ 124
$ 71,128
$ 144,367
 
$ (81,677
)
$ (646
)
$  473
 
$ 133,769
 

(1)  
As restated, see Note 1.
(2)  
Includes the repurchase of 884 shares of distributed restricted stock.

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

 
3

 


PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders' Equity
(As Restated – See Note 1)
(Unaudited)
Dollars in Thousands
For the Six Months Ended December 31, 2007 and 2006

 
 
Common
Stock
 
Additional Paid-In
 
 
Retained
 
 
Treasury
 
Unearned Stock
Accumulated
Other
Comprehensive
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Income
Total
Balance at July 1, 2007, as previously reported
6,376,945
 
$ 124
$ 69,456
 
$ 149,523
 
$ (90,694
)
$ (175
)
$    693
 
$ 128,927
 
Adjustments to opening stockholders’ equity
-
 
-
3,479
 
(3,329
)
-
 
(280
)
-
 
(130
)
Balance at July 1, 2007, as restated
6,376,945
 
124
72,935
 
146,194
 
(90,694
)
(455
)
693
 
128,797
 
                               
Comprehensive income:
                             
   Net income (1)
         
1,656
             
1,656
 
   Unrealized holding gain on
      securities available for sale,
                             
      net of tax expense of $432
                     
597
   
597
 
Total comprehensive income (1)
                         
2,253
 
                               
Purchase of treasury stock (2)
(188,011
)
         
(4,096
)
       
(4,096
)
Exercise of stock options
7,500
 
-
69
                 
69
 
Amortization of restricted stock
     
131
                 
131
 
Awards of restricted stock
     
(45
)
   
45
         
-
 
Forfeiture of restricted stock
     
52
     
(52
)
       
-
 
Stock options expense
     
276
                 
276
 
Tax benefit from non-qualified equity
                             
  compensation
     
6
                 
6
 
Allocation of contributions to ESOP (1)
     
756
         
194
     
950
 
Cash dividends
         
(2,263
)
           
(2,263
)
                               
Balance at December 31, 2007
6,196,434
 
$ 124
$ 74,180
 
$ 145,587
 
$ (94,797
)
$ (261
)
$ 1,290
 
$ 126,123
 

(1)  
As restated, see Note 1.
(2)  
Includes the repurchase of 930 shares of distributed restricted stock.


 
 
Common
Stock
 
Additional Paid-In
 
 
Retained
 
 
Treasury
 
Unearned Stock
Accumulated
Other Compre-
hensive (Loss)
 
 
Shares
 
Amount
Capital
Earnings
Stock
Compensation
Income
Total
Balance at July 1, 2006, as previously reported
6,991,842
 
$ 124
$ 66,798
 
$ 142,867
 
$ (72,524
)
$ (644
)
$ (411
)
$ 136,210
 
Adjustment to opening stockholders’ equity
-
 
-
2,642
 
(2,494
)
-
 
(210
)
-
 
(62
)
Balance at July 1, 2006, as restated
6,991,842
 
124
69,440
 
140,373
 
(72,524
)
(854
)
(411
)
136,148
 
                               
Comprehensive income:
                             
   Net income (1)
         
6,261
             
6,261
 
   Unrealized holding gain on
      securities available for sale,
                             
      net of tax expense of $640
                     
884
   
884
 
Total comprehensive income (1)
                         
7,145
 
                               
Purchase of treasury stock (2)
(303,219
)
         
(9,153
)
       
(9,153
)
Exercise of stock options
8,400
 
-
201
                 
201
 
Amortization of restricted stock
     
32
                 
32
 
Stock options expense
     
138
                 
138
 
Tax benefit from non-qualified equity
                             
  compensation
     
32
                 
32
 
Allocation of contributions to ESOP (1)
     
1,285
         
208
     
1,493
 
Cash dividends
         
(2,267
)
           
(2,267
)
                               
Balance at December 31, 2006
6,697,023
 
$ 124
$71,128
 
$ 144,367
 
$ (81,677
)
$ (646
)
$  473
 
$ 133,769
 

(1)  
As restated, see Note 1.
(2)  
Includes the repurchase of 1,696 shares of distributed restricted stock.

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

 
4

 


PROVIDENT FINANCIAL HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited - In Thousands)
 
Six Months Ended
December 31,
 
 
 
2007
(As Restated –
See Note 1)
   
2006
(As Restated –
See Note 1)
 
Cash flows from operating activities:
         
   Net income
$      1,656
   
$      6,261
 
   Adjustments to reconcile net income to net cash provided by
         
    Operating activities:
         
       Depreciation and amortization
1,148
   
1,017
 
       Provision for loan losses
3,659
   
4,383
 
       Provision for losses on real estate
463
   
-
 
       Gain on sale of loans
(1,056
)
 
(6,411
)
       Net loss (gain) on sale of real estate
168
   
(2,340
)
       Stock compensation
1,282
   
1,468
 
       FHLB – San Francisco stock dividend
(1,023
)
 
(1,028
)
   Tax benefit from non-qualified equity compensation
(6
)
 
(32
)
   Decrease in accounts payable and other liabilities
(2,876
)
 
(2,770
)
   Decrease (increase) in prepaid expense and other assets
2,465
   
(707
)
   Loans originated for sale
(197,912
)
 
(631,931
)
   Proceeds from sale of loans and net change in receivable from sale of loans
240,317
   
633,013
 
Net cash provided by operating activities
48,285
   
923
 
           
Cash flows from investing activities:
         
   Net increase in loans held for investment
(53,766
)
 
(132,070
)
   Maturity and call of investment securities held to maturity
14,000
   
13,000
 
   Maturity and call of investment securities available for sale
2,129
   
7,087
 
   Principal payments from mortgage-backed securities
23,382
   
18,844
 
   Purchase of investment securities available for sale
(41,172
)
 
(41,904
)
   Net proceeds from sale of real estate
3,709
   
3,406
 
   Net redemption (purchase) of FHLB – San Francisco stock
13,599
   
(4,094
)
   Purchase of premises and equipment
(144
)
 
(528
)
Net cash used for investing activities
(38,263
)
 
(136,259
)
           
Cash flows from financing activities:
         
   Net increase in deposits
4,287
   
8,845
 
   (Repayment of) proceeds from borrowings, net
(8,390
)
 
143,232
 
   ESOP loan payment
52
   
79
 
   Exercise of stock options
69
   
201
 
   Tax benefit from non-qualified equity compensation
6
   
32
 
   Cash dividends
(2,263
)
 
(2,267
)
   Treasury stock purchases
(4,096
)
 
(9,153
)
Net cash (used for) provided by financing activities
(10,335
)
 
140,969
 
           
Net (decrease) increase in cash and cash equivalents
(313
)
 
5,633
 
Cash and cash equivalents at beginning of period
12,824
   
16,358
 
           
Cash and cash equivalents at end of period
$    12,511
   
$    21,991
 
           
Supplemental information:
         
  Cash paid for interest
$ 29,250
   
$ 27,773
 
  Cash paid for income taxes
$      100
   
$   4,670
 
  Transfer of loans held for sale to loans held for investment
$   8,467
   
$   3,653
 
  Real estate acquired in the settlement of loans
$   8,393
   
$   1,225
 


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

 
5

 


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

December 31, 2007

Note 1:
Restatement of Condensed Consolidated Financial Statements

In February 2008, the Corporation identified an error regarding the failure to release shares of common stock from its ESOP consistent with the repayment of the ESOP loan.  The failure occurred as a result of the application of cash dividend payments received on unallocated ESOP shares to reduce the balance of the ESOP loan.  Additional shares should have been released in the years ended December 31, 2002 through 2007.  Releasing these additional shares results in additional compensation expense to the Corporation for those respective periods.  As a result, the Audit Committee concluded, in accordance with SAB No. 108, that the amounts involved required the restatement of the accompanying condensed consolidated financial statements.  The impact of the adjustments to the previously issued Condensed Consolidated Financial Statements as of December 31, 2007 and June 30, 2007 and for the quarters and six months ended December 31, 2007 and 2006 are summarized in the following tables.

 
As of December 31, 2007
 
As of June 30, 2007
 
As
           
As
         
(Dollars in thousands, except
Previously
           
Previously
         
  earnings per share)
Reported
 
Adjustment
 
Restated
   
Reported
 
Adjustment
 
Restated
 
Condensed Consolidated Statements of
                         
  Financial Condition
                         
Accounts payable, accrued
                         
  interest and other liabilities
 $     14,120
 
 $        180
 
 $     14,300
   
$      15,825
 
$       130
 
$      15,955
 
Total liabilities
  1,514,188
 
180
 
1,514,368
   
1,519,996
 
130
 
1,520,126
 
Additional paid-in capital
       70,490
 
3,690
 
74,180
   
69,456
 
3,479
 
72,935
 
Retained earnings
     149,196
 
(3,609
)
145,587
   
149,523
 
(3,329
)
146,194
 
Unearned stock compensation
          -
 
(261
)
(261
)
 
(175
)
(280
)
(455
)
Total stockholders' equity
     126,303
 
(180
)
126,123
   
128,927
 
 (130
)
128,797
 
                           


 
Quarter Ended December 31, 2007
 
Quarter Ended December 31, 2006
 
As
           
As
         
(Dollars in thousands, except
Previously
           
Previously
         
  earnings per share)
Reported
 
Adjustment
 
Restated
   
Reported
 
Adjustment
 
Restated
 
Condensed Consolidated
                         
  Statements of Operations
                         
Salaries and employee benefits
$ 4,393
 
 $ 129
 
$ 4,522
   
$ 5,359
 
$ 260
 
$ 5,619
 
Total non-interest expense
7,191
 
129
 
7,320
   
8,223
 
260
 
8,483
 
Income before income taxes
2,184
 
(129
)
2,055
   
 2,790
 
 (260
)
2,530
 
Provision for income taxes
1,006
 
5
 
1,011
   
1,295
 
-
 
1,295
 
Net income
1,178
 
(134
)
1,044
   
 1,495
 
(260
)
1,235
 
Basic earnings per share
0.20
 
(0.03
)
0.17
   
 0.23
 
(0.04
)
 0.19
 
Diluted earnings per share
 0.19
 
(0.02
)
0.17
   
 0.22
 
(0.04
)
 0.18
 
                           
Condensed Consolidated Statements of
                         
  Stockholders’ Equity
                         
Net income
1,178
 
(134
)
1,044
   
1,495
 
(260
)
1,235
 
Total comprehensive income
1,451
 
(134
)
1,317
   
1,764
 
(260
)
1,504
 
Allocation of contributions to ESOP
295
 
156
 
451
   
461
 
304
 
765
 
Prepayment of ESOP loan
47
 
(47
)
-
   
58
 
(58
)
-
 
Total stockholders’ equity
126,303
 
(180
)
126,123
   
133,858
 
(89
)
133,769
 
                           

 
6

 


 
Six Months Ended December 31, 2007
 
Six Months Ended December 31, 2006
 
As
           
As
         
(Dollars in thousands, except
Previously
           
Previously
         
  earnings per share)
Reported
 
Adjustment
 
Restated
   
Reported
 
Adjustment
 
Restated
 
Condensed Consolidated
                         
  Statements of Operations
                         
Salaries and employee benefits
$  9,375
 
 $ 271
 
$  9,646
   
$ 10,775
 
$ 492
 
$ 11,267
 
Total non-interest expense
14,817
 
271
 
15,088
   
16,440
 
492
 
16,932
 
Income before income taxes
3,787
 
(271
)
3,516
   
 12,069
 
 (492
)
11,577
 
Provision for income taxes
1,851
 
9
 
1,860
   
5,316
 
-
 
5,316
 
Net income
1,936
 
(280
)
1,656
   
 6,753
 
(492
)
6,261
 
Basic earnings per share
0.32
 
(0.05
)
0.27
   
 1.02
 
(0.08
)
 0.94
 
Diluted earnings per share
 0.32
 
(0.05
)
0.27
   
 1.00
 
(0.08
)
 0.92
 
                           
Condensed Consolidated Statements of
                         
  Stockholders’ Equity
                         
Net income
1,936
 
(280
)
1,656
   
6,753
 
(492
)
6,261
 
Total comprehensive income
2,533
 
(280
)
2,253
   
7,637
 
(492
)
7,145
 
Allocation of contributions to ESOP
627
 
323
 
950
   
922
 
571
 
1,493
 
Prepayment of ESOP loan
93
 
(93
)
-
   
106
 
(106
)
-
 
Total stockholders’ equity
126,303
 
(180
)
126,123
   
133,858
 
(89
)
133,769
 
                           
Condensed Consolidated Statements of
                         
  Cash Flows
                         
Cash flows from operating
                         
  activities
                         
Net income
1,936
 
(280
)
1,656
   
6,753
 
(492
)
6,261
 
Stock-based compensation
1,011
 
271
 
1,282
   
976
 
492
 
1,468
 
Decrease in accounts payable,
                         
  accrued interest and
                         
  other liabilities
(2,833
)
(43
)
(2,876
)
 
(2,691
)
(79
)
(2,770
)
Net cash provided by
                         
  operating activities
48,337
 
(52
)
48,285
   
1,002
 
(79
)
923
 
                           
Cash flows from financing
                         
  activities
                         
ESOP loan payment
-
 
52
 
52
   
-
 
79
 
79
 
Net cash (used for) provided by
                         
  financing activities
(10,387
)
52
 
(10,335
)
 
140,890
 
79
 
140,969
 
                           


Note 2: 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 results of operations for the interim periods presented.  All such adjustments are of a normal, recurring nature.  The condensed consolidated financial statements at June 30, 2007 are derived from the audited consolidated financial statements of Provident Financial Holdings, Inc. and its wholly owned subsidiary, Provident Savings Bank, F.S.B. (the “Bank”) (collectively, 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, 2007, as amended.  
 
Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current period’s presentation.  In the Condensed Consolidated Statement of Financial Condition at June 30, 2007, escrow balances of $1.4 million, previously reported in loans held for investment, were reclassified to interest-bearing deposits; and custodial accounts of $1.4 million, previously reported in accounts payable, accrued interest and other liabilities, were reclassified to non interest-bearing deposits.  In the Condensed Consolidated Statements of Operations for the quarter and six months ended December 31, 2006, interest expense on escrow balances of $18,000 and $35,000, respectively, previously reported in other non-interest expense, was reclassified to interest expense - checking and money market deposits.
 
7

 
The results of operations for the quarter and six months ended December 31, 2007 are not necessarily indicative of results that may be expected for the entire fiscal year ending June 30, 2008.

Note 3: Recent Accounting Pronouncements

Statement of Financial Accounting Standards (“SFAS” or “Statement”) No. 159:
In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.” This Statement permits entities to choose to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments.  This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  Management has not determined the impact, if any, of this Statement on the Corporation’s financial condition, results of operations, or cash flows.

SFAS No. 157:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  This Statement defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  Management has not determined the impact, if any, of this Statement on the Corporation’s financial condition, results of operations, or cash flows.


Note 4: 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. Stock options outstanding as of December 31, 2007 and 2006 were 734,700 and 608,593, respectively.  Of these options outstanding as of December 31, 2007 and 2006, 597,000 and none, respectively, were excluded from the diluted EPS computation as their effect was anti-dilutive.
 
 
8


The following table provides the basic and diluted EPS computations for the quarters and six months ended December 31, 2007 and 2006, respectively.

 
For the Quarter
Ended
December 31,
 
For the Six Months
Ended
December 31,
 
(In Thousands, Except Earnings Per Share)
 
 
2007
 
2006
 
2007
 
2006
Numerator:
             
     Net income – numerator for basic earnings
         per share and diluted earnings per share -
         income available to common stockholders
             
           
$ 1,044
$ 1,235
 
$ 1,656
 
$ 6,261
               
Denominator:
             
     Denominator for basic earnings per share:
         Weighted-average shares
             
6,134
6,623
 
6,186
 
6,690
               
     Effect of dilutive securities:
             
         Stock option dilution
63
 
126
 
58
 
128
         Restricted stock dilution
-
 
1
 
1
 
2
               
     Denominator for diluted earnings per share:
             
         Adjusted weighted-average shares
         and assumed conversions
 
6,197
 
 
6,750
 
 
6,245
 
 
6,820
               
Basic earnings per share
$ 0.17
 
$ 0.19
 
$ 0.27
 
$ 0.94
Diluted earnings per share
$ 0.17
 
$ 0.18
 
$ 0.27
 
$ 0.92

SFAS No. 123R, “Share-Based Payment,” requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and directors.  Effective July 1, 2005, the Corporation adopted SFAS No. 123R using the modified prospective method under which the provisions of SFAS No. 123R are applied to new awards and to awards modified, repurchased or cancelled after June 30, 2005 and to awards outstanding on June 30, 2005 for which requisite service has not yet been rendered.

The adoption of SFAS No. 123R resulted in incremental stock-based compensation expense and is solely related to issued and unvested stock option grants.  The incremental stock-based compensation expense for the quarters ended December 31, 2007 and 2006 was $136,000 and $105,000, respectively.  For the six months ended December 31, 2007 and 2006, the incremental stock-based compensation expense was $276,000 and $138,000, respectively.  For the first six months of fiscal 2008 and 2007, cash provided by operating activities decreased by $6,000 and $32,000, respectively, and cash provided by financing activities increased by an identical amount, respectively, related to excess tax benefits from stock-based payment arrangements.  These amounts are reflective of the tax benefit for stock options exercised and restricted stock distributions during the respective periods.


Note 5: Operating Segment Reports

The Corporation operates in two business segments: community banking through the Bank and mortgage banking through Provident Bank Mortgage (“PBM”), a division of the Bank.
 
 
9


The following tables set forth condensed statements of operations and total assets for the Corporation’s operating segments for the quarters and six months ended December 31, 2007 and 2006, respectively (in thousands).

 
For the Quarter Ended December 31, 2007
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income (loss), after provision for loan
  losses
 
$ 8,624
 
 
$ (1,196
 
)
 
$ 7,428
 
             
Non-interest income:
           
     Loan servicing and other fees (1)
63
 
450
 
513
 
     Gain on sale of loans, net
10
 
924
 
934
 
     Deposit account fees
785
 
-
 
785
 
     Net (loss) gain on sale of real estate
(236
)
7
 
(229
)
     Other
451
 
(507
)
(56
)
          Total non-interest income
1,073
 
874
 
1,947
 
             
Non-interest expense:
           
     Salaries and employee benefits
3,321
 
1,201
 
4,522
 
     Premises and occupancy
491
 
340
 
831
 
     Operating and administrative expenses
926
 
1,041
 
1,967
 
          Total non-interest expense
4,738
 
2,582
 
7,320
 
Income (loss) before taxes
$ 4,959
 
$ (2,904
)
$ 2,055
 
Total assets, end of period
$ 1,619,102
 
$ 21,389
 
$ 1,640,491
 

(1)  
Includes an inter-company charge of $352 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.


 
For the Quarter Ended December 31, 2006
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income (loss), after provision for loan
  losses
 
$ 6,788
 
 
$     (49
 
)
 
$ 6,739
 
             
Non-interest income:
           
     Loan servicing and other fees (1)
(421
)
909
 
488
 
     Gain on sale of loans, net
19
 
2,900
 
2,919
 
     Deposit account fees
510
 
-
 
510
 
     Net gain on sale of real estate
27
 
-
 
27
 
     Other
328
 
2
 
330
 
          Total non-interest income
463
 
3,811
 
4,274
 
             
Non-interest expense:
           
     Salaries and employee benefits
3,324
 
2,295
 
5,619
 
     Premises and occupancy
488
 
257
 
745
 
     Operating and administrative expenses
907
 
1,212
 
2,119
 
          Total non-interest expense
4,719
 
3,764
 
8,483
 
Income (loss) before taxes
$ 2,532
 
$       (2
)
$ 2,530
 
Total assets, end of period
$ 1,662,127
 
$ 109,744
 
$ 1,771,871
 

(1)  
Includes an inter-company charge of $751 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.
 

 
10

 
For the Six Months Ended December 31, 2007
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income (loss), after provision for loan
  losses
 
$ 17,334
 
 
$ (2,052
 
)
 
$ 15,282
 
             
Non-interest income:
           
     Loan servicing and other fees (1)
(1
)
1,005
 
1,004
 
     Gain on sale of loans, net
33
 
1,023
 
1,056
 
     Deposit account fees
1,443
 
-
 
1,443
 
     Net (loss) gain on sale of real estate
(181
)
13
 
(168
)
     Other
653
 
(666
)
(13
)
          Total non-interest income
1,947
 
1,375
 
3,322
 
             
Non-interest expense:
           
     Salaries and employee benefits
6,801
 
2,845
 
9,646
 
     Premises and occupancy
1,041
 
497
 
1,538
 
     Operating and administrative expenses
1,915
 
1,989
 
3,904
 
          Total non-interest expense
9,757
 
5,331
 
15,088
 
Income (loss) before taxes
$   9,524
 
$ (6,008
)
$   3,516
 
Total assets, end of period
$ 1,619,102
 
$ 21,389
 
$ 1,640,491
 

(1)  
Includes an inter-company charge of $695 credited to PBM by the Bank during the period to compensate PBM for originating loans held for investment.


 
For the Six Months Ended December 31, 2006
   
Provident
 
 
Provident
Bank
Consolidated
 
Bank
Mortgage
Totals
             
Net interest income, after provision for loan losses
$ 16,614
 
$    227
 
$ 16,841
 
             
Non-interest income:
           
     Loan servicing and other fees (1)
(516
)
1,480
 
964
 
     Gain on sale of loans, net
127
 
6,284
 
6,411
 
     Deposit account fees
1,032
 
-
 
1,032
 
     Net gain on sale of real estate
2,340
 
-
 
2,340
 
     Other
919
 
2
 
921
 
          Total non-interest income
3,902
 
7,766
 
11,668
 
             
Non-interest expense:
           
     Salaries and employee benefits
6,790
 
4,477
 
11,267
 
     Premises and occupancy
1,029
 
500
 
1,529
 
     Operating and administrative expenses
1,914
 
2,222
 
4,136
 
          Total non-interest expense
9,733
 
7,199
 
16,932
 
Income before taxes
$ 10,783
 
$    794
 
$ 11,577
 
Total assets, end of period
$ 1,662,127
 
$ 109,744
 
$ 1,771,871
 

(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.


Note 6: Derivative and Other Financial Instruments with Off-Balance Sheet Risks

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit in the form of originating loans or providing funds under existing lines of credit, and forward loan sale agreements to third parties.  These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the accompanying Condensed Consolidated Statements of Financial Condition.  The
 
 
11

 
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.  As of December 31, 2007 and June 30, 2007, the Corporation had commitments to extend credit (on loans to be held for investment and loans to be held for sale) of $29.7 million and $44.5 million, respectively.

 
December 31,
 
June 30,
Commitments
2007
 
2007
(In Thousands)
     
       
Undisbursed loan funds – Construction loans
$ 20,366
 
$ 25,484
Undisbursed lines of credit – Single-family loans
3,472
 
3,326
Undisbursed lines of credit – Commercial business loans
10,330
 
14,532
Undisbursed lines of credit – Consumer loans
1,868
 
1,637
Commitments to extend credit on loans to be held for investment
19,725
 
9,387
Total
$ 55,761
 
$ 54,366

In accordance with SFAS No. 133 and interpretations of the Derivatives Implementation Group of the FASB, the fair value of the commitments to extend credit on loans to be held for sale, forward loan sale agreements, forward commitments to purchase mortgage-backed securities (“MBS”), put option contracts and call option contracts are recorded at fair value on the balance sheet, and are included in other assets or other liabilities.  The Corporation does not apply hedge accounting to its derivative financial instruments; therefore, all changes in fair value are recorded in earnings.  The net impact of derivative financial instruments on the Consolidated Statements of Operations during the quarters ended December 31, 2007 and 2006 was a gain of $30,000 and a loss of $150,000, respectively.  For the six months ended December 31, 2007 and 2006, the net impact of derivative financial instruments on the consolidated statements of operations was a loss of $42,000 and a gain of $169,000, respectively.

 
 December 31, 2007
 
 June 30, 2007
 
December 31, 2006
 
     
Fair
     
Fair
     
Fair
 
Derivative Financial Instruments
Amount
 
Value
 
Amount
 
Value
 
Amount
 
Value
 
(In Thousands)
                       
                         
Commitments to extend credit
                       
  on loans to be held for sale (1)
$ 9,995
 
$ (29
)
$ 35,130
 
$   24
 
$ 31,043
 
$ (55
)
Forward loan sale agreements
(9,995
)
-
 
(27,012
)
(51
)
(19,500
)
43
 
Forward commitments to purchase
                       
   MBS
-
 
-
 
6,500
 
23
 
-
 
-
 
Put option contracts
-
 
-
 
(11,500
)
112
 
(7,500
)
24