UNITED
      STATESSECURITIES
      AND EXCHANGE COMMISSIONWASHINGTON,
      D.C. 20549FORM
      10-Q(Mark
      One)x QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) ofTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the quarterly period ended:  September 30,
      2009ORo TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) ofTHE
      SECURITIES EXCHANGE ACT OF 1934For
      the transition period from _____ to _____Commission
      File Number: 000-50592K-FED BANCORP(Exact
      name of registrant as specified in its
charter)


Federal
            
            20-0411486(State
      or other jurisdiction of incorporation)
            
            (I.R.S.
      Employer Identification No.)1359 N. Grand Avenue, Covina,
      CA
            
            91724(Address
      of principal executive offices)
            
            (Zip
      Code)(800) 524-2274(Registrant’s
      telephone number, including area
code)





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Sections 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 o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes o
No o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):








Large
accelerated filer o                                           Accelerated
filer o
Non-accelerated filer o
Smaller Reporting Company x





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


Yes o
No x





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





Common
Stock, $.01 par value – 13,303,988 shares outstanding as of October 30,
2009.











Form 10-Q





K-FED
BANCORP


Table
of Contents





PagePart
      I.
            FINANCIAL INFORMATIONItem
      1:
            Financial Statements
      (Unaudited)Consolidated Statements of Financial
      Condition at September 30, 2009 and June 30,
    2009
            1Consolidated
      Statements of Income and Comprehensive Income for the
      Three  Months Ended September 30, 2009 and
      2008
            2Consolidated Statement of
      Stockholders’ Equity and Comprehensive Income for the Three Months Ended
      September 30, 2009
            3Consolidated Statements
      of Cash Flows for the Three Months Ended September 30, 2009 and
      2008
            4Notes to Consolidated
      Financial Statements
            5Item
      2:
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            14Item
      3:
            Quantitative and
      Qualitative Disclosures about Market Risk
            24Item
      4:
            Controls and
      Procedures
            26Part
      II.
            OTHER INFORMATIONItem
      1:
            Legal
      Proceedings
            26Item
      1A:
            Risk
      Factors
            26Item
      2:
            Unregistered Sales of Equity
      Securities and Use of Proceeds
            27Item
      3:
            Defaults upon Senior
      Securities
            27Item
      4:
            Submission of
      Matters to a Vote of Security Holders
            27Item
      5:
            Other
      Information
            27Item
      6:
            Exhibits
            27SIGNATURES
            28


Table of Contents


Part
I — FINANCIAL INFORMATION


Item 1. Financial Statements


K-FED
BANCORP AND SUBSIDIARY


Consolidated
Statements of Financial Condition


(Unaudited)


(Dollars
in thousands, except per share data)


September
      30
                2009
              
              
              June
      30
                2009ASSETSCash
      and due from banks
              
              $
              13,847
              
              
              $
              32,685Federal
      funds sold
              
              
              19,660
              
              
              
              41,020Total
      cash and cash equivalents
              
              
              33,507
              
              
              
              73,705Interest
      earning time deposits in other financial institutions
              
              
              28,122
              
              
              
              25,508Securities
      available-for-sale, at fair value
              
              
              3,591
              
              
              
              4,236Securities
      held-to-maturity, fair value of $5,063 and $5,625  at September
      30, 2009  and June 30, 2009, respectively
              
              
              4,932
              
              
              
              5,528Federal
      Home Loan Bank stock, at cost
              
              
              12,649
              
              
              
              12,649Loans
      receivable, net of allowance for loan losses of $5,297 and $4,586 at
      September 30, 2009 and June 30, 2009, respectively
              
              
              759,406
              
              
              
              746,875Accrued
      interest receivable
              
              
              3,401
              
              
              
              3,402Premises
      and equipment, net
              
              
              2,426
              
              
              
              2,562Core
      deposit intangible
              
              
              128
              
              
              
              147Goodwill
              
              
              3,950
              
              
              
              3,950Bank-owned
      life insurance
              
              
              12,006
              
              
              
              11,884Real
      estate owned
              
              
              —
              
              
              
              496Other
      assets
              
              
              4,042
              
              
              
              4,155Total
      assets
              
              $
              868,160
              
              
              $
              895,097LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDepositsNoninterest
      bearing
              
              $
              54,170
              
              
              $
              50,161Interest
      bearing
              
              
              543,946
              
              
              
              516,032Total
      deposits
              
              
              598,116
              
              
              
              566,193Federal
      Home Loan Bank advances, short-term
              
              
              10,000
              
              
              
              70,000Federal
      Home Loan Bank advances, long-term
              
              
              137,000
              
              
              
              137,004State
      of California time deposit
              
              
              25,000
              
              
              
              25,000Accrued
      expenses and other liabilities
              
              
              4,255
              
              
              
              4,342Total
      liabilities
              
              
              774,371
              
              
              
              802,539Commitments
      and contingent liabilitiesStockholders’
      equityNonredeemable
      serial preferred stock, $.01 par value;
                2,000,000 shares authorized; issued and outstanding — none
              
              
              —
              
              
              
              —Common
      stock, $0.01 par value; 18,000,000 authorized;
                September 30, 2009 — 14,728,440 shares issued
                June
      30, 2009 — 14,728,440 shares issued
              
              
              147
              
              
              
              147Additional
      paid-in capital
              
              
              59,315
              
              
              
              59,134Retained
      earnings
              
              
              54,459
              
              
              
              53,512Accumulated
      other comprehensive income, net of tax
              
              
              72
              
              
              
              77Unearned
      employee stock ownership plan (ESOP) shares
              
              
              (2,047
              )
              
              
              (2,161
              )Treasury
      stock, at cost (September 30, 2009 — 1,424,452 shares;
                June 30, 2009 — 1,423,852 shares)
              
              
              (18,157
              )
              
              
              (18,151
              )Total
      stockholders’ equity
              
              
              93,789
              
              
              
              92,558Total
      liabilities and stockholders’ equity
              
              $
              868,160
              
              
              $
              895,097The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements


Page 1 of
28
 Table of Contents


K-FEDBANCORP AND SUBSIDIARY


Consolidated
Statements of Income and Comprehensive Income


(Unaudited)


(Dollars
in thousands, except per share data)





Three
      Months Ended
              September
      302009
            
            
            2008Interest
      IncomeInterest
      and fees on loans
            
            $
            11,033
            
            
            $
            10,900Interest
      on securities, taxable
            
            
            102
            
            
            
            174Federal
      Home Loan Bank dividends
            
            
            27
            
            
            
            192Other
      interest
            
            
            158
            
            
            
            239Total
      interest income
            
            
            11,320
            
            
            
            11,505Interest
      ExpenseInterest
      on deposits
            
            
            2,807
            
            
            
            3,509Interest
      on borrowings
            
            
            2,323
            
            
            
            2,721Total
      interest expense
            
            
            5,130
            
            
            
            6,230Net
      interest income
            
            
            6,190
            
            
            
            5,275Provision
      for loan losses
            
            
            865
            
            
            
            363Net
      interest income after provision for loan losses
            
            
            5,325
            
            
            
            4,912Noninterest
      incomeService
      charges and fees
            
            
            617
            
            
            
            622ATM
      fees and charges
            
            
            450
            
            
            
            453Referral
      commissions
            
            
            81
            
            
            
            76Loss
      on equity investment
            
            
            (75
            )
            
            
            (66
            )Bank-owned
      life insurance
            
            
            122
            
            
            
            119Other
      noninterest income
            
            
            5
            
            
            
            6Total
      noninterest income
            
            
            1,200
            
            
            
            1,210Noninterest
      expenseSalaries
      and benefits
            
            
            2,142
            
            
            
            1,990Occupancy
      and equipment
            
            
            598
            
            
            
            596ATM
      expense
            
            
            411
            
            
            
            365Advertising
      and promotional
            
            
            104
            
            
            
            102Professional
      services
            
            
            183
            
            
            
            222Federal
      deposit insurance premiums
            
            
            251
            
            
            
            87Postage
            
            
            64
            
            
            
            67Telephone
            
            
            181
            
            
            
            121Other
      operating expense
            
            
            339
            
            
            
            385Total
      noninterest expense
            
            
            4,273
            
            
            
            3,935Income
      before income tax expense
            
            
            2,252
            
            
            
            2,187Income
      tax expense
            
            
            842
            
            
            
            778Net
      income
            
            $
            1,410
            
            
            $
            1,409Comprehensive
      Income
            
            $
            1,405
            
            
            $
            1,412Earnings
      per common share:Basic
            
            $
            0.11
            
            
            $
            0.11Diluted
            
            $
            0.11
            
            
            $
            0.11The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements








Page 2 of
28
 Table of Contents





K-FED BANCORP AND SUBSIDIARY


Consolidated
Statements of Stockholders’ Equity


(Unaudited)


(Dollars
in thousands, except per share data)





Common
      Stock
            
            
            
            
            
            
            
            
            
            
            Treasury
      StockComprehensive
              Income
            
            Shares
            
            Amount
            
            Additional
      Paid-in Capital
            
            Retained
      Earnings
            
            Accumulated
      Other Comprehensive Income, net
            
            Unearned
      ESOP Shares
            
            
            Shares
            
            Amount
            
            TotalBalance
      June 30, 2009
            
            
            
            
            14,728,440
            
            $
            147
            
            $
            59,134
            
            $
            53,512
            
            $
            77
            
            $
            (2,161
            )
            
            (1,423,852
            )
            $
            (18,151
            )
            $
            92,558Comprehensive
      incomeNet
      income for the three months ended September 30, 2009
            
            $
            1,410
            
            —
            
            
            —
            
            
            —
            
            
            1,410
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,410Other
      comprehensive income – unrealized loss on securities, net of
      tax
            
            
            (5
            )
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (5
            )
            
            —
            
            
            —
            
            
            —
            
            
            (5
            )Total
      comprehensive income
            
            $
            1,405Dividends
      declared ($0.11 per share) *
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            (463
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (463
            )Purchase
      of treasury stock
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (600
            )
            
            (6
            )
            
            (6
            )Stock
      options earned
            
            
            
            
            —
            
            
            —
            
            
            85
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            85Allocation
      of stock awards
            
            
            
            
            —
            
            
            —
            
            
            108
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            108Allocation
      of ESOP common stock
            
            
            
            
            —
            
            
            —
            
            
            (12
            )
            
            —
            
            
            —
            
            
            114
            
            
            —
            
            
            —
            
            
            102Balance
      September 30, 2009
            
            
            
            
            14,728,440
            
            $
            147
            
            $
            59,315
            
            $
            54,459
            
            $
            72
            
            $
            (2,047
            )
            
            (1,424,452
            )
            $
            (18,157
            )
            $
            93,789*
      K-Fed Mutual Holding Company waived its receipt of dividends on the
      8,861,750 shares it owns.The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements





Page 3 of
28
 Table of Contents


K-FEDBANCORP AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)


(Dollars
in thousands)





Three
      Months Ended
              September
      302009
            
            
            2008OPERATING
      ACTIVITIESNet
      income
            
            $
            1,410
            
            
            $
            1,409Adjustments
      to reconcile net income to net cash provided by operating
      activities:Amortization
      of net premiums on securities
            
            
            1
            
            
            
            4(Accretion)
      Amortization of net discounts on loan purchases
            
            
            (1
            )
            
            
            22Amortization
      (Accretion) of net loan origination costs
            
            
            16
            
            
            
            (55
            )Provision
      for loan losses
            
            
            865
            
            
            
            363Federal
      Home Loan Bank stock (FHLB) dividend
            
            
            —
            
            
            
            (192
            )Depreciation
      and amortization
            
            
            196
            
            
            
            213Amortization
      of core deposit intangible
            
            
            19
            
            
            
            23Loss
      on equity investment
            
            
            75
            
            
            
            66Increase
      in cash surrender value of bank-owned life insurance
            
            
            (122
            )
            
            
            (119
            )Accretion
      of net premiums on purchased certificates of deposits
            
            
            —
            
            
            
            (37
            )Accretion
      of debt exchange costs
            
            
            (4
            )
            
            
            (4
            )Allocation
      of ESOP common stock
            
            
            102
            
            
            
            111Allocation
      of stock awards
            
            
            108
            
            
            
            101Stock
      options earned
            
            
            85
            
            
            
            79Net
      change in accrued interest receivable
            
            
            1
            
            
            
            (65
            )Net
      change in other assets
            
            
            31
            
            
            
            (89
            )Net
      change in accrued expenses and other liabilities
            
            
            (87
            )
            
            
            644Net
      cash provided by operating activities
            
            
            2,695
            
            
            
            2,474INVESTING
      ACTIVITIESProceeds
      from maturities and principal repayments of available-for-sale securities
      sesddfsfssecurities
            
            
            638
            
            
            
            766Proceeds
      from maturities and principal repayments of held-to-maturity
      securities
            
            
            596
            
            
            
            201Net
      change in interest earning time deposits with other financial
      institutions
            
            
            (2,614
            )
            
            
            (7,325
            )Net
      change in loans
            
            
            (13,411
            )
            
            
            2,221Proceeds
      from sale of real estate owned
            
            
            504
            
            
            
            225Purchases
      of premises and equipment
            
            
            (60
            )
            
            
            (12
            )Net
      cash used in investing activities
            
            
            (14,347
            )
            
            
            (3,924
            )FINANCING
      ACTIVITIESRepayment
      of FHLB advances
            
            
            (60,000
            )
            
            
            (10,000
            )Dividends
      paid on common stock
            
            
            (463
            )
            
            
            (473
            )Purchase
      of treasury stock
            
            
            (6
            )
            
            
            (874
            )Net
      change in deposits
            
            
            31,923
            
            
            
            14,153Net
      cash provided by (used in) financing activities
            
            
            (28,546
            )
            
            
            2,806Net
      (decrease) increase in cash and cash equivalents
            
            
            (40,198
            )
            
            
            1,356Beginning
      cash and cash equivalents
            
            
            73,705
            
            
            
            51,240Ending
      cash and cash equivalents
            
            $
            33,507
            
            
            $
            52,596The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements


Page 4 of
28
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K-FEDBANCORP AND SUBSIDIARY


Notes
to Consolidated Financial Statements


(Unaudited)





Note
1 – Nature of Business
and Significant Accounting Policies





Nature of
Business:  K-Fed Bancorp (or the “Company”) is a majority-owned
subsidiary of K-Fed Mutual Holding Company (or the “Parent”). The Company and
its Parent are holding companies that are federally chartered. The Company’s
sole subsidiary, Kaiser Federal Bank (or the “Bank”), is a federally chartered
savings association, which provides retail and commercial banking services to
individuals and business customers from its nine branch locations throughout
California. While the Bank originates many types of residential and commercial
real estate loans, a large percentage of our residential real estate loans have
been purchased from other financial institutions using our underwriting
standards.  However, we have not purchased any loans since June
2007.





The
Company’s business activities generally are limited to passive investment
activities and oversight of our investment in the Bank. Unless the context
otherwise requires, all references to the Company include the Bank and the
Company on a consolidated basis.





Basis of
Presentation:  The financial statements of K-Fed Bancorp have
been prepared in conformity with accounting principles generally accepted in the
United States of America (“GAAP”) for interim financial information and
predominant practices followed by the financial services industry, and are
unaudited. In the opinion of the Company’s management, all adjustments
consisting of normal recurring accruals necessary for (i) a fair presentation of
the financial condition and results of operations for the interim periods
included herein and (ii) to make such statements not misleading have been
made.





The
results of operations for the three months ended September 30, 2009 are not
necessarily indicative of the results of operations that may be expected for any
other interim period or for the fiscal year ending June 30, 2010. Certain
information and note disclosures normally included in the Company’s annual
financial statements have been condensed or omitted. Therefore, these
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes included in the
2009 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.





Principles of
Consolidation:The consolidated financial statements presented
in this quarterly report include the accounts of K-Fed Bancorp and its
wholly-owned subsidiary, Kaiser Federal Bank. All material intercompany balances
and transactions have been eliminated in consolidation. K-Fed Mutual Holding
Company is owned by the depositors of the Bank. These financial statements do
not include the transactions and balances of K-Fed Mutual Holding
Company.





Use of
Estimates:The preparation of consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of income and expenses during the
reporting period. Changes in these estimates and assumptions are considered
reasonably possible and may have a material impact on the consolidated financial
statements and thus actual results could differ from the amounts reported and
disclosed herein. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses and the valuation of financial instruments.





Subsequent
Events:Management has reviewed events occurring through
November 9, 2009, the date the financial statements were issued and determined
no subsequent events requiring accrual or disclosure occurred.





Reclassifications:Some
items in prior year financial statements were reclassified to conform to the
current presentation.







Page 5 of
28
 Table of Contents





Adoption
of New Accounting Standards:




Effective
July 2009, The Financial Accounting Standards Board (“FASB”) codified accounting
literature into a single source of authoritative accounting principles, except
for certain authoritative rules and interpretive releases issued by the
Securities and Exchange Commission.  Since the codification did not
alter existing GAAP, it did not have an impact on the financial statements of
the Company.





In
December 2007, the FASB issued new authoritative guidance under ASC Topic 805,
“Business Combinations.” This guidance replaces the standard on business
combinations and will significantly change the accounting for and reporting of
business combinations in consolidated financial statements. This guidance
requires an entity to measure the business acquired at fair value and to
recognize goodwill attributable to any noncontrolling interests (previously
referred to as minority interests) rather than just the portion attributable to
the acquirer.  The guidance will also result in fewer exceptions to
the principle of measuring assets acquired and liabilities assumed in a business
combination at fair value.  In addition, the guidance will result in
payments to third parties for consulting, legal, and similar services associated
with an acquisition to be recognized as expenses when incurred rather than
capitalized as part of the business combination.  The new
authoritative guidance under ASC Topic 805 was effective for fiscal years
beginning on or after December 15, 2008. The adoption of this guidance did not
have a material effect on the financial statements of the Company.




In June
2008, the FASB issued new authoritative guidance under ASC Topic 260, “Earnings
Per Share.”  The guidance addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and, therefore, need to be included in the earnings allocation in computing
earnings per share (“EPS”) under the two-class method. This guidance provides
that unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of EPS pursuant to the
two-class method. The new authoritative guidance under ASC Topic 260 was
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years. All prior-period
EPS data presented were to be adjusted retrospectively (including interim
financial statements, summaries of earnings, and selected financial data) to
conform with the provisions of this guidance. The adoption of this guidance did
not have a material impact upon the Company.




Newly
Issued Accounting Standards:




In June
2009, the FASB issued new authoritative guidance under ASC Topic 860, “Transfers
and Servicing,” to enhance reporting about transfers of financial assets,
including securitizations, and where companies have continuing exposure to the
risks related to transferred financial assets.  ASC Topic 860
eliminates the concept of a “qualifying special-purpose entity” and changes the
requirements for derecognizing financial assets.  ASC Topic 860 also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period.  The new authoritative
guidance under ASC Topic 860 will be effective at the start of the fiscal year
beginning after November 15, 2009.  Early application is not
permitted.  The adoption of this guidance is not expected to have a
material impact upon the Company.






In June
2009, the FASB issued new authoritative guidance under Statement of Financial
Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No.
46R.”  Under FASB’s Codification at ASC 105-10-65-1d, SFAS No. 167
will remain authoritative until integrated into the FASB
Codification.  SFAS 167 amends FIN 46 (Revised December 2003),
“Consolidation of Variable Interest Entities,” to change how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting or similar rights should be
consolidated.  The determination of whether a company is required to
consolidate an entity is based on, among other things, an entity’s purpose and
design and a company’s ability to direct the activities of the entity that most
significantly impact the entity’s economic performance.  SFAS No. 167
requires additional disclosures about the reporting entity’s involvement with
variable-interest entities and any significant changes in risk exposure due to
that involvement as well as its affect on the entity’s financial
statements.  SFAS No. 167 will be effective at the start of the fiscal
year beginning after November 15, 2009.  Early application is not
permitted.  The adoption of this guidance is not expected to have a
material impact upon the Company.






Page 6 of
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In August
2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05,
“Measuring Liabilities at Fair Value,” and was issued to increase the
consistency in the application of ASC Topic 820.  This ASU applies to
all entities that measure liabilities at fair value under ASC Topic 820 and
amends sections of ASC 820-10.  This ASU states that, in circumstances
in which a quoted price in an active market for the identical liability is not
available, fair value of the liability must be measured by either (a) a
valuation technique that uses the quoted price of the identical liability when
traded as an asset or quoted prices for similar liabilities or similar
liabilities when traded as assets, or (b) another valuation technique that is
consistent with the principles of ASC Topic 820, such as an income approach or a
market approach.  Further if a restriction on the transference of the
liability exists, the ASU clarifies that an entity is not required to factor
that in to the inputs of the fair value determination.  Lastly, the
ASU also clarifies that a quoted price in an active market for the identical
liability, or an unadjusted quoted price in an active market for the identical
liability, when traded as an asset, are level 1 measurements within the fair
value hierarchy.  The guidance in this ASU is effective for the first
reporting period beginning after August 2009.  The adoption of this
guidance is not expected to have a material impact upon the
Company.




Note
2 – Earnings Per
Share





Basic
earnings per common share is net income divided by the weighted average number
of common shares outstanding during the period. Employee Stock Ownership Plan
(“ESOP”) shares are considered outstanding for this calculation unless unearned.
Unvested stock awards with non-forfeitable rights to dividends are considered
outstanding for this calculation. Diluted earnings per common share includes the
dilutive effect of additional potential common shares issuable under stock
options.


Three
      months ended
              September
      30,2009
            
            
            2008Basic
            
            (Dollars
      in thousands, except per share data)Net
      income
            
            $
            1,410
            
            
            $
            1,409Weighted
      average common shares outstanding
            
            
            13,088,485
            
            
            
            13,165,194Basic
      earnings per share
            
            $
            0.11
            
            
            $
            0.11DilutedNet
      income
            
            $
            1,410
            
            
            $
            1,409Weighted
      average common shares outstanding
            
            
            13,088,485
            
            
            
            13,165,194Dilutive
      effect of stock options
            
            
            —
            
            
            
            —Average
      shares and dilutive potential common shares
            
            
            13,088,485
            
            
            
            13,165,194Diluted
      earnings per share
            
            $
            0.11
            
            
            $
            0.11





For the
three months ended September 30, 2009 and 2008, outstanding stock options to
purchase 484,400 and 322,400 shares, respectively, were anti-dilutive and not
considered in computing diluted earnings per common share.




Note
3 – Fair Value
Measurements





FASB ASC
820-10 establishes a fair value hierarchy which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:





Level 1: Quoted prices
(unadjusted) for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.


Level 2: Significant other
observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data.


Level 3: Significant
unobservable inputs that reflect a reporting entity’s own assumptions about the
assumptions that market participants would use in pricing an asset or
liability.





Page 7 of
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The fair
values of securities available for sale are determined by obtaining quoted
prices on nationally recognized securities exchanges (Level 1 inputs) or matrix
pricing, which is a mathematical technique widely used in the industry to value
debt securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted securities (Level 2 inputs).





The fair
value of impaired loans with specific allocations of the allowance for loan
losses is generally based on recent real estate appraisals.  These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income
approach.  Adjustments are routinely made in the appraisal process by
the appraisers to adjust for differences between the comparable sales and income
data available.  Such adjustments are typically significant and result
in a Level 3 classification of the inputs for determining fair
value.


Assets
and liabilities measured at fair value on a recurring basis are summarized in
the following table:





Fair
      Value Measurements at September 30, 2009 UsingAssets at September 30,
    2009:
            
            Total
            
            Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            Significant
      Other Observable Inputs (Level 2)
            
            Significant
      Unobservable Inputs
              (Level
      3)(Dollars
      in thousands)Available for sale
    securitiesMortgage-backed
      securities (residential)
            
            $
            476
            
            
            $
            —
            
            
            $
            476
            
            
            $
            —Collateralized
      mortgage obligations (residential)
            
            $
            3,115
            
            
            $
            —
            
            
            $
            3,115
            
            
            $
            —





Fair
      Value Measurements at June 30, 2009 UsingAssets at June 30, 2009:
            
            Total
            
            Quoted
      Prices in Active Markets for Identical Assets
              (Level
      1)
            
            Significant Other
      Observable Inputs (Level 2)
            
            Significant
      Unobservable Inputs
              (Level
      3)(Dollars
      in thousands)Available-for-sale
    securitiesMortgage-backed
      securities (residential)
            
            $
            524
            
            
            $
            —
            
            
            $
            524
            
            
            $
            —Collateralized
      mortgage obligations (residential)
            
            $
            3,712
            
            
            $
            —
            
            
            $
            3,712
            
            
            $
            —





The
Company may also be required, from time to time, to measure certain other
financial assets at fair value on a non-recurring basis in accordance with
GAAP.  The following assets and liabilities were measured at fair
value on a non-recurring basis:


Fair
      Value Measurements at September 30, 2009 UsingAssets at September 30,
    2009:
            
            Total
            
            Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            Significant
      Other Observable Inputs (Level 2)
            
            Significant
      Unobservable Inputs
              (Level
      3)(Dollars
      in thousands)Impaired
      loans
            
            $
            11,466
            
            
            $
            —
            
            
            $
            —
            
            
            $
            11,466





Fair
      Value Measurements at June 30, 2009 UsingAssets at June 30, 2009:
            
            Total
            
            Quoted
      Prices in Active Markets for Identical Assets (Level 1)
            
            Significant
      Other Observable Inputs (Level 2)
            
            Significant
      Unobservable Inputs
              (Level
      3)(Dollars
      in thousands)Impaired
      loans
            
            $
            7,659
            
            
            $
            —
            
            
            $
            —
            
            
            $
            7,659


Page 8 of
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Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $13,301,000 at
September 30, 2009 as compared to $8,860,000 at June 30, 2009.  The
fair value of collateral is calculated using a third party
appraisal.  The valuation allowance for these loans was $1,835,000 at
September 30, 2009 as compared to $1,201,000 at June 30, 2009.  An
additional provision for loan losses of $738,000 was made for the three months
ended September 30, 2009 relating to impaired loans.





Fair
Value of Financial Instruments




The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.




The
following methods and assumptions were used to estimate fair value of each class
of financial instruments for which it is practicable to estimate fair
value:




Investments




Estimated
fair values for investments are obtained from quoted market prices where
available. Where quoted market prices are not available, estimated fair values
are based on quoted market prices of comparable instruments.




Loans




The
estimated fair value for all fixed rate loans and variable rate loans with an
initial fixed rate feature is determined by discounting the estimated cash flows
using the current rate at which similar loans would be made to borrowers with
similar credit ratings and maturities.




The
estimated fair value for variable rate loans with no initial fixed rate feature
is the carrying amount.




Impaired
loans that are previously reported are excluded from the fair value disclosure
below.




Deposits




The
estimated fair value of deposit accounts (savings, non interest bearing demand
and money market accounts) is the carrying amount. The fair value of
fixed-maturity time certificates of deposit is estimated by discounting the
estimated cash flows using the current rate at which similar certificates would
be issued.




FHLB
Advances




The fair
values of the FHLB advances are estimated using discounted cash flow analyses,
based on the Company’s current incremental borrowing rates for similar types of
borrowing arrangements.




Other On-Balance-Sheet
Financial Instruments




Other
on-balance-sheet financial instruments include cash and cash equivalents,
accrued interest receivable, FHLB stock and accrued expenses and other
liabilities. The carrying value of each of these financial instruments is a
reasonable estimation of fair value.  It was not practicable to
determine the fair value of FHLB stock due to restrictions placed on its
transferability.




Off-Balance-Sheet Financial
Instruments




Page 9 of
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The fair
values for the Company’s off-balance sheet loan commitments are estimated based
on fees charged to others to enter into similar agreements taking into account
the remaining terms of the agreements and credit standing of the Company’s
customers. The estimated fair value of these commitments is not
significant.





The
estimated fair values of the Company’s financial instruments are summarized as
follows:


September
      30, 2009
            
            
            June
      30, 2009Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              Value(In
      thousands)Financial
      assets:Cash
      and cash equivalents
            
            $
            33,507
            
            
            $
            33,507
            
            
            $
            73,705
            
            
            $
            73,705Interest
      earning time deposits in other financial institutions
            
            
            28,122
            
            
            
            28,122
            
            
            
            25,508
            
            
            
            25,508Securities
      available-for-sale
            
            
            3,591
            
            
            
            3,591
            
            
            
            4,236
            
            
            
            4,236Securities
      held-to-maturity
            
            
            4,932
            
            
            
            5,063
            
            
            
            5,528
            
            
            
            5,625Federal
      Home Loan Bank Stock
            
            
            12,649
            
            
            NA
            
            
            
            12,649
            
            
            NALoans
      receivable, net
            
            
            746,105
            
            
            
            777,762
            
            
            
            738,015
            
            
            
            763,451Accrued
      interest receivable
            
            
            3,401
            
            
            
            3,401
            
            
            
            3,402
            
            
            
            3,402Financial
      liabilities:Deposits
            
            
            598,116
            
            
            
            592,135
            
            
            
            566,193
            
            
            
            549,207Borrowings
            
            
            147,000
            
            
            
            155,012
            
            
            
            207,004
            
            
            
            215,677State
      of California time deposit
            
            
            25,000
            
            
            
            25,268
            
            
            
            25,000
            
            
            
            25,320





Note
4 – Investments





The
amortized cost and fair value of available-for-sale securities and the related
gross unrealized gains and losses recognized in accumulated other
comprehensive income were as follows:


Fair
              Value
            
            
            Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            Amortized
              Cost(In
      thousands)September 30, 2009Mortgage-backed
      (residential):Freddie
      Mac
            
            $
            476
            
            
            $
            15
            
            
            $
            ─
            
            $
            461Collateralized
      mortgage obligations (residential):Freddie
      Mac
            
            
            3,115
            
            
            
            108
            
            
            
            ─
            
            
            3,007Total
            
            $
            3,591
            
            
            $
            123
            
            
            $
            ─
            
            $
            3,468June 30, 2009Mortgage-backed
      (residential):Freddie
      Mac
            
            $
            524
            
            
            $
            13
            
            
            $
            ─
            
            $
            511Collateralized
      mortgage obligations (residential):Freddie
      Mac
            
            
            3,712
            
            
            
            117
            
            
            
            ─
            
            
            3,595Total
            
            $
            4,236
            
            
            $
            130
            
            
            $
            ─
            
            $
            4,106





Page 10
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The
carrying amount, unrecognized gains and losses, and fair value of securities
held-to-maturity were as follows:





Carrying
              Amount
            
            
            Gross
              Unrecognized
              Gains
            
            
            Gross
              Unrecognized
              Losses
            
            Fair
              Value(In
      thousands)September 30, 2009Mortgage-backedFannie
      Mae
            
            $
            173
            
            
            $
            1
            
            
            $
            ─
            
            $
            174Freddie
      Mac
            
            
            150
            
            
            ─
            
            
            
            ─
            
            
            150Ginnie
      Mae
            
            
            107
            
            
            
            4
            
            
            
            ─
            
            
            111Collateralized
      mortgage obligationsFannie
      Mae
            
            
            1,673
            
            
            
            25
            
            
            
            ─
            
            
            1,698Freddie
      Mac
            
            
            2,829
            
            
            
            101
            
            
            
            ─
            
            
            2,930Ginnie
      Mae
            
            ─
            
            
            ─
            
            
            
            ─
            
            ─Total
            
            $
            4,932
            
            
            $
            131
            
            
            $
            ─
            
            $
            5,063June 30, 2009Mortgage-backedFannie
      Mae
            
            $
            191
            
            
            $
            1
            
            
            $
            ─
            
            $
            192Freddie
      Mac
            
            
            156
            
            
            ─
            
            
            
            ─
            
            
            156Ginnie
      Mae
            
            
            111
            
            
            
            4
            
            
            
            ─
            
            
            115Collateralized
      mortgage obligationsFannie
      Mae
            
            
            1,819
            
            
            
            14
            
            
            
            (1
            )
            
            1,832Freddie
      Mac
            
            
            3,251
            
            
            
            93
            
            
            
            (14
            )
            
            3,330Ginnie
      Mae
            
            ─
            
            
            ─
            
            
            
            ─
            
            ─Total
            
            $
            5,528
            
            
            $
            112
            
            
            $
            (15
            )
            $
            5,625




There
were no sales of securities during the three months ended September 30, 2009 and
2008.






Securities
with unrealized losses at September 30, 2009 and June 30, 2009, aggregated by
investment category and length of time that individual securities have been in a
continuous unrealized loss position, are as follows:




Less
      than 12 months
            
            12
      months or more
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            UnrealizedValue
            
            Loss
            
            Value
            
            Loss
            
            Value
            
            Loss(In
      thousands)September
      30, 2009Description
      of SecuritiesMortgage-backed
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─Collateralized
      mortgage obligations
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─Total
      temporarily impaired
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─June
      30, 2009Description
      of SecuritiesMortgage-backed
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─
            
            $
            ─Collateralized
      mortgage obligations
            
            
            1,353
            
            
            (15
            )
            
            ─
            
            
            ─
            
            
            1,353
            
            
            (15
            )Total
      temporarily impaired
            
            $
            1,353
            
            $
            (15
            )
            $
            ─
            
            $
            ─
            
            $
            1,353
            
            $
            (15
            )


Page 11
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The
Company evaluates securities for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, the financial condition and
near-term prospects of the issuer, and the Company does not have the intent to
sell these securities and it is likely that it will not be required to sell the
securities before their anticipated recovery. In analyzing an issuer’s financial
condition, the Company may consider whether the securities are issued by the
federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and the results of reviews of the issuer’s financial
condition.






The
unrealized losses relate principally to the general change in interest rates and
illiquidity, and not credit quality, that has occurred since the securities
purchase dates, and such unrecognized losses or gains will continue to vary with
general interest rate level fluctuations in the future. As management has the
intent and ability to hold debt securities until recovery, which may be
maturity, and it is likely that it will not be required to sell the securities
before their anticipated recovery, no declines are deemed to be
other-than-temporary.




Note
5 – Loans





The
composition of loans consists of the following:




September
      30,
              2009
            
            
            June
      30,
              2009(In
      thousands)Real
      Estate:One-to-four
      family residential, fixed rate
            
            $
            298,485
            
            
            $
            303,287One-to-four
      family residential, variable rate
            
            
            69,522
            
            
            
            73,943Multi-family
      residential, variable rate
            
            
            227,801
            
            
            
            196,575Commercial
      real estate, variable rate
            
            
            116,093
            
            
            
            121,143711,901
            
            
            
            694,948Consumer:Automobile
            
            
            39,723
            
            
            
            41,798Home
      equity
            
            
            1,217
            
            
            
            1,299Other
      consumer loans, primarily unsecured
            
            
            11,573
            
            
            
            13,11952,513
            
            
            
            56,216Total
      loansDeferred
      net loan origination costs
            
            
            367
            
            
            
            376Net
      discounts on purchased loans
            
            
            (78
            )
            
            
            (79
            )Allowance
      for loan losses
            
            
            (5,297
            )
            
            
            (4,586
            )$
            759,406
            
            
            $
            746,875


Page 12
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 Table of Contents


The
following is the activity in the allowance for loan losses:




Three
      months ended
              September
      30,2009
            
            2008(In
      thousands)Balance,
      beginning of period
            
            $
            4,586
            
            
            $
            3,229Provision
      for loan losses
            
            
            865
            
            
            
            363Recoveries
            
            
            36
            
            
            
            62Loans
      charged off
            
            
            (190
            )
            
            
            (377
            )Balance,
      end of year
            
            $
            5,297
            
            
            $
            3,277





At
September 30, 2009, non-accrual loans totaled $13.3 million, compared to $8.9
million at June 30, 2009.  At September 30, 2009 and June 30, 2009,
there were no loans past due more than 90 days and still accruing
interest.





A loan is
impaired when it is probable, based on current information and events, the Bank
will be unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement.  When it is
determined that a loss is probable, a specific valuation allowance is
established and included in the allowance for loan losses.  The amount
of impairment is determined by the difference between the recorded investment in
the loan and estimated net realizable value of the underlying collateral on
collateral dependent loans.





At
September 30, 2009 and June 30, 2009, the Company had a gross investment in
impaired loans of $13.3 million and $8.9 million, respectively. Impaired loans
at September 30, 2009 included $8.6 million of loans for which valuation
allowances of $1.8 million had been established and $4.7 million of loans for
which no valuation allowances were established. At June 30, 2009, the Company
had $5.1 million of impaired loans for which valuation allowances of $1.2
million had been established and $3.8 million of loans for which no valuation
allowances were established. All valuation allowances are recorded as part of
the total allowance for loan losses. For the three months ended September 30,
2009, the Company’s average investment in impaired loans was $11.1
million.  For the three months ended September 30, 2008, the Company’s
average investment in impaired loans was $4.7 million.




Payments
received on impaired loans are recorded as a reduction of principal or as
interest income depending on management’s assessment of the ultimate
collectability of the loan principal. Generally, interest income on an impaired
loan is recorded on a cash basis when the outstanding principal is brought
current. For the three months ended September 30, 2009, income recorded on
impaired loans totaled $28,000. For the three months ended September 30, 2008,
income recorded on impaired loans totaled $18,000.  Interest income
recorded on impaired loans for all periods presented was recorded on a cash
basis.





Page 13
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Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations





Forward-Looking
Statements





This Quarterly Report on Form 10-Q
contains certain forward-looking statements and information relating to the
Company and the Bank that are based on the beliefs of management as well as
assumptions made by and information currently available to management.
Forward-looking statements can be identified by the fact that they do not relate
strictly to historical or current facts.  They often includes words
like” “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or
conditional verbs such as “will,” “should,” “could,” or “may” and similar
expressions or the negative thereof.  Certain factors that could cause
actual results to differ materially from expected results include, changes in
the interest rate environment, changes in general economic conditions,
legislative and regulatory changes that adversely affect the business of K-Fed
Bancorp and Kaiser Federal Bank, and changes in the securities markets. Should
one or more of these risks or uncertainties materialize or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein.  We caution readers not to place undue reliance on
forward-looking statements.  The Company disclaims any obligation to
revise or update any forward-looking statements contained in this Form 10-Q to
reflect future events or developments.








Recent
Developments





Legislative
Proposal.  The U.S. Treasury Department recently released a
legislative proposal that would implement sweeping changes to the current bank
regulatory structure.  The proposal would create a new federal banking
regulator, the National Bank Supervisor, and merge our current primary federal
regulator, the Office of Thrift Supervision (“OTS”), as well as the Office of
the Comptroller of the Currency (the primary federal regulator for national
banks) into this new federal bank regulator.  The proposal would also
eliminate federal savings associations and require all federal savings
associations, such as Kaiser Federal Bank, to elect, within six months of the
effective date of the legislation, to convert to a national bank, state bank or
state savings association.  A federal savings association that does
not make the election would, by operation of law, be converted into a national
bank within one year of the effective date of the legislation.  The
proposal would also require thrift holding companies such as K-Fed Bancorp to be
regulated as bank holding companies subject to the regulation and supervision of
the Federal Reserve Board.  Unlike a bank holding company, a thrift
holding company is not required to maintain any minimum level of regulatory
capital.




U.S. Treasury’s Troubled Asset Relief
Program-Capital Purchase Program.On October 3, 2008, Congress enacted
the Emergency Economic Stabilization Act (“EESA”) of 2008 that provides the U.S.
Secretary of the Treasury broad authority to implement certain actions to help
restore stability and liquidity to U.S. markets.  One of the
provisions resulting from the legislation is the Troubled Asset Relief Program
Capital Purchase Program, which provides direct equity investment in perpetual
preferred stock by the U.S. Treasury Department in qualified financial
institutions.  The program is voluntary and requires an institution to
comply with a number of restrictions and provisions, including limits on
executive compensation, stock redemptions and declaration of
dividends.  After careful consideration and given that the Bank is
well capitalized and profitable with strong credit quality the Company elected
not to participate.





Federal Deposit Insurance Corporation
Coverage/Assessments.The EESA temporarily increased the limit
on FDIC coverage for deposits to $250,000 from $100,000 through December 31,
2009 which was recently extended to December 31, 2013.  In addition,
on October 14, 2008, the FDIC announced the creation of the Temporary Liquidity
Guarantee Program (“TLGP”) as part of a larger government effort to strengthen
confidence and encourage liquidity in the nation’s banking
system.  All eligible institutions were automatically enrolled in the
program through December 5, 2008 at no cost.  Organizations that did
not wish to participate in the TLGP needed to opt out by December 5,
2008.  After that time, participating entities will be charged
fees.  One component of the TLGP provides full FDIC insurance coverage
for non-interest bearing transaction deposit accounts, regardless of dollar
amount.  This program, originally set to expire on December 31, 2009,
was recently extended to June 30, 2010.  An annualized 10 basis point
assessment on balances in noninterest-bearing transaction accounts that exceed
the existing deposit insurance limit of $250,000 will be assessed on a quarterly
basis.





Page 14
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The
Company did not opt out and is participating in this component of the TLGP. As
of September 30, 2009 the Company had three accounts with total balances of
$993,000 in non-interest bearing transaction accounts in excess of
$250,000.  Institutions have until November 2, 2009 to decide whether
they will opt out of the extension which takes effect on January 1,
2010.  An annualized assessment rate between 15 and 25 basis points on
balances in noninterest-bearing transaction accounts that exceed the existing
deposit insurance limit of $250,000 will be assessed depending on the
institution’s risk category.  We currently intend to opt into the
extension.





The FDIC
currently imposes an assessment against institutions for deposit insurance based
on the risk category of the institution.  Federal law requires that
the designated reserve ratio for the deposit insurance fund be established by
the FDIC at 1.15% to 1.50% of estimated insured deposits.  Recent bank
failures coupled with deteriorating economic conditions have significantly
reduced the deposit insurance fund’s reserve ratio.  On February 27,
2009, the FDIC issued a final rule that altered the way the FDIC calculates
federal deposit insurance assessment rates beginning in the second quarter of
2009 and thereafter.  Under the rule, the Federal Deposit Insurance
Corporation first establishes an institution’s initial base assessment
rate.  This initial base assessment rate ranges, depending on the risk
category of the institution, from 12 to 45 basis points.  The Federal
Deposit Insurance Corporation would then adjust the initial base assessment
(higher or lower) to obtain the total base assessment rate.  The
adjustments to the initial base assessment rate are based upon an institution’s
levels of unsecured debt, secured liabilities, and brokered
deposits.  The total base assessment rate ranges from 7 to 77.5 basis
points of the institution’s deposits. Additionally, the Federal Deposit
Insurance Corporation on May 22, 2009, issued a final rule that imposed a
special 5 basis point assessment on each FDIC-insured depository institution's
assets, minus its Tier 1 capital on June 30, 2009, which was collected on
September 30, 2009. The special assessment is capped at 10 basis points of an
institution's domestic deposits. On September 30, 2009, the Bank paid $407,000
related to this special assessment.  Future special assessments could
also be assessed.




On
September 29, 2009, the Federal Deposit Insurance Corporation issued a proposed
rule pursuant to which all insured depository institutions would be required to
prepay their estimated assessments for the fourth quarter of 2009, and for all
of 2010, 2011 and 2012.  Under the proposed rule, this pre-payment would be
due on December 30, 2009.  Under the proposed rule, the assessment rate for
the fourth quarter of 2009 and for 2010 would be based on each institution’s
total base assessment rate for the third quarter of 2009, modified to assume
that the assessment rate in effect on September 30, 2009 had been in effect for
the entire third quarter, and the assessment rate for 2011 and 2012 would be
equal to the modified third quarter assessment rate plus an additional 3 basis
points.  In addition, each institution’s base assessment rate for each
period would be calculated using its third quarter assessment base, adjusted
quarterly for an estimated 5% annual growth rate in the assessment base through
the end of 2012. Based on our deposits and assessment rate at September 30,
2009, we estimate that our prepayment amount will be approximately $3.8 million.
We expect that we will be able to make the prepayment from available cash on
hand.




Page 15
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 Table of Contents


Comparison
of Financial Condition at September 30, 2009 and June 30, 2009.





Assets.   Total
assets decreased $26.9 million, or 3.0% to $868.2 million at September 30, 2009
from $895.1 million at June 30, 2009 due primarily to a decrease in total cash
and cash equivalents.  Total cash and cash equivalents decreased $40.2
million, or 54.5% to $33.5 million at September 30, 2009 from $73.7 million at
June 30, 2009. The decrease was a result of the repayment of FHLB advances that
matured during the quarter.





Our
investment securities portfolio decreased $1.2 million, or 12.7% to $8.5 million
at September 30, 2009 from $9.8 million at June 30, 2009. The decrease was
attributable to maturities and normal repayments of principal on our
mortgage-backed securities and collateralized mortgage obligations.





Our gross
loan portfolio increased by $12.5 million, or 1.7% to $759.4 million at
September 30, 2009 from $746.9 million at June 30, 2009. One-to-four family real
estate loans decreased $9.2 million, or 2.4% to $368.0 million at September 30,
2009 from $377.2 million at June 30, 2009.  Commercial real estate
loans decreased $5.0 million, or 4.2% to $116.1 million at September 30, 2009
from $121.1 million at June 30, 2009.  Multi-family loans increased
$31.2 million, or 15.9% to $227.8 million at September 30, 2009 from $196.6
million at June 30, 2009.  Other loans which are comprised primarily
of automobile loans decreased $3.7 million, or 6.6% to $52.5 million at
September 30, 2009 from $56.2 million at June 30, 2009. Real estate loans
comprised 93.1% of the total loan portfolio at September 30, 2009, compared with
92.5% at June 30, 2009. The decrease in one-to-four family and increase in
multi-family loans was due to our focus on originating income producing property
loans as a means of diversifying the loan portfolio.





Deposits. Total deposits
increased $31.9 million or 5.6% to $598.1 million at September 30, 2009 from
$566.2 million at June 30, 2009. The change was comprised of increases of $22.1
million in certificates of deposit, $4.3 million in money market accounts, $4.0
million in noninterest-bearing demand accounts and $1.5 million in savings
accounts.  The increase in certificate of deposit accounts was a
result of promotions for these types of accounts.





Borrowings. Advances from the
FHLB of San Francisco decreased $60.0 million, or 29.0% to $147.0 million at
September 30, 2009 from $207.0 million at June 30, 2009.  The decline
was the result of scheduled maturities in August and September 2009 and was
funded with available liquidity as well as increased deposits.





Stockholders’ Equity.
Stockholders’ equity increased $1.2 million, to $93.8 million at September 30,
2009 from $92.6 million at June 30, 2009 primarily as a result of $1.4 million
in net income for the three months ended September 30, 2009 and the allocation
of ESOP shares, stock awards, and stock options earned totaling $295,000. This
increase was offset in part by cash payments of $6,000 for the repurchase of
shares of common stock and $463,000 in dividends ($0.11 per share) paid to
stockholders of record for the three months ended September 30, 2009, excluding
shares held by K-Fed Mutual Holding Company which waved receipt of its dividend
payment.


Page 16
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 Table of Contents


Average
Balances, Net Interest Income, Yields Earned and Rates Paid





The
following table sets forth certain information for the quarter ended September
30, 2009 and 2008, respectively.





For
      the three months ended September 30,2009
      (1)
            
            
            
            
            
            
            
            
            2008
      (1)Average
            
            
            
            
            
            
            
            
            AverageAverage
            
            
            
            
            
            Yield/
            
            
            Average
            
            
            
            
            
            Yield/Balance
            
            
            Interest
            
            
            Cost
            
            
            Balance
            
            
            Interest
            
            
            Cost(Dollars
      in thousands)INTEREST-EARNING
      ASSETSLoans
      receivable(2)
            
            $
            754,024
            
            
            $
            11,033
            
            
            
            5.85
            %
            
            $
            743,437
            
            
            $
            10,900
            
            
            
            5.86
            %Securities(3)
            
            
            9,069
            
            
            
            102
            
            
            
            4.50
            %
            
            
            15,536
            
            
            
            174
            
            
            
            4.48
            %Federal
      funds sold
            
            
            50,180
            
            
            
            38
            
            
            
            0.30
            %
            
            
            39,876
            
            
            
            200
            
            
            
            2.01
            %Federal
      Home Loan Bank stock
            
            
            12,649
            
            
            
            27
            
            
            
            0.85
            %
            
            
            12,636
            
            
            
            192
            
            
            
            6.08
            %Interest-earning
      deposits in other financial institutions
            
            
            35,361
            
            
            
            120
            
            
            
            1.36
            %
            
            
            7,225
            
            
            
            39
            
            
            
            2.16
            %Total
      interest-earning assets
            
            
            861,283
            
            
            
            11,320
            
            
            
            5.26
            %
            
            
            818,710
            
            
            
            11,505
            
            
            
            5.62
            %Noninterest
      earning assets
            
            
            44,025
            
            
            
            
            
            
            
            
            
            
            
            37,043Total
      assets
            
            $
            905,308
            
            
            
            
            
            
            
            
            
            
            $
            855,753INTEREST-BEARING  LIABILITIESMoney
      market
            
            $
            112,042
            
            
            $
            309
            
            
            
            1.10
            %
            
            $
            81,709
            
            
            $
            479
            
            
            
            2.34
            %Savings
      deposits
            
            
            131,513
            
            
            
            192
            
            
            
            0.58
            %
            
            
            122,846
            
            
            
            384
            
            
            
            1.25
            %Certificates
      of deposit
            
            
            293,292
            
            
            
            2,306
            
            
            
            3.14
            %
            
            
            253,059
            
            
            
            2,646
            
            
            
            4.18
            %Borrowings
            
            
            214,502
            
            
            
            2,323
            
            
            
            4.33
            %
            
            
            255,017
            
            
            
            2,721
            
            
            
            4.27
            %Total
      interest-bearing liabilities
            
            
            751,349
            
            
            
            5,130
            
            
            
            2.73
            %
            
            
            712,631
            
            
            
            6,230
            
            
            
            3.50
            %Noninterest
      bearing liabilities
            
            
            60,665
            
            
            
            
            
            
            
            
            
            
            
            52,392Total
      liabilities
            
            
            812,014
            
            
            
            
            
            
            
            
            
            
            
            765,023Equity
            
            
            93,294
            
            
            
            
            
            
            
            
            
            
            
            90,730Total
      liabilities and equity
            
            $
            905,308
            
            
            
            
            
            
            
            
            
            
            $
            855,753Net
      interest/spread
            
            
            
            
            
            $
            6,190
            
            
            
            2.53
            %
            
            
            
            
            
            $
            5,275
            
            
            
            2.12
            %Margin(4)
            
            
            
            
            
            
            
            
            
            
            2.87
            %
            
            
            
            
            
            
            
            
            
            
            2.58
            %Ratio
      of interest-earning assets to interest bearing liabilities
            
            
            114.63
            %
            
            
            
            
            
            
            
            
            
            
            114.89
            %(1)
      Yields earned and rates paid have been annualized.(2)
      Calculated net of deferred fees, loss reserves and includes non-accrual
      loans.(3)
      Calculated based on amortized cost.(4)
      Net interest income divided by interest-earning assets.


Page 17
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Comparison
of Results of Operations for the Three Months Ended September 30, 2009 and
September 30, 2008.





General.Net income was unchanged
at $1.4 million for the three months ended September 30, 2009 and 2008,
respectively.  Earnings per basic and diluted common share were $0.11
for the three months ended September 30, 2009 and 2008,
respectively.  While overall net income remained unchanged the Company
experienced an increase of $915,000 in net interest income for the quarter ended
September 30, 2009 as compared to the same quarter last year.  The
increase in net interest income for the quarter ended September 30, 2009 was
offset by increases in the provision for loan losses and noninterest expense of
$502,000 and $338,000, respectively.





Interest Income.Interest
income decreased by $185,000 or 1.6%, to $11.3 million for the three months
ended September 30, 2009 from $11.5 million for the three months ended September
30, 2008. The primary reasons for the decline in interest income were decreases
in interest on securities, dividends on FHLB stock and interest on federal funds
sold.





Interest
income on securities decreased by $72,000 or 41.4%, to $102,000 for the three
months ended September 30, 2009 from $174,000 for the three months ended
September 30, 2008. The decrease was primarily attributable to a $6.5 million
decrease in the average balance of investment securities from $15.5 million for
the three months ended September 30, 2008 to $9.1 million for the three months
ended September 30, 2009 as a result of maturities and normal repayments of
principal on our mortgage-backed securities and collateralized mortgage
obligations.





FHLB
dividends decreased by $165,000, or 85.9%, to $27,000 for the three months ended
September 30, 2009 from $192,000 for the three months ended September 30,
2008.  The decrease was attributable to the FHLB significantly
reducing its dividend payment as compared to the prior period.





Other
interest income decreased by $81,000 or 33.9% to $158,000 for the three months
ended September 30, 2009 from $239,000 for the three months ended September 30,
2008. The decrease was a result of a 171 basis point decline in the average
yield earned on federal funds sold from 2.01% for the three months ended
September 30, 2008 to 0.30% for the three months ended September 30,
2009.  The yield earned on federal funds sold was impacted by the
actions taken by the Federal Reserve in lowering the targeted federal funds
rate.





Interest Expense. Interest
expense decreased $1.1 million or 17.7% to $5.1 million for the three months
ended September 30, 2009 from $6.2 million for the three months ended September
30, 2008. The decrease was primarily attributable to a 77 basis point decline in
the average cost of interest bearing liabilities from 3.50% for the three months
ended September 30, 2008 to 2.73% for the three months ended September 30, 2009
as a result of a general decline in interest rates during the
period.  The decrease was partially offset by an increase in the
average balance of interest-bearing liabilities of $38.7 million from $712.6
million for the three months ended September 30, 2008 to $751.3 million for the
three months ended September 30, 2009.





The
average balance of borrowing decreased $40.5 million, or 15.9%, to $214.5
million for the three months ended September 30, 2009 from $255.0 million for
the three months ended September 30, 2008.  The decline was the result
of scheduled advance repayments and was funded with available liquidity due to
increased deposits.




Provision for Loan
Losses.We
maintain an allowance for loan losses to absorb probable incurred losses
inherent in the loan portfolio. The allowance is based on ongoing, quarterly
assessments of the probable losses inherent in the loan portfolio. Our
methodology for assessing the appropriateness of the allowance consists of
several key elements, which include loss ratio analysis by type of loan and
specific allowances for identified problem loans, including the results of
measuring impaired loans as provided in FASB ASC 310, “Accounting Receivables.”
The accounting standards prescribe the measurement methods, income recognition
and disclosures related to impaired loans.




The loss
ratio analysis component of the allowance is calculated by applying loss factors
to outstanding loans based on the internal risk evaluation of the loans or pools
of loans. Changes in risk evaluations of both performing and nonperforming loans
affect the amount of the formula allowance. Loss factors are based both on our
historical loss experience as well as on significant factors that, in
management’s judgment, affect the collectability of the portfolio as of the
evaluation date.


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 Table of Contents


The
appropriateness of the allowance is reviewed and established by management based
upon its evaluation of then-existing economic and business conditions affecting
our key lending areas and other conditions, such as credit quality trends
(including trends in nonperforming loans expected to result from existing
conditions), collateral values, loan volumes and concentrations, specific
industry conditions within portfolio segments and recent loss experience in
particular segments of the portfolio that existed as of the balance sheet date
and the impact that such conditions were believed to have had on the
collectability of the loan. Significant factors reviewed in determining the
allowance for loan losses included loss ratio trends by loan product and
concentrations in geographic regions, interest only loans, stated income loans
and loans with credit scores less than a specified amount. The Company also
reviewed the debt service coverage ratios and seasoning for income property
loans. Senior management reviews these conditions quarterly in discussions with
our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as
of the evaluation date, management’s estimate of the effect of such condition
may be reflected as a specific allowance applicable to such credit or portfolio
segment. Where any of these conditions is not evidenced by a specifically
identifiable problem credit or portfolio segment as of the evaluation date,
management’s evaluation of the loss related to this condition is reflected in
the general allowance. The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they are not
identified with specific problem credits or portfolio segments.





Management
also evaluates the adequacy of the allowance for loan losses based on a review
of individual loans, historical loan loss experience, the value and adequacy of
collateral and economic conditions in our market area. This evaluation is
inherently subjective as it requires material estimates, including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. For all specifically reviewed loans
for which it is probable that we will be unable to collect all amounts due
according to the terms of the loan agreement, we determine impairment by
computing a fair value either based on discounted cash flows using the loan’s
initial interest rate or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment and are excluded from specific impairment
evaluation, and their allowance for loan losses is calculated in accordance with
the allowance for loan losses policy described above.




Because
the allowance for loan losses is based on estimates of losses inherent in the
loan portfolio, actual losses can vary significantly from the estimated amounts.
Our methodology as described above permits adjustments to any loss factor used
in the computation of the formula allowance in the event that, in management’s
judgment, significant factors which affect the collectability of the portfolio
as of the evaluation date are not reflected in the loss factors. By assessing
the estimated losses inherent in the loan portfolio on a quarterly basis, we are
able to adjust specific and inherent loss estimates based upon any more recent
information that has become available. In addition, management’s determination
as to the amount of our allowance for loan losses is subject to review by the
Office of Thrift Supervision (OTS) and the FDIC, which may require the
establishment of additional general or specific allowances based upon their
judgment of the information available to them at the time of their examination
of Kaiser Federal Bank.





Our
provision for loan losses increased to $865,000 for the three months ended
September 30, 2009 compared to $363,000 for the three months ended September 30,
2008. The allowance for loan losses as a percent of total loans was 0.69% at
September 30, 2009 as compared to 0.44% at September 30, 2008. Net charge-offs
totaled $154,000 or 0.08% of average loans for the three months ended September
30, 2009 as compared to $315,000 or 0.17% of average loans for the three months
ended September 30, 2008. The increase in provision for loan losses was
primarily attributable to an increase in real estate loan delinquencies as well
as an increase in loans that were reviewed for impairment. The increase in
delinquencies was experienced primarily in our one-to-four family loans as a
result of the continued deterioration in the housing market as well as
deteriorating general economic conditions and increased unemployment in our
market area.





The
increase in non-performing loans has impacted the level of the allowance for
loan losses at September 30, 2009.  Non-performing loans are assessed
to determine impairment.  Loans that are found to be impaired are
individually evaluated and a specific valuation allowance is
applied.   Accordingly the Company’s specific valuation allowance
has increased from $1.2 million at June 30, 2009 to $1.8 million at September
30, 2009.


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 Table of Contents


Noninterest Income.Our
noninterest income decreased $10,000, or 0.8% to $1.20 million for the three
months ended September 30, 2009 compared to $1.21 million for the three months
ended September 30, 2008.





Noninterest Expense.Our
noninterest expense increased $338,000, or 8.6% to $4.3 million for the three
months ended September 30, 2009 compared to $3.9 million for the three months
ended September 30, 2008. The increase was primarily due to a $152,000 increase
in salaries and benefits and a $164,000 increase in federal deposit insurance
premiums.





Salaries
and benefits represented 50.1% and 50.6% of total noninterest expense for the
three months ended September 30, 2009 and 2008, respectively. Total salaries and
benefits increased $152,000, or 7.6 %, to $2.1 million for the three months
ended September 30, 2009 from $2.0 million for the three months ended September
30, 2008. The increase was primarily due to annual salary increases and an
increase in the number of full-time equivalent employees.





Federal
deposit insurance premiums increased $164,000, or 188.5% to $251,000 for the
three months ended September 30, 2009 from $87,000 for the year ended September
30, 2008. The increase was due to an increase in the general assessment rate due
to ongoing bank failures.





Income Tax Expense. Income tax
expense increased $64,000, or 8.2% to $842,000 for the three months ended
September 30, 2009 compared to $778,000 for the three months ended September 30,
2008. This increase was primarily the result of a higher effective tax rate for
the three months ended September 30, 2009 compared to the three months ended
September 30, 2008. The effective tax rate was 37.4% and 35.6% for the three
months ended September 30, 2009 and 2008, respectively.  The increase
in the effective tax rate was attributable to an increase in non-deductible
expense related to stock options and stock awards.





Asset
Quality





As
expected, based on the weakened economy and continued decline in the housing
market, the one-to-four family mortgage loan portfolio has shown increased
delinquency.  Despite this increased delinquency, non-accrual and
delinquency ratios are significantly below industry averages.  This
has been accomplished through our conservative and disciplined lending practices
including our strict adherence to a long standing disciplined credit culture
that emphasizes the consistent application of underwriting standards to all
loans. In this regard, the Bank fully underwrites all loans based on an
applicant’s employment history, credit history and an appraised value of the
subject property. With respect to purchased loans, the Bank underwrites each
loan based upon our own underwriting standards prior to making the
purchase.





The
following underwriting guidelines have been used by the Bank as underwriting
tools to further limit the Bank’s potential loss exposure:





1.
            All
      variable rate loans are underwritten using the fully indexed
      rate.


2.
            All
      interest-only loans are underwritten using the fully amortized
      payment.


3.
            We
      only lend up to 80% of the lesser of the appraised value or purchase price
      for one-to-four family residential
loans.





Additionally,
the Bank’s portfolio has remained strongly anchored in traditional mortgage
products. In this regard, we do not originate or purchase construction and
development loans, teaser option-ARM loans, negatively amortizing loans or high
loan to value loans.


Page 20
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 Table of Contents


Delinquent Loans.The
following table sets forth certain information with respect to our loan
portfolio delinquencies at the dates indicated.




Loans
      Delinquent :60-89
      Days
              
              90
      Days or More
              
              Total
      Delinquent LoansNumber
      of Loans
              
              Amount
              
              Number
      of Loans
              
              Amount
              
              Number
      of Loans
              
              Amount(Dollars
      in thousands)At September 30, 2009Real estate loans:One-to-four
      family
              8
              
              $
              3,853
              
              22
              
              $
              9,929
              
              30
              
              $
              13,782Multi-family
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Commercial
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Other loans:Automobile
              —
              
              
              —
              
              3
              
              
              30
              
              3
              
              
              30Home
      equity
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Other
              6
              
              
              8
              
              5
              
              
              6
              
              11
              
              
              14Total
      loans
              14
              
              $
              3,861
              
              30
              
              $
              9,965
              
              44
              
              $
              13,826At June 30, 2009Real estate loans:One-to-four
      family
              6
              
              $
              2,212
              
              14
              
              $
              6,220
              
              20
              
              $
              8,432Multi-family
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Commercial
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Other loans:Automobile
              3
              
              
              16
              
              —
              
              
              —
              
              3
              
              
              16Home
      equity
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Other
              11
              
              
              16
              
              6
              
              
              11
              
              17
              
              
              27Total
      loans
              20
              
              $
              2,244
              
              20
              
              $
              6,231
              
              40
              
              $
              8,475At June 30, 2008Real estate loans:One-to-four
      family
              —
              
              $
              —
              
              4
              
              $
              1,583
              
              4
              
              $
              1,583Multi-family
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Commercial
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Other loans:Automobile
              10
              
              
              159
              
              8
              
              
              132
              
              18
              
              
              291Home
      equity
              —
              
              
              —
              
              —
              
              
              —
              
              —
              
              
              —Other
              22
              
              
              34
              
              9
              
              
              15
              
              31
              
              
              49Total
      loans
              32
              
              $
              193
              
              21
              
              $
              1,730
              
              53
              
              $
              1,923
  As
expected, based on the weakened economy and continued decline in the housing
market, the one-to-four family mortgage loan portfolio has shown increased
delinquency.  Delinquent loans 60 days or more increased to $13.8
million or 1.81% of total loans at September 30, 2009 from $8.5 million or 1.13%
of total loans at June 30, 2009.





Non-Performing Assets.The
following table sets forth the amounts and categories of non-performing assets
in our loan portfolio. Non-performing assets consist of non-accrual loans and
foreclosed assets. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days and over past due. All loans past due 90 days and over are classified as
non-accrual. On non-accrual loans, interest income is not recognized until
actually collected. At the time the loan is placed on non-accrual status,
interest previously accrued but not collected is reversed and charged against
current income.  At September 30, 2009, we had $3.4 million of
troubled debt restructurings (loans for which a concession has been granted due
to the debtor’s financial difficulties) that are included in non-accrual loans
in the following table.





Other
real estate owned and repossessed assets consist of real estate and other assets
which have been acquired through foreclosure on loans. At the time of
foreclosure, assets are recorded at the lower of their estimated fair value less
selling costs or the loan balance, with any write-down charged against the
allowance for loan losses.


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At
      September 30,
                
                
                At
      June 30,
                
                
                At
      June 30,2009
                
                
                2009
                
                
                2008(Dollars
      in thousands)Non-accrual loans:Real estate loans:One-to-four
      family
                
                $
                9,929
                
                
                $
                6,766
                
                
                $
                1,583Multi-family
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —
                
                
                
                —Other loans:Automobile
                
                
                30
                
                
                
                —
                
                
                
                132Home
      equity
                
                
                —
                
                
                
                —
                
                
                
                —Other
                
                
                6
                
                
                
                11
                
                
                
                15Troubled debt
restructuring:One-to-four
      family
                
                
                3,138
                
                
                
                1,859
                
                
                
                —Multi-family
                
                
                234
                
                
                
                235
                
                
                
                —Commercial
                
                
                —
                
                
                
                —
                
                
                
                —Total
      non-accrual loans
                
                
                13,337
                
                
                
                8,871
                
                
                
                1,730Other real estate owned and repossessed
      assets:Real estate:One-to-four
      family
                
                
                —
                
                
                
                496
                
                
                
                1,045Multi-family
                
                
                —
                
                
                
                —
                
                
                
                —Commercial
                
                
                —
                
                
                
                —
                
                
                
                —Other:Automobile
                
                
                —
                
                
                
                3
                
                
                
                161Home
      equity
                
                
                —
                
                
                
                —
                
                
                
                —Other
                
                
                —
                
                
                
                —
                
                
                
                —Total
      other real estate owned and repossessed assets
                
                
                —
                
                
                
                499
                
                
                
                1,206Total
      non-performing assets
                
                $
                13,337
                
                
                $
                9,370
                
                
                $
                2,936Ratios:Non-performing
      loans to total loans (1)
                
                
                1.74
                %
                
                
                1.18
                %
                
                
                0.23
                %Non-performing
      assets to total assets
                
                
                1.54
                %
                
                
                1.05
                %
                
                
                0.35
                %(1)
      Total loans are net of deferred fees and costs


The
increase in non-performing loans was a result of the increased delinquency in
our one-to-four family loans as a result of the continued deterioration in the
housing market as well as deteriorating general economic conditions and
increased unemployment in our market area. The increase in non-performing loans
has impacted our determination of the allowance for loan losses at September 30,
2009.  Non-performing loans are assessed to determine
impairment.  Loans that are found to be impaired are individually
evaluated and a specific valuation allowance is
applied.   Accordingly the Company’s specific valuation allowance
has increased from $1.2 million at June 30, 2009 to $1.8 million at September
30, 2009.





Changes
in asset quality were considered in the allowance for loan losses based on a
detailed analysis of loans, including delinquent loans. Each delinquent loan was
evaluated for impairment based on the loan balance, the borrower’s ability to
pay and collateral value. The other factors reviewed in determining the
allowance for loan losses included loss ratio trends by loan product and
concentrations in (1) geographic regions, (2) interest only loans, (3) stated
income loans and (4) loans with credit scores less than a specified amount. The
Company also reviewed the debt service coverage ratios and seasoning for income
property loans.  The Company has not changed its estimation methods or
assumptions related to the allowance for loan losses during the periods
presented.


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Liquidity,
Capital Resources and Commitments





Liquidity
may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, we have maintained liquid assets at levels above the minimum
requirements previously imposed by OTS regulations and above levels believed to
be adequate to meet the requirements of normal operations, including potential
deposit outflows. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained. See “Consolidated Statements of
Cash Flows” contained in the unaudited Consolidated Financial Statements
included in this document.





Our
liquidity, represented by cash and cash equivalents, interest earning accounts
and mortgage-backed and related securities, is a product of our operating,
investing and financing activities. Our primary sources of funds are deposits;
amortization, prepayments and maturities of outstanding loans and
mortgage-backed and related securities, and other short-term investments; and
funds provided from operations. While scheduled payments from the amortization
of loans and mortgage-backed related securities and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions, and competition. In addition, we invest
excess funds in short-term interest earning assets, which provide liquidity to
meet lending requirements. We also generate cash through borrowings. We utilize
FHLB advances and State of California time deposits to leverage our capital base
and provide funds for our lending and investment activities as well as enhance
our interest rate risk management.





Liquidity
management is both a daily and long-term function of business management. Excess
liquidity is generally invested in short-term investments such as overnight
deposits as well as interest earning time deposits in other financial
institutions. On a longer-term basis, we maintain a strategy of investing in
various lending products. We use our sources of funds primarily to meet ongoing
commitments, to pay maturing certificates of deposit and savings withdrawals, to
fund loan commitments and to maintain our portfolio of mortgage-backed and
related securities. At September 30, 2009, total approved loan commitments
amounted to $7.4 million, which included the unfunded portion of loans of $2.2
million.





Certificates
of deposit, State of California time deposits, and advances from the FHLB of San
Francisco scheduled to mature in one year or less at September 30, 2009, totaled
$144.6 million, $25.0 million and $10.0 million, respectively. Based on
historical experience, management believes that a significant portion of
maturing deposits will remain with Kaiser Federal Bank and we anticipate that we
will continue to have sufficient funds, through deposits and borrowings, to meet
our current commitments.





At
September 30, 2009, we had available additional advances from the FHLB of San
Francisco in the amount of $160.7 million. In fiscal 2009 we established a line
of credit with the Federal Reserve Bank. At September 30, 2009 the available
line of credit was $103.8 million.





Capital





The table
below sets forth Kaiser Federal Bank’s capital position relative to its OTS
capital requirements at September 30, 2009 and June 30, 2009. The definitions of
the terms used in the table are those provided in the capital regulations issued
by the OTS.





Actual
            
            
            Minimum
      Capital Requirements
            
            
            Minimum
      required to be Well Capitalized Under Prompt Corrective Actions
      ProvisionsSeptember 30, 2009
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio(Dollars
      in thousands)Total
      risk-based capital (to risk-weighted assets)
            
            $
            81,864
            
            
            
            13.46
            %
            
            $
            48,668
            
            
            
            8.00
            %
            
            $
            60,835
            
            
            
            10.00
            %Tier
      1 risk-based capital (to risk-weighted assets)
            
            
            78,440
            
            
            
            12.89
            
            
            
            24,334
            
            
            
            4.00
            
            
            
            36,501
            
            
            
            6.00Tier
      1 (core) capital (to adjusted tangible assets)
            
            
            78,440
            
            
            
            9.11
            
            
            
            34,442
            
            
            
            4.00
            
            
            
            43,052
            
            
            
            5.00


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Actual
            
            
            Minimum
      Capital Requirements
            
            
            Minimum
      required to be Well Capitalized Under Prompt Corrective Actions
      ProvisionsJune 30, 2009
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio(Dollars
      in thousands)Total
      risk-based capital (to risk-weighted assets)
            
            $
            80,077
            
            
            
            13.32
            %
            
            $
            48,096
            
            
            
            8.00
            %
            
            $
            60,120
            
            
            
            10.00
            %Tier
      1 risk-based capital (to risk-weighted assets)
            
            
            76,713
            
            
            
            12.76
            
            
            
            24,048
            
            
            
            4.00
            
            
            
            36,072
            
            
            
            6.00Tier
      1 (core) capital (to adjusted tangible assets)
            
            
            76,713
            
            
            
            8.65
            
            
            
            35,493
            
            
            
            4.00
            
            
            
            44,367
            
            
            
            5.00





Consistent
with our goal to operate a sound and profitable financial organization, we
actively seek to continue as a “well capitalized” institution in accordance with
regulatory standards.  At September 30, 2009, Kaiser Federal Bank was
a “well-capitalized” institution under regulatory standards.





Impact
of Inflation





The
consolidated financial statements presented herein have been prepared in
accordance with GAAP. These principles require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation.





Our
primary assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of
general levels of inflation. Interest rates, however, do not necessarily move in
the same direction or with the same magnitude as the price of goods and
services, since such prices are affected by inflation. In a period of rapidly
rising interest rates, the liquidity and maturity structure of our assets and
liabilities are critical to the maintenance of acceptable performance
levels.





The
principal effect of inflation, as distinct from levels of interest rates, on
earnings is in the area of noninterest expense. Such expense items as employee
compensation, employee benefits and occupancy and equipment costs may be subject
to increases as a result of inflation. An additional effect of inflation is the
possible increase in the dollar value of the collateral securing loans that we
have made. We are unable to determine the extent, if any, to which properties
securing our loans have appreciated in dollar value due to
inflation.








Item 3. Quantitative and Qualitative Disclosures
about Market Risk





Our Risk When Interest Rates Change.The rates of interest we earn on assets and pay on liabilities generally
are established contractually for a period of time. Market interest rates change
over time. Our fixed rate loans generally have longer maturities than our fixed
rate deposits. Accordingly, our results of operations, like those of other
financial institutions, are impacted by changes in interest rates and the
interest rate sensitivity of our assets and liabilities. The risk associated
with changes in interest rates and our ability to adapt to these changes is
known as interest rate risk and is our most significant market
risk.





How We Measure Our Risk of Interest
Rate Changes.As part of our attempt to manage our exposure to changes in
interest rates and comply with applicable regulations, we monitor our interest
rate risk. In monitoring interest rate risk we continually analyze and manage
assets and liabilities based on their payment streams and interest rates, the
timing of their maturities, and their sensitivity to actual or potential changes
in market interest rates.





In order
to minimize the potential for adverse effects of material and prolonged
increases in interest rates on our results of operations, we have adopted
investment/asset and liability management policies to better match the
maturities and repricing terms of our interest-earning assets and
interest-bearing liabilities. The board of directors sets and recommends the
asset and liability policies of Kaiser Federal Bank, which are implemented by
the asset/liability management committee.





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The
purpose of the asset/liability management committee is to communicate,
coordinate and control asset/liability management consistent with our business
plan and board approved policies. The committee establishes and monitors the
volume and mix of assets and funding sources taking into account relative costs
and spreads, interest rate sensitivity and liquidity needs. The objectives are
to manage assets and funding sources to produce results that are consistent with
liquidity, capital adequacy, growth, risk, and profitability goals.





The
asset/liability management committee generally meets on a weekly basis to
review, among other things, economic conditions and interest rate outlook,
current and projected liquidity needs and capital position, anticipated changes
in the volume and mix of assets and liabilities and interest rate risk exposure
limits versus current projections pursuant to net present value of portfolio
equity analysis and income simulations. The asset/liability management committee
regularly reviews interest rate risk by forecasting the impact of alternative
interest rate environments on net interest income and market value of portfolio
equity, which is defined as the net present value of an institution’s existing
assets, liabilities and off-balance sheet instruments, and evaluating such
impacts against the maximum potential changes in net interest income and market
value of portfolio equity that are authorized by the board of directors of
Kaiser Federal Bank. The asset/liability management committee recommends
appropriate strategy changes based on this review. The chairman or his designee
is responsible for reviewing and reporting on the effects of the policy
implementations and strategies to the board of directors at least
monthly.





In order
to manage our assets and liabilities and achieve the desired liquidity, credit
quality, interest rate risk, profitability and capital targets, we have focused
our strategies on: (1) originating adjustable rate loans; (2) originating a
reasonable volume of short- and intermediate-term consumer loans; (3) managing
our deposits to establish stable deposit relationships; and (4) using FHLB
advances, and pricing on fixed-term non-core deposits to align maturities and
repricing terms.





At times,
depending on the level of general interest rates, the relationship between long-
and short-term interest rates, market conditions and competitive factors, the
asset/liability management committee may determine to increase our interest rate
risk position somewhat in order to maintain our net interest margin. We intend
to continue our existing strategy of originating relatively short-term and/or
adjustable rate loans. The Bank does not maintain any securities for trading
purposes. The Bank does not currently engage in trading activities or use
instruments such as interest rate swaps, hedges, or other similar derivatives to
control interest rate risk.





The OTS
provides Kaiser Federal Bank with the information presented in the following
table, which is based on information provided to the OTS by Kaiser Federal Bank.
It presents the change in Kaiser Federal Bank’s net portfolio value at September
30, 2009 that would occur upon an immediate change in interest rates based on
OTS assumptions but without giving effect to any steps that management might
take to counteract that change.





September
      30, 2009Change
      in interest rates in basis points (“bp”)
              (Rate
      shock in rates)Net
      portfolio value (NPV)
            
            NPV
      as % of PV of assets$
      amount
            
            $
      change
            
            %
      change
            
            NPV
      ratio
            
            Change(bp)(Dollars
      in thousands)+300
      bp
            
            
            $
            87,271
            
            
            $
            (16,670
            )
            
            
            (16
            )%
            
            
            10.05
            %
            
            
            (143
            )bp+200
      bp
            
            
            
            95,959
            
            
            
            (7,982
            )
            
            
            (8
            )
            
            
            10.86
            
            
            
            (62
            )+100
      bp
            
            
            
            102,322
            
            
            
            (1,619
            )
            
            
            (2
            )
            
            
            11.41
            
            
            
            (7
            )0
      bp
            
            
            
            103,941
            
            
            
            —
            
            
            
            —
            
            
            
            11.48
            
            
            
            —-100
      bp
            
            
            
            98,040
            
            
            
            (5,901
            )
            
            
            (6
            )
            
            
            10.82
            
            
            
            (66
            )





The OTS
uses certain assumptions in assessing the interest rate risk of savings
associations. These assumptions relate to interest rates, loan prepayment rates,
deposit decay rates, and the market values of certain assets under differing
interest rate scenarios.


Page 25
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 Table of Contents


As with
any method of measuring interest rate risk, shortcomings are inherent in the
method of analysis presented in the foregoing tables. For example, although
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in the 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
may lag behind changes in market rates. Additionally, certain assets, such as
adjustable rate mortgage loans, have features, that restrict changes in interest
rates on a short-term basis and over the life of the asset. Further, if interest
rates change, expected rates of prepayments on loans and early withdrawals from
certificates of deposit could deviate significantly from those assumed in
calculating the table.








Item 4. Controls and Procedures





Our
management evaluated, with the participation of our Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the “Act”)) as of the end of the period covered by this
report. The Company’s Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures as of the end of
the period covered by this report are effective in ensuring that the information
required to be disclosed by the Company in the reports it files or submits under
the Act is (i) accumulated and communicated to the Company’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.




There
have been no changes in our internal control over financial reporting (as
defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended
September 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.











Part
II. OTHER INFORMATION








Item 1. Legal Proceedings





From time
to time, we are involved as plaintiff or defendant in various legal actions
arising in the normal course of business.  We do not anticipate
incurring any material liability as a result of this litigation or any material
impact on our financial position, results of operations or cash
flows.








Item 1A. Risk Factors





There
have been no material changes to the risk factors that were previously disclosed
in the Company’s annual report on Form 10-K for the fiscal year ended June 30,
2009.





Page 26
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Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds





Issuer
Purchases of Equity Securities


Period
            
            Total
      Number of Shares Purchased
            
            Weighted
      Average Price Paid Per Share
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans*
            
            Maximum
      Number of Shares That May Yet be Purchased Under the Plan07/1/08
      – 07/31/08
            
            
            41,469
            
            $
            10.87
            
            
            508,788
            
            
            —08/1/08
      – 08/31/08
            
            
            —
            
            
            —
            
            
            —
            
            
            228,35409/1/08
      – 09/30/08
            
            
            14,024
            
            
            9.96
            
            
            14,024
            
            
            214,33010/1/08
      – 10/31/08
            
            
            —
            
            
            —
            
            
            —
            
            
            214,33011/1/08
      – 11/30/08
            
            
            14,536
            
            
            8.14
            
            
            28,560
            
            
            199,79412/1/08
      – 12/31/08
            
            
            75
            
            
            7.41
            
            
            28,635
            
            
            199,71901/1/09
      – 01/31/09
            
            
            15,150
            
            
            8.04
            
            
            43,785
            
            
            184,56902/1/09
      – 02/28/09
            
            
            46,983
            
            
            7.56
            
            
            90,768
            
            
            137,58603/1/09
      – 03/31/09
            
            
            37,956
            
            
            7.68
            
            
            128,724
            
            
            99,63004/1/09
      – 04/30/09
            
            
            —
            
            
            —
            
            
            —
            
            
            99,63005/1/09
      – 05/31/09
            
            
            10,125
            
            
            7.82
            
            
            138,849
            
            
            89,50506/1/09
      – 06/30/09
            
            
            400
            
            
            9.95
            
            
            139,249
            
            
            89,10507/1/09
      – 07/31/09
            
            
            —
            
            
            —
            
            
            —
            
            
            89,10508/1/09
      – 08/31/09
            
            
            —
            
            
            —
            
            
            —
            
            
            89,10509/1/09
      – 09/30/09
            
            
            600
            
            
            9.17
            
            
            139,849
            
            
            88,505





* On
August 27, 2008, the Company announced its intention to repurchase an additional
5% of its outstanding publicly held common stock, or 228,354 shares of
stock.








Item 3. Defaults Upon Senior Securities





None.





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





None.





Item 5. Other Information





None.





Item 6. Exhibits





31.1
            Certification of Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act31.2
            Certification of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act32.1
            Certification of Chief Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act32.2
            Certification of Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley
Act





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K-FEDBANCORP AND SUBSIDIARY


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.








K-FED
      BANCORPDated:November 9,
      2009BY:
      /s/ K. M. HovelandK.
      M. HovelandPresident,
      Chief Executive OfficerBY:
      /s/ Dustin LutonDustin
      LutonChief
      Financial Officer


Page 28
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