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:  December 31,
      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 oIndicate
      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 oIndicate
      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 xIndicate
      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 – 13,291,512 shares outstanding as of January 29,
      2010.







Form 10-QK-FED
      BANCORPTable
      of Contents





PagePart
      I.
            FINANCIAL INFORMATIONItem
      1:
            Financial
      Statements (Unaudited)Consolidated
      Statements of Financial Condition at December 31, 2009 and June 30,
      2009
            1Consolidated
      Statements of Income (Loss) and Comprehensive Income (Loss) for the Three
      and Six Months Ended December 31, 2009 and 2008
            2Consolidated Statement
      of Stockholders’ Equity for the Six Months Ended December 31,
      2009
            3Consolidated
      Statements of Cash Flows for the Six Months Ended December 31, 2009 and
      2008
            4Notes to Consolidated
      Financial Statements
            5Item
      2:
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            15Item
      3:
            Quantitative and Qualitative
      Disclosures about Market Risk
            29Item
      4:
            Controls and
      Procedures
            30Part
      II.
            OTHER INFORMATIONItem
      1:
            Legal
      Proceedings
            30Item
      1A:
            Risk
      Factors
            30Item
      2:
            Unregistered Sales of Equity
      Securities and Use of Proceeds
            31Item
      3:
            Defaults upon
      Senior Securities
            31Item
      4:
            Submission of Matters to a Vote of
      Security Holders
            31Item
      5:
            Other
      Information
            31Item
      6:
            Exhibits
            32SIGNATURES
            33


Table of Contents


Part
I — FINANCIAL INFORMATION


Item
1. Financial Statements


K-FEDBANCORP AND SUBSIDIARY


Consolidated
Statements of Financial Condition


(Unaudited)


(Dollars
in thousands, except per share data)


December
      31
              2009
            
            
            June
      30
              2009ASSETSCash
      and due from banks
            
            $
            9,894
            
            
            $
            32,685Federal
      funds sold
            
            
            39,395
            
            
            
            41,020Total
      cash and cash equivalents
            
            
            49,289
            
            
            
            73,705Interest
      earning time deposits in other financial institutions
            
            
            19,223
            
            
            
            25,508Securities
      available-for-sale, at fair value
            
            
            3,167
            
            
            
            4,236Securities
      held-to-maturity, fair value of $4,662 and $5,625  at December
      31, 2009 and June 30, 2009, respectively
            
            
            4,536
            
            
            
            5,528Federal
      Home Loan Bank stock, at cost
            
            
            12,649
            
            
            
            12,649Loans
      receivable, net of allowance for loan losses of $10,740 and $4,586 at
      December 31, 2009 and June 30, 2009, respectively
            
            
            757,963
            
            
            
            746,875Accrued
      interest receivable
            
            
            3,231
            
            
            
            3,402Premises
      and equipment, net
            
            
            2,356
            
            
            
            2,562Core
      deposit intangible
            
            
            114
            
            
            
            147Goodwill
            
            
            3,950
            
            
            
            3,950Bank-owned
      life insurance
            
            
            12,127
            
            
            
            11,884Real
      estate owned
            
            
            403
            
            
            
            496Other
      assets
            
            
            8,523
            
            
            
            4,155Total
      assets
            
            $
            877,531
            
            
            $
            895,097LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDepositsNoninterest
      bearing
            
            $
            64,958
            
            
            $
            50,161Interest
      bearing
            
            
            559,241
            
            
            
            516,032Total
      deposits
            
            
            624,199
            
            
            
            566,193Federal
      Home Loan Bank advances, short-term
            
            
            62,000
            
            
            
            70,000Federal
      Home Loan Bank advances, long-term
            
            
            85,000
            
            
            
            137,004State
      of California time deposit
            
            
            10,000
            
            
            
            25,000Accrued
      expenses and other liabilities
            
            
            4,096
            
            
            
            4,342Total
      liabilities
            
            
            785,295
            
            
            
            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;
              December
      31, 2009 — 14,728,440 shares issued
              June
      30, 2009 — 14,728,440 shares issued
            
            
            147
            
            
            
            147Additional
      paid-in capital
            
            
            59,440
            
            
            
            59,134Retained
      earnings
            
            
            52,788
            
            
            
            53,512Accumulated
      other comprehensive income, net of tax
            
            
            60
            
            
            
            77Unearned
      employee stock ownership plan (ESOP) shares
            
            
            (1,934
            )
            
            
            (2,161
            )Treasury
      stock, at cost (December 31, 2009 — 1,436,928 shares;
              June
      30, 2009 — 1,423,852 shares)
            
            
            (18,265
            )
            
            
            (18,151
            )Total
      stockholders’ equity
            
            
            92,236
            
            
            
            92,558Total
      liabilities and stockholders’ equity
            
            $
            877,531
            
            
            $
            895,097The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements


Page 1 of
33
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K-FEDBANCORP AND SUBSIDIARY


Consolidated
Statements of Income (Loss) and Comprehensive Income (Loss)


(Unaudited)


(Dollars
in thousands, except per share data)





Three
      Months Ended
              December
      31
            
            
            Six
      Months Ended
              December
      312009
            
            
            2008
            
            
            2009
            
            
            2008Interest
      incomeInterest
      and fees on loans
            
            $
            11,020
            
            
            $
            10,719
            
            
            $
            22,052
            
            
            $
            21,619Interest
      on securities, taxable
            
            
            92
            
            
            
            164
            
            
            
            195
            
            
            
            339Federal
      Home Loan Bank dividends
            
            
            —
            
            
            
            122
            
            
            
            27
            
            
            
            314Other
      interest
            
            
            105
            
            
            
            107
            
            
            
            263
            
            
            
            346Total
      interest income
            
            
            11,217
            
            
            
            11,112
            
            
            
            22,537
            
            
            
            22,618Interest
      expenseInterest
      on deposits
            
            
            2,746
            
            
            
            3,444
            
            
            
            5,553
            
            
            
            6,952Interest
      on borrowings
            
            
            1,709
            
            
            
            2,501
            
            
            
            4,032
            
            
            
            5,223Total
      interest expense
            
            
            4,455
            
            
            
            5,945
            
            
            
            9,585
            
            
            
            12,175Net
      interest income
            
            
            6,762
            
            
            
            5,167
            
            
            
            12,952
            
            
            
            10,443Provision
      for loan losses
            
            
            5,650
            
            
            
            984
            
            
            
            6,515
            
            
            
            1,347Net
      interest income after provision for loan losses
            
            
            1,112
            
            
            
            4,183
            
            
            
            6,437
            
            
            
            9,096Noninterest
      incomeService
      charges and fees
            
            
            578
            
            
            
            619
            
            
            
            1,195
            
            
            
            1,241ATM
      fees and charges
            
            
            470
            
            
            
            424
            
            
            
            920
            
            
            
            877Referral
      commissions
            
            
            77
            
            
            
            77
            
            
            
            158
            
            
            
            153Loss
      on equity investment
            
            
            (75
            )
            
            
            (66
            )
            
            
            (150
            )
            
            
            (132
            )Bank-owned
      life insurance
            
            
            121
            
            
            
            118
            
            
            
            243
            
            
            
            237Other
      noninterest income
            
            
            22
            
            
            
            5
            
            
            
            27
            
            
            
            11Total
      noninterest income
            
            
            1,193
            
            
            
            1,177
            
            
            
            2,393
            
            
            
            2,387Noninterest
      expenseSalaries
      and benefits
            
            
            2,119
            
            
            
            1,991
            
            
            
            4,261
            
            
            
            3,982Occupancy
      and equipment
            
            
            585
            
            
            
            593
            
            
            
            1,182
            
            
            
            1,189ATM
      expense
            
            
            426
            
            
            
            356
            
            
            
            837
            
            
            
            721Advertising
      and promotional
            
            
            107
            
            
            
            92
            
            
            
            211
            
            
            
            194Professional
      services
            
            
            216
            
            
            
            237
            
            
            
            399
            
            
            
            459Federal
      deposit insurance premiums
            
            
            240
            
            
            
            92
            
            
            
            491
            
            
            
            178Postage
            
            
            73
            
            
            
            77
            
            
            
            137
            
            
            
            144Telephone
            
            
            169
            
            
            
            131
            
            
            
            350
            
            
            
            252Other
      operating expense
            
            
            385
            
            
            
            396
            
            
            
            724
            
            
            
            782Total
      noninterest expense
            
            
            4,320
            
            
            
            3,965
            
            
            
            8,592
            
            
            
            7,901Income
      (loss) before income tax expense
            
            
            (2,015
            )
            
            
            1,395
            
            
            
            238
            
            
            
            3,582Income
      tax expense (benefit)
            
            
            (809
            )
            
            
            464
            
            
            
            34
            
            
            
            1,242Net
      income (loss)
            
            $
            (1,206
            )
            
            $
            931
            
            
            $
            204
            
            
            $
            2,340Comprehensive
      income (loss)
            
            $
            (1,219
            )
            
            $
            948
            
            
            $
            187
            
            
            $
            2,361Earnings
      (loss) per common share:Basic
            
            $
            (0.09
            )
            
            $
            0.07
            
            
            $
            0.02
            
            
            $
            0.18Diluted
            
            $
            (0.09
            )
            
            $
            0.07
            
            
            $
            0.02
            
            
            $
            0.18The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements





Page 2 of
33
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K-FEDBANCORP 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 six months ended December 31, 2009
            
            $
            204
            
            
            —
            
            
            —
            
            
            —
            
            
            204
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            204Other
      comprehensive income – unrealized loss on securities, net of
      tax
            
            
            (17
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (17
            )
            
            —
            
            
            —
            
            
            —
            
            
            (17
            )Total
      comprehensive income
            
            $
            187Dividends
      declared ($0.22 per share) *
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            (928
            )
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (928
            )Purchase
      of treasury stock
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (13,076
            )
            
            (114
            )
            
            (114
            )Stock
      options earned
            
            
            
            
            
            —
            
            
            —
            
            
            175
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            175Allocation
      of stock awards
            
            
            
            
            
            —
            
            
            —
            
            
            155
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            155Allocation
      of ESOP common stock
            
            
            
            
            
            —
            
            
            —
            
            
            (24
            )
            
            —
            
            
            —
            
            
            227
            
            
            —
            
            
            —
            
            
            203Balance
      December 31, 2009
            
            
            
            
            
            14,728,440
            
            $
            147
            
            $
            59,440
            
            $
            52,788
            
            $
            60
            
            $
            (1,934
            )
            
            (1,436,928
            )
            $
            (18,265
            )
            $
            92,236*
      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


3
 Page 3 of
33
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K-FEDBANCORP AND SUBSIDIARY


Consolidated
Statements of Cash Flows


(Unaudited)


(Dollars
in thousands)





Six
      Months Ended
              December
      312009
            
            
            2008OPERATING
      ACTIVITIESNet
      income
            
            $
            204
            
            
            $
            2,340Adjustments
      to reconcile net income to net cash provided by operating
      activities:Amortization
      of net premiums on securities
            
            
            2
            
            
            
            7(Accretion)
      Amortization of net discounts on loan purchases
            
            
            (14
            )
            
            
            46Amortization
      (Accretion) of net loan origination costs
            
            
            34
            
            
            
            (36
            )Provision
      for loan losses
            
            
            6,515
            
            
            
            1,347Federal
      Home Loan Bank stock (FHLB) dividend
            
            
            —
            
            
            
            (314
            )Depreciation
      and amortization
            
            
            390
            
            
            
            431Amortization
      of core deposit intangible
            
            
            33
            
            
            
            42Loss
      on equity investment
            
            
            150
            
            
            
            132Increase
      in cash surrender value of bank-owned life insurance
            
            
            (243
            )
            
            
            (237
            )Accretion
      of debt exchange costs
            
            
            (4
            )
            
            
            (8
            )Allocation
      of ESOP common stock
            
            
            203
            
            
            
            202Allocation
      of stock awards
            
            
            155
            
            
            
            203Stock
      options earned
            
            
            175
            
            
            
            159Net
      change in accrued interest receivable
            
            
            171
            
            
            
            (14
            )Net
      change in other assets
            
            
            (4,517
            )
            
            
            91Net
      change in accrued expenses and other liabilities
            
            
            (246
            )
            
            
            (66
            )Net
      cash provided by operating activities
            
            
            3,008
            
            
            
            4,325INVESTING
      ACTIVITIESProceeds
      from maturities and principal repayments of available-for-sale securities
      sesddfsfssecurities
            
            
            1,042
            
            
            
            1,602Proceeds
      from maturities and principal repayments of held-to-maturity
      securities
            
            
            991
            
            
            
            354Net
      change in interest earning time deposits with other financial
      institutions
            
            
            6,285
            
            
            
            (4,131
            )Net
      change in loans
            
            
            (18,026
            )
            
            
            (1,934
            )Proceeds
      from sale of real estate owned
            
            
            504
            
            
            
            1,047Redemption
      of FHLB stock
            
            
            —
            
            
            
            205Purchases
      of premises and equipment
            
            
            (184
            )
            
            
            (258
            )Net
      cash used in investing activities
            
            
            (9,388
            )
            
            
            (3,115
            )FINANCING
      ACTIVITIESRepayment
      of FHLB advances
            
            
            (60,000
            )
            
            
            (28,000
            )Dividends
      paid on common stock
            
            
            (928
            )
            
            
            (946
            )Purchase
      of treasury stock
            
            
            (114
            )
            
            
            (994
            )Net
      change in deposits
            
            
            58,006
            
            
            
            12,919Change
      in State of California time deposit
            
            
            (15,000
            )
            
            
            —Net
      cash used in financing activities
            
            
            (18,036
            )
            
            
            (17,021
            )Net
      decrease in cash and cash equivalents
            
            
            (24,416
            )
            
            
            (15,811
            )Beginning
      cash and cash equivalents
            
            
            73,705
            
            
            
            51,240Ending
      cash and cash equivalents
            
            $
            49,289
            
            
            $
            35,429The
      accompanying notes are an integral part of these unaudited consolidated
      financial statements


4
 Page 4 of
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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 and six months ended December 31, 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 February 9, 2010, 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
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 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 Accounting
Standards Codification (“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.





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 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.


Page 6 of
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In June
2009, the FASB issued new authoritative guidance under Statement of Financial
Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No.
46R.” In December 2009, the FASB issued Accounting Standards Update (“ASU”) No.
2009-17 which provides updates to ASC Topic 810,
“Consolidations”  This guidance changes 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. The
guidance 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. The new guidance under ASC Topic 810 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.





Note
2 – Earnings (Loss)
Per Share





Basic
earnings (loss) per common share is net income (loss) 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 (loss) per
common share includes the dilutive effect of additional potential common shares
issuable under stock options.





Three
      months ended
              December
      31,
            
            
            Six
      months ended
              December
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Basic
            
            (Dollars
      in thousands, except per share data)Net
      income (loss)
            
            $
            (1,206
            )
            
            $
            931
            
            
            $
            204
            
            
            
            2,340Weighted
      average common shares outstanding
            
            
            13,095,348
            
            
            
            13,156,966
            
            
            
            13,091,916
            
            
            
            13,161,080Basic
      earnings (loss) per share
            
            $
            (0.09
            )
            
            $
            0.07
            
            
            $
            0.02
            
            
            
            0.18DilutedNet
      income (loss)
            
            $
            (1,206
            )
            
            $
            931
            
            
            $
            204
            
            
            
            2,340Weighted
      average common shares outstanding
            
            
            13,095,348
            
            
            
            13,156,966
            
            
            
            13,091,916
            
            
            
            13,161,080Dilutive
      effect of stock options
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Average
      shares and dilutive potential common shares
            
            
            13,095,348
            
            
            
            13,156,966
            
            
            
            13,091,916
            
            
            
            13,161,080Diluted
      earnings (loss) per share
            
            $
            (0.09
            )
            
            $
            0.07
            
            
            $
            0.02
            
            
            
            0.18





For the
three and six months ended December 31, 2009 outstanding stock options to
purchase 484,400 shares were anti-dilutive and not considered in computing
diluted earnings (loss) per common share. For the three and six months ended
December 31, 2008 outstanding stock options to purchase 304,400 shares were
anti-dilutive and not considered in computing diluted earnings per common
share.





Page 7 of
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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.





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.





Nonrecurring
adjustments to certain real estate properties classified as real estate owned
are measured at the lower of carrying amount or fair value, less costs to sell.
Fair values are generally based on third party appraisals of the property,
resulting in a Level 3 classification. In cases where the carrying amount
exceeds the fair value, less costs to sell, an impairment loss is
recognized.





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





Fair
      Value Measurements at December 31, 2009 UsingAssets at December 31,
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)
            
            $
            438
            
            
            $
            —
            
            
            $
            438
            
            
            $
            —Collateralized
      mortgage obligations (residential)
            
            $
            2,729
            
            
            $
            —
            
            
            $
            2,729
            
            
            $
            —





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
            
            
            $
            —





Page 8 of
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The
Company may also be required, from time to time, to measure certain other 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 December 31, 2009 UsingAssets at December 31,
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
            
            $
            14,556
            
            
            $
            —
            
            
            $
            —
            
            
            $
            14,556Real
      estate owned
            
            $
            403
            
            
            $
            —
            
            
            $
            —
            
            
            $
            403





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
            
            $
            3,855
            
            
            $
            —
            
            
            $
            —
            
            
            $
            3,855Real
      estate owned
            
            $
            496
            
            
            $
            —
            
            
            $
            —
            
            
            $
            496





Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $18,186,000 at December
31, 2009 as compared to $5,056,000 at June 30, 2009. The fair value of
collateral is calculated using a third party appraisal. The valuation allowance
for these loans was $3,630,000 at December 31, 2009 as compared to $1,201,000 at
June 30, 2009. An additional provision for loan losses of $2,642,000 was made
for the six months ended December 31, 2009 relating to impaired
loans.





Real
estate owned is measured at the lower of carrying amount or fair value less
costs to sell at transfer. If the fair value of the asset declines, a write-down
is recorded through expense. During the three and six months ended December 31,
2009, the Company did not incur any charges to reduce real estate owned to fair
value.





Page 9 of
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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 loans 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.





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





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.


Page 10
of 33
 Table of Contents


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





December
      31, 2009
            
            
            June
      30, 2009Carrying
              Amount
            
            
            Fair
              Value
            
            
            Carrying
              Amount
            
            
            Fair
              Value(In
      thousands)Financial
      assets:Cash
      and cash equivalents
            
            $
            49,289
            
            
            $
            49,289
            
            
            $
            73,705
            
            
            $
            73,705Interest
      earning time deposits in other financial institutions
            
            
            19,223
            
            
            
            19,223
            
            
            
            25,508
            
            
            
            25,508Securities
      available-for-sale
            
            
            3,167
            
            
            
            3,167
            
            
            
            4,236
            
            
            
            4,236Securities
      held-to-maturity
            
            
            4,536
            
            
            
            4,662
            
            
            
            5,528
            
            
            
            5,625Federal
      Home Loan Bank Stock
            
            
            12,649
            
            
            NA
            
            
            
            12,649
            
            
            NALoans
      receivable, net
            
            
            735,467
            
            
            
            768,079
            
            
            
            738,015
            
            
            
            763,451Accrued
      interest receivable
            
            
            3,231
            
            
            
            3,231
            
            
            
            3,402
            
            
            
            3,402Financial
      liabilities:Deposits
            
            
            624,199
            
            
            
            617,957
            
            
            
            566,193
            
            
            
            560,531Borrowings
            
            
            147,000
            
            
            
            154,085
            
            
            
            207,004
            
            
            
            215,677State
      of California time deposit
            
            
            10,000
            
            
            
            10,092
            
            
            
            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)December 31, 2009Mortgage-backed
      (residential):Freddie
      Mac
              
              $
              438
              
              $
              13
              
              $
              ─
              
              $
              425Collateralized
      mortgage obligations (residential):Freddie
      Mac
              
              
              2,729
              
              
              89
              
              
              ─
              
              
              2,640Total
              
              $
              3,167
              
              $
              102
              
              $
              ─
              
              $
              3,065June 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 11
of 33
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Contents
  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)December 31, 2009Mortgage-backedFannie
      Mae
            
            $
            171
            
            $
            ─
            
            $
            ─
            
            $
            171Freddie
      Mac
            
            
            146
            
            
            ─
            
            
            ─
            
            
            146Ginnie
      Mae
            
            
            103
            
            
            3
            
            
            ─
            
            
            106Collateralized
      mortgage obligationsFannie
      Mae
            
            
            1,568
            
            
            34
            
            
            ─
            
            
            1,602Freddie
      Mac
            
            
            2,548
            
            
            89
            
            
            ─
            
            
            2,637Ginnie
      Mae
            
            
            ─
            
            
            ─
            
            
            ─
            
            
            ─Total
            
            $
            4,536
            
            $
            126
            
            $
            ─
            
            $
            4,662June 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 six months ended December 31, 2009 and
December 31, 2008.





Securities
with unrealized losses at December 31, 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)December
      31, 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 12
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 Table of Contents


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 not more than likely it will 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
liquidity, 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 not more than likely it will 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:





December
      31,
              2009
            
            
            June
      30,
              2009(In
      thousands)Real
      Estate:One-to-four
      family residential, fixed rate
            
            $
            289,582
            
            
            $
            303,287One-to-four
      family residential, variable rate
            
            
            63,822
            
            
            
            73,943Multi-family
      residential, variable rate
            
            
            247,867
            
            
            
            196,575Commercial
      real estate, variable rate
            
            
            114,899
            
            
            
            121,143716,170
            
            
            
            694,948Consumer:Automobile
            
            
            36,045
            
            
            
            41,798Home
      equity
            
            
            1,092
            
            
            
            1,299Other
      consumer loans, primarily unsecured
            
            
            15,021
            
            
            
            13,11952,158
            
            
            
            56,216Total
      loans
            
            
            768,328
            
            
            
            751,164Deferred
      net loan origination costs
            
            
            440
            
            
            
            376Net
      discounts on purchased loans
            
            
            (65
            )
            
            
            (79
            )Allowance
      for loan losses
            
            
            (10,740
            )
            
            
            (4,586
            )$
            757,963
            
            
            $
            746,875


Page 13
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The
following is the activity in the allowance for loan losses:





Three
      months ended December 31,
            
            Six
      months endedDecember
      31,2009
            
            2008
            
            2009
            
            2008(In
      thousands)Balance,
      beginning of period
            
            $
            5,297
            
            
            $
            3,278
            
            
            $
            4,586
            
            
            $
            3,229Provision
      for loan losses
            
            
            5,650
            
            
            
            984
            
            
            
            6,515
            
            
            
            1,347Recoveries
            
            
            10
            
            
            
            76
            
            
            
            46
            
            
            
            138Loans
      charged off
            
            
            (217
            )
            
            
            (406
            )
            
            
            (407
            )
            
            
            (782
            )Balance,
      end of period
            
            $
            10,740
            
            
            $
            3,932
            
            
            $
            10,740
            
            
            $
            3,932





At
December 31, 2009, non-accrual loans totaled $22.5 million, compared to $8.9
million at June 30, 2009. At December 31, 2009 and June 30, 2009, there were no
loans past due more than 90 days and still accruing interest. Included in
non-accrual loans are troubled debt restructures of $5,092,000 and $2,094,000 at
December 31, 2009 and June 30, 2009, respectively.





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.





Individually
impaired loans were as follows:





December
      31,
              2009
            
            
            June
      30,
              2009(In
      thousands)Loans
      with no allocated allowance
            
            $
            3,270
            
            
            $
            3,522Troubled
      debt restructured loans with no allocated allowance
            
            
            1,040
            
            
            
            282Loans
      with allocated allowance
            
            
            14,134
            
            
            
            3,244Troubled
      debt restructured loans with allocated allowance
            
            
            4,052
            
            
            
            1,812$
            22,496
            
            
            $
            8,860Amount
      of allowance allocated
            
            $
            2,439
            
            
            $
            648Amount
      of allowance allocated for troubled debt restructured
loans
            
            
            1,191
            
            
            
            553Total
      allowance for loan losses allocated
            
            $
            3,630
            
            
            $
            1,201





For the
three and six months ended December 31, 2009, the Company’s average investment
in impaired loans was $17.9 million and $14.9 million, respectively. For the
three and six months ended December 31, 2008, the Company’s average investment
in impaired loans was $5.6 million and $5.0 million, respectively.





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 and six months ended December 31, 2009, income recorded
on impaired loans totaled $114,000 and $142,000, respectively. For the three and
six months ended December 31, 2008, income recorded on impaired loans totaled
$17,000 and $34,000, respectively. Interest income recorded on impaired loans
for all periods presented was recorded on a cash basis.


Page 14
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 Table of Contents


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.





Federal Deposit Insurance Corporation
Coverage/Assessments.The Emergency Economic Stabilization Act (“EESA”)
of 2008 temporarily increased the limit on FDIC coverage for deposits to
$250,000 from $100,000 through 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 were
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. The Company
did not opt out and is participating in this component of the TLGP. As of
December 31, 2009 the Company had no non-interest bearing transaction accounts
in excess of $250,000. We opted into the extension which took 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.





Page 15
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 Table of Contents


The FDIC
currently imposes an assessment against institutions for deposit insurance based
on the risk category of the institution. Federal law requires 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 December 31, 2009. The special assessment
was capped at 10 basis points of an institution's domestic deposits. On December
31, 2009, the Bank paid $407,000 related to this special assessment. Future
special assessments could also be assessed.





The FDIC
issued a final rule pursuant to which all insured depository institutions were
required to prepay their estimated assessments for the fourth quarter of 2009,
and for all of 2010, 2011 and 2012. Under the rule, this pre-payment was due on
December 30, 2009. The assessment rate for the fourth quarter of 2009 and for
2010 was based on each institution’s total base assessment rate for the third
quarter of 2009, modified to assume 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 was 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 was 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, our prepayment amount was $3.5
million.





Market
Area





The
financial services sector of the United States economy continues to experience a
declining economic environment.  Economic conditions remain weak both
nationally and in our market area of California.  We continue to
experience a downward pressure on home prices and California remains one of the
top in the nation for foreclosure activity.  California, in particular
has experienced significant declines in real estate values and elevated
unemployment rates.  Unemployment rates in California increased to
12.4% in December 2009 from 11.6% in June 2009.





Page 16
of 33
 Table of Contents


Comparison
of Financial Condition at December 31, 2009 and June 30, 2009.





Assets. Total assets decreased
$17.6 million, or 2.0% to $877.5 million at December 31, 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 $24.4 million, or 33.1%
to $49.3 million at December 31, 2009 from $73.7 million at June 30, 2009. The
decrease was a result of the repayment of $60.0 million in FHLB advances that
matured during the period.  The repayment was funded with available
liquidity and strong deposit growth.





Our
investment securities portfolio decreased $2.1 million, or 21.1% to $7.7 million
at December 31, 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 loan
portfolio increased by $11.1 million, or 1.5% to $758.0 million at December 31,
2009 from $746.9 million at June 30, 2009 due primarily to an increase in
multi-family loans. Multi-family loans increased $51.3 million, or 26.1% to
$247.9 million at December 31, 2009 from $196.6 million at June 30, 2009.
One-to-four family real estate loans decreased $23.8 million, or 6.3% to $353.4
million at December 31, 2009 from $377.2 million at June 30, 2009. Commercial
real estate loans decreased $6.2 million, or 5.2% to $114.9 million at December
31, 2009 from $121.1 million at June 30, 2009. Other loans which are comprised
primarily of automobile loans decreased $4.0 million, or 7.2% to $52.2 million
at December 31, 2009 from $56.2 million at June 30, 2009. Real estate loans
comprised 93.2% of the total loan portfolio at December 31, 2009, compared with
92.5% at June 30, 2009. The decrease in one-to-four family real estate loans and
increase in multi-family loans was due to our focus on originating multi-family
loans as a means of diversifying the loan portfolio.





Other
assets increased by $4.4 million to $8.5 million at December 31, 2009 from $4.2
million at June 30, 2009.  The increase in other assets was primarily
a result of the FDIC prepayment of $3.5 million that was paid on the last day of
the quarter.





Deposits. Total deposits
increased $58.0 million or 10.2% to $624.2 million at December 31, 2009 from
$566.2 million at June 30, 2009. The growth was comprised of increases of $33.6
million in certificates of deposit, $11.3 million in money market accounts, and
$13.1 million in checking and savings accounts. The increase in certificate of
deposit accounts was a result of promotions for these types of accounts as well
as an increase in individual retirement account balances. Money market accounts
have steadily increased throughout the year.  The increase in checking
and savings balances was primarily a result of a third pay period experienced by
a significant number of our customers on the last day of December.





Borrowings. Advances from the
FHLB of San Francisco decreased $60.0 million, or 29.0% to $147.0 million at
December 31, 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.  In addition $15.0
million was paid down on the outstanding State of California time deposit at
maturity.





Stockholders’
Equity.Stockholders’ equity decreased $322,000, to $92.2
million at December 31, 2009 from $92.6 million at June 30, 2009 primarily as a
result of the payment of dividends of $928,000 ($0.22 per share) and stock
repurchases of $114,000.  This decrease was partially offset by
$204,000 in net income for the six months ended December 31, 2009 and the
allocation of ESOP shares, stock awards, and stock options earned totaling
$533,000.


Page 17
of 33
 Table of
Contents
  Average
Balances, Net Interest Income, Yields Earned and Rates Paid


The
following table sets forth certain information for the quarter ended December
31, 2009 and 2008, respectively.
 
 For
      the three months ended December 31,2009
      (1)
              
              
              
              
              
              
              
              
              2008
      (1)Average
              
              
              
              
              
              
              
              
              AverageAverage
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Cost
              
              
              Balance
              
              
              Interest
              
              
              Cost(Dollars
      in thousands)INTEREST-EARNING
      ASSETSLoans
      receivable(2)
              
              $
              758,697
              
              
              $
              11,020
              
              
              
              5.81
              %
              
              $
              736,460
              
              
              $
              10,719
              
              
              
              5.82
              %Securities(3)
              
              
              8,118
              
              
              
              92
              
              
              
              4.53
              %
              
              
              14,590
              
              
              
              164
              
              
              
              4.50
              %Federal
      funds sold
              
              
              32,928
              
              
              
              20
              
              
              
              0.24
              %
              
              
              33,684
              
              
              
              71
              
              
              
              0.84
              %Federal
      Home Loan Bank stock
              
              
              12,649
              
              
              
              —
              
              
              
              0.00
              %
              
              
              12,640
              
              
              
              122
              
              
              
              3.86
              %Interest-earning
      deposits in other financial institutions
              
              
              24,345
              
              
              
              85
              
              
              
              1.40
              %
              
              
              9,908
              
              
              
              36
              
              
              
              1.45
              %Total
      interest-earning assets
              
              
              836,737
              
              
              
              11,217
              
              
              
              5.36
              %
              
              
              807,282
              
              
              
              11,112
              
              
              
              5.51
              %Noninterest
      earning assets
              
              
              36,631
              
              
              
              
              
              
              
              
              
              
              
              35,007Total
      assets
              
              $
              873,368
              
              
              
              
              
              
              
              
              
              
              $
              842,289INTEREST-BEARING  LIABILITIESMoney
      market
              
              $
              116,075
              
              
              $
              284
              
              
              
              0.98
              %
              
              $
              78,555
              
              
              $
              492
              
              
              
              2.51
              %Savings
      deposits
              
              
              129,210
              
              
              
              157
              
              
              
              0.49
              %
              
              
              118,389
              
              
              
              333
              
              
              
              1.13
              %Certificates
      of deposit
              
              
              304,488
              
              
              
              2,305
              
              
              
              3.03
              %
              
              
              255,909
              
              
              
              2,619
              
              
              
              4.09
              %Borrowings
              
              
              168,250
              
              
              
              1,709
              
              
              
              4.06
              %
              
              
              236,513
              
              
              
              2,501
              
              
              
              4.23
              %Total
      interest-bearing liabilities
              
              
              718,023
              
              
              
              4,455
              
              
              
              2.48
              %
              
              
              689,366
              
              
              
              5,945
              
              
              
              3.45
              %Noninterest
      bearing liabilities
              
              
              61,725
              
              
              
              
              
              
              
              
              
              
              
              61,592Total
      liabilities
              
              
              779,748
              
              
              
              
              
              
              
              
              
              
              
              750,958Equity
              
              
              93,620
              
              
              
              
              
              
              
              
              
              
              
              91,331Total
      liabilities and equity
              
              $
              873,368
              
              
              
              
              
              
              
              
              
              
              $
              842,289Net
      interest/spread
              
              
              
              
              
              $
              6,762
              
              
              
              2.88
              %
              
              
              
              
              
              $
              5,167
              
              
              
              2.06
              %Margin(4)
              
              
              
              
              
              
              
              
              
              
              3.23
              %
              
              
              
              
              
              
              
              
              
              
              2.56
              %Ratio
      of interest-earning assets to interest bearing liabilities
              
              
              116.53
              %
              
              
              
              
              
              
              
              
              
              
              117.10
              %(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 18
of 33
 Table of Contents
 
 For
      the six months ended December 31,2009
      (1)
              
              
              
              
              
              
              
              
              2008
      (1)Average
              
              
              
              
              
              
              
              
              AverageAverage
              
              
              
              
              
              Yield/
              
              
              Average
              
              
              
              
              
              Yield/Balance
              
              
              Interest
              
              
              Cost
              
              
              Balance
              
              
              Interest
              
              
              Cost(Dollars
      in thousands)INTEREST-EARNING
      ASSETSLoans
      receivable(2)
              
              $
              755,926
              
              
              $
              22,052
              
              
              
              5.83
              %
              
              $
              740,025
              
              
              $
              21,619
              
              
              
              5.84
              %Securities(3)
              
              
              8,603
              
              
              
              195
              
              
              
              4.53
              %
              
              
              15,061
              
              
              
              339
              
              
              
              4.50
              %Federal
      funds sold
              
              
              44,681
              
              
              
              58
              
              
              
              0.26
              %
              
              
              35,733
              
              
              
              272
              
              
              
              1.52
              %Federal
      Home Loan Bank stock
              
              
              12,649
              
              
              
              27
              
              
              
              0.43
              %
              
              
              12,624
              
              
              
              314
              
              
              
              4.97
              %Interest-earning
      deposits in other financial institutions
              
              
              29,382
              
              
              
              205
              
              
              
              1.40
              %
              
              
              8,744
              
              
              
              74
              
              
              
              1.69
              %Total
      interest-earning assets
              
              
              851,241
              
              
              
              22,537
              
              
              
              5.30
              %
              
              
              812,187
              
              
              
              22,618
              
              
              
              5.57
              %Noninterest
      earning assets
              
              
              41,122
              
              
              
              
              
              
              
              
              
              
              
              36,103Total
      assets
              
              $
              892,363
              
              
              
              
              
              
              
              
              
              
              $
              848,290INTEREST-BEARING  LIABILITIESMoney
      market
              
              $
              114,191
              
              
              $
              594
              
              
              
              1.04
              %
              
              $
              80,244
              
              
              $
              972
              
              
              
              2.42
              %Savings
      deposits
              
              
              130,284
              
              
              
              349
              
              
              
              0.54
              %
              
              
              120,307
              
              
              
              715
              
              
              
              1.19
              %Certificates
      of deposit
              
              
              298,743
              
              
              
              4,610
              
              
              
              3.09
              %
              
              
              254,678
              
              
              
              5,265
              
              
              
              4.13
              %Borrowings
              
              
              194,144
              
              
              
              4,032
              
              
              
              4.15
              %
              
              
              245,158
              
              
              
              5,223
              
              
              
              4.26
              %Total
      interest-bearing liabilities
              
              
              737,362
              
              
              
              9,585
              
              
              
              2.60
              %
              
              
              700,387
              
              
              
              12,175
              
              
              
              3.48
              %Noninterest
      bearing liabilities
              
              
              61,592
              
              
              
              
              
              
              
              
              
              
              
              56,880Total
      liabilities
              
              
              798,954
              
              
              
              
              
              
              
              
              
              
              
              757,267Equity
              
              
              93,409
              
              
              
              
              
              
              
              
              
              
              
              91,023Total
      liabilities and equity
              
              $
              892,363
              
              
              
              
              
              
              
              
              
              
              $
              848,290Net
      interest/spread
              
              
              
              
              
              $
              12,952
              
              
              
              2.70
              %
              
              
              
              
              
              $
              10,443
              
              
              
              2.09
              %Margin(4)
              
              
              
              
              
              
              
              
              
              
              3.04
              %
              
              
              
              
              
              
              
              
              
              
              2.57
              %Ratio
      of interest-earning assets to interest bearing liabilities
              
              
              115.44
              %
              
              
              
              
              
              
              
              
              
              
              115.96
              %(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 19
of 33
 Table of Contents





Comparison
of Results of Operations for the Three Months Ended December 31, 2009 and
December 31, 2008.





General.Net loss for the
three months ended December 31, 2009 was $1.2 million, a decrease of $2.1
million as compared to net income of $931,000 for the three months ended
December 31, 2008. Loss per basic and diluted common share were $0.09 for the
three months ended December 31, 2009 compared to earnings per basic and diluted
common share of $0.07 for the three months ended December 31, 2008. The net loss
resulted primarily from an increase in the provision for loan
losses.





Interest Income.Interest
income increased by $105,000 or 0.9%, to $11.2 million for the three months
ended December 31, 2009 from $11.1 million for the three months ended December
31, 2008. The primary factor for the increase in interest income was an increase
in the average loan receivable balance of $22.2 million, or 3.0% from $736.5
million for the three months ended December 31, 2008 to $758.7 million for the
three months ended December 31, 2009.





Interest Expense. Interest
expense decreased $1.5 million or 25.1% to $4.4 million for the three months
ended December 31, 2009 from $5.9 million for the three months ended December
31, 2008. The decrease was primarily attributable to a 97 basis point decline in
the average cost of interest bearing liabilities from 3.45% for the three months
ended December 31, 2008 to 2.48% for the three months ended December 31, 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 $28.6 million from $689.4 million for the three months ended
December 31, 2008 to $718.0 million for the three months ended December 31,
2009.





The
decrease in interest expense was also the result of a decline in the average
balance of borrowings of $68.3 million, or 28.9%, to $168.2 million for the
three months ended December 31, 2009 from $236.5 million for the three months
ended December 31, 2008. The decline was the result of scheduled advance
repayments and was funded with available liquidity and 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.





Our
provision for loan losses increased to $5.7 million for the three months ended
December 31, 2009 compared to $1.0 million for the three months ended December
31, 2008. The provision for loan losses for the three months ended December 31,
2009 is comprised of $3.8 million in general valuation allowances and $1.9
million in specific valuation allowances.  The increase in provision
for loan losses was primarily attributable to the significant increase in real
estate loan delinquencies and troubled debt restructures during the
period.  The increase in delinquencies and troubled debt restructures
was experienced primarily in our one-to-four family residential mortgage loans
as a result of the continued deterioration in the housing market as well as
deteriorating general economic conditions and prolonged and elevated levels of
unemployment in our market area.  Also, impacting the provision for
loan losses for the quarter ended December 31, 2009 were three income property
loans totaling $5.5 million that were added to non-accrual.  Of the
$1.9 million in specific valuation allowances, $871,000 was related to the three
income property loans noted above.





Noninterest Income.Our
noninterest income remained unchanged for the three months ended December 31,
2009 and 2008 at $1.2 million.





Noninterest Expense.Our
noninterest expense increased $355,000, or 9.0% to $4.3 million for the three
months ended December 31, 2009 compared to $4.0 million for the three months
ended December 31, 2008. The increase was primarily due to a $128,000 increase
in salaries and benefits and a $148,000 increase in federal deposit insurance
premiums.  The increase in federal deposit insurance premiums was a
result of increased deposits and an increase in the general assessment rate due
to ongoing bank failures.


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Salaries
and benefits represented 49.1% and 50.2% of total noninterest expense for the
three months ended December 31, 2009 and 2008, respectively. Total salaries and
benefits increased $128,000, or 6.4 %, to $2.1 million for the three months
ended December 31, 2009 from $2.0 million for the three months ended December
31, 2008. The increase was primarily due to annual salary increases and an
increase in the number of full-time equivalent employees.





Income Tax Expense (Benefit).
Income taxes decreased $1.3 million, or 274.4% to an $809,000 benefit for the
three months ended December 31, 2009 compared to income tax expense of $464,000
for the three months ended December 31, 2008. This decrease was a result of a
net loss for the three months ended December 31, 2009 compared to net income for
the three months ended December 31, 2008. The effective tax rate was (40.1%) and
33.3% for the three months ended December 31, 2009 and 2008,
respectively.  The change in the effective tax rate was a result of
the impact of tax credits on lower projected taxable income.





Comparison
of Results of Operations for the Six Months Ended December 31, 2009 and December
31, 2008.





General.Net income for the
six months ended December 31, 2009 was $204,000, a decrease of $2.1 million as
compared to net income of $2.3 million for the six months ended December 31,
2008. Earnings per basic and diluted common share were $0.02 for the six months
ended December 31, 2009 compared to $0.18 for the six months ended December 31,
2008. The decrease in net income primarily resulted from an increase in the
provision for loan losses.





Interest Income.Interest
income decreased by $81,000 or 0.4%, to $22.5 million for the six months ended
December 31, 2009 from $22.6 million for the six months ended December 31, 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.  These decreases were partially offset by an increase in
interest and fees on loans.





Interest
income on securities decreased by $144,000 or 42.5%, to $195,000 for the six
months ended December 31, 2009 from $339,000 for the six months ended December
31, 2008. The decrease was primarily attributable to a $6.5 million decrease in
the average balance of investment securities from $15.1 million for the six
months ended December 31, 2008 to $8.6 million for the six months ended December
31, 2009 as a result of maturities and normal repayments of principal on our
mortgage-backed securities and collateralized mortgage obligations.





FHLB
dividends decreased by $287,000, or 91.4%, to $27,000 for the six months ended
December 31, 2009 from $314,000 for the six months ended December 31, 2008. The
decrease was attributable to the FHLB paying only a minimal dividend as compared
to the prior period.  Based on announcements from the FHLB we are not
expecting any dividend payments for the foreseeable future.





Other
interest income decreased by $83,000 or 24.0% to $263,000 for the six months
ended December 31, 2009 from $346,000 for the six months ended December 31,
2008. The decrease was a result of a 126 basis point decline in the average
yield earned on federal funds sold from 1.52% for the six months ended December
31, 2008 to 0.26% for the six months ended December 31, 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
and fees on loans increased $433,000, or 2.0%, to $22.1 million for the six
months ended December 31, 2009 from $21.6 million for the six months ended
December 31, 2008.  The primary factor for the increase was an
increase in the average loan receivable balance of $15.9 million, or 2.2% to
$755.9 million for the six months ended December 31, 2009 from $740.0 million
for the six months ended December 31, 2008.





Interest Expense. Interest
expense decreased $2.6 million or 21.3% to $9.6 million for the six months ended
December 31, 2009 from $12.2 million for the six months ended December 31, 2008.
The decrease was primarily attributable to an 88 basis point decline in the
average cost of interest bearing liabilities from 3.48% for the six months ended
December 31, 2008 to 2.60% for the six months ended December 31, 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 $37.0 million from $700.4 million for the six months ended
December 31, 2008 to $737.4 million for the six months ended December 31,
2009.


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The
decrease in interest expense was also the result of a decline in the average
balance of borrowings which decreased $51.0 million, or 20.8%, to $194.1 million
for the six months ended December 31, 2009 from $245.1 million for the six
months ended December 31, 2008. The decline was the result of scheduled advance
repayments and was funded with available liquidity due to increased
deposits.





Provision for Loan Losses. Our
provision for loan losses increased to $6.5 million for the six months ended
December 31, 2009 compared to $1.3 million for the six months ended December 31,
2008. The provision for loan losses for the six months ended December 31, 2009
is comprised of $3.9 million in general valuation allowances and $2.6 million in
specific valuation allowances.  The increase in provision for loan
losses was primarily attributable to an increase in real estate loan
delinquencies and troubled debt restructures during the period. –
See-“Comparison of Results of Operations for the Three Months Ended December 31,
2009 and December 31, 2008-Provision for Loan Losses.”





Noninterest Income.Our
noninterest income remained unchanged for the six months ended December 31, 2009
and 2008 at $2.4 million.





Noninterest Expense.Our
noninterest expense increased $691,000, or 8.7% to $8.6 million for the six
months ended December 31, 2009 compared to $7.9 million for the six months ended
December 31, 2008. The increase was primarily due to a $279,000 increase in
salaries and benefits and a $313,000 increase in federal deposit insurance
premiums.





Salaries
and benefits represented 49.6% and 50.4% of total noninterest expense for the
six months ended December 31, 2009 and 2008, respectively. Total salaries and
benefits increased $279,000, or 7.0 %, to $4.3 million for the six months ended
December 31, 2009 from $4.0 million for the six months ended December 31, 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 $313,000, or 175.8% to $491,000 for the six
months ended December 31, 2009 from $178,000 for the six months ended December
31, 2008. The increase was due to an increase in the general assessment rate due
to ongoing bank failures.





Income Tax Expense. Income tax
expense decreased to $34,000 for the six months ended December 31, 2009 compared
to $1.2 million for the six months ended December 31, 2008. This decrease was
primarily the result of lower pretax income for the six months ended December
31, 2009 compared to the six months ended December 31, 2008. The effective tax
rate was 14.3% and 34.7% for the six months ended December 31, 2009 and 2008,
respectively. The change in the effective tax rate was a result of the impact of
tax credits on lower projected taxable income.





Asset
Quality





As a
result of the prolonged distressed economic environment, elevated unemployment
levels and a depressed real estate market, the loan portfolio continues to show
increased delinquency.  While delinquency ratios have increased we
continue 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 were 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.


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





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 December 31, 2009Real estate loans:One-to-four
      family
            9
            
            $
            3,397
            
            24
            
            $
            10,842
            
            33
            
            $
            14,239Multi-family
            —
            
            
            —
            
            1
            
            
            1,757
            
            1
            
            
            1,757Commercial
            —
            
            
            —
            
            —
            
            
            —
            
            —
            
            
            —Other loans:Automobile
            4
            
            
            46
            
            4
            
            
            55
            
            8
            
            
            101Home
      equity
            —
            
            
            —
            
            —
            
            
            —
            
            —
            
            
            —Other
            6
            
            
            3
            
            4
            
            
            3
            
            10
            
            
            6Total
      loans
            19
            
            $
            3,446
            
            33
            
            $
            12,657
            
            52
            
            $
            16,103At 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 a
result of the distressed economic environment, elevated unemployment levels and
a depressed real estate market, the real estate loan portfolio has shown
increased delinquency. Delinquent loans 60 days or more increased to $16.1
million or 2.10% of total loans at December 31, 2009 from $8.5 million or 1.13%
of total loans at June 30, 2009.  Delinquent one-to-four family loans
increased from $8.4 million at June 30, 2009 to $14.2 million at December 31,
2009.  In addition there is one multi-family loan totaling $1.8
million that was over 90 days delinquent at December 31, 2009 and in the process
of foreclosure.  This property has a court appointed receiver in place
to manage the property and collect the rents during the foreclosure
process.





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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. Non-accrual loans also include troubled debt restructurings
(loans for which a concession has been granted due to the debtor’s financial
difficulties). 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.  The fair value of other real
estate owned is determined by a third party appraisal of the
property.





At
      December 31,
            
            
            At
      June 30,
            
            
            At
      June 30,2009
            
            
            2009
            
            
            2008(Dollars
      in thousands)Non-accrual loans:Real estate loans:One-to-four
      family
            
            $
            11,872
            
            
            $
            6,766
            
            
            $
            1,583Multi-family
            
            
            2,787
            
            
            
            —
            
            
            
            —Commercial
            
            
            2,687
            
            
            
            —
            
            
            
            —Other loans:Automobile
            
            
            55
            
            
            
            —
            
            
            
            132Home
      equity
            
            
            —
            
            
            
            —
            
            
            
            —Other
            
            
            3
            
            
            
            11
            
            
            
            15Troubled debt
    restructurings:One-to-four
      family
            
            
            4,859
            
            
            
            1,859
            
            
            
            —Multi-family
            
            
            233
            
            
            
            235
            
            
            
            —Commercial
            
            
            —
            
            
            
            —
            
            
            
            —Total
      non-accrual loans
            
            
            22,496
            
            
            
            8,871
            
            
            
            1,730Other real estate owned and repossessed
      assets:Real estate:One-to-four
      family
            
            
            403
            
            
            
            496
            
            
            
            1,045Multi-family
            
            
            —
            
            
            
            —
            
            
            
            —Commercial
            
            
            —
            
            
            
            —
            
            
            
            —Other:Automobile
            
            
            16
            
            
            
            3
            
            
            
            161Home
      equity
            
            
            —
            
            
            
            —
            
            
            
            —Other
            
            
            —
            
            
            
            —
            
            
            
            —Total
      other real estate owned and repossessed assets
            
            
            419
            
            
            
            499
            
            
            
            1,206Total
      non-performing assets
            
            $
            22,915
            
            
            $
            9,370
            
            
            $
            2,936Ratios:Non-accrual
      loans to total loans (1)
            
            
            2.93
            %
            
            
            1.18
            %
            
            
            0.23
            %Non-performing
      assets to total assets
            
            
            2.61
            %
            
            
            1.05
            %
            
            
            0.35
            %(1)
      Total loans are net of deferred fees and costs





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The
increase in non-accrual loans was a result of the increased delinquency in our
real estate loans as a result of the continued deterioration in the housing
market as well as deteriorating general economic conditions and increased and
prolonged unemployment in our market area.   The Bank continues
to work with responsible borrowers to stay in their homes and as a result has
restructured $5.1 million in mortgage loans that are performing according to
their revised contractual terms at December 31, 2009.  This compares
to $2.1 million in restructured loans at June 30, 2009. At December 31, 2009
there were $5.5 million of income property loans on non-accrual for which
specific valuation allowances of $871,000 have been applied.  Included
in the $5.5 million of income property loans on non-accrual at December 31, 2009
were two multi-family loans totaling $2.8 million and one commercial real estate
loan totaling $2.7 million.  One of the multi-family loans totaling
$1.8 million was over 90 days delinquent and has a court appointed receiver in
place to manage the property and collect the rents during the foreclosure
process.  The other multi-family loan totaling $1.0 million was less
than 60 days delinquent but the borrower has filed for
bankruptcy.  The commercial real estate loan is a retail strip mall
that was less than 60 days delinquent at December 31, 2009.  The
borrower was experiencing cash flow problems and was delinquent with property
tax payments.  In January 2010, the commercial real estate loan was
brought current.  There were no delinquent or non-accrual income
property loans at June 30, 2009.  The increase in non-accrual loans
has impacted our determination of the allowance for loan losses at December 31,
2009. Non-accrual loans are assessed to determine impairment. Loans that are
found to be impaired are individually evaluated and a specific valuation
allowance is applied.





Classified
Assets.We regularly review potential problem assets in our
portfolio to determine whether any assets require classification in accordance
with applicable regulations.  The total amount of classified assets
represented 4.54% of our total assets at December 31, 2009, as compared to 2.39%
of our total assets at June 30, 2009.The aggregate amount of our classified and
special mention assets at the dates indicated were as follows:




December
      31,
              2009
            
            
            June
      30,
              2009(Dollars
      in thousands)Classified and Special Mention
      Assets:Loss
            
            $
            6
            
            
            $
            20Doubtful
            
            
            84
            
            
            
            126Substandard
            
            
            30,075
            
            
            
            13,964Special
      Mention
            
            
            9,712
            
            
            
            7,316Total
            
            $
            39,877
            
            
            $
            21,426





The
increase in classified assets is consistent with the increases noted in
delinquent loans and non-performing assets noted above.





Allowance 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 non-performing 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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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 non-performing 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. 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 the Bank.


The
distribution of the allowance for losses on loans at the dates indicated is
summarized as follows.
 
 December
      31,
                2009
              
              June
      30,
                2009Amount
              
              
              Percent
      of Loans in Each Category to Total Loans
              
              Amount
              
              
              Percent
      of Loans in Each Category to Total Loans(Dollars
      in thousands)Real estate loans:One-to-four
      family
              
              $
              6,858
              
              
              46.00
              %
              $
              3,326
              
              
              50.22
              %Multi-family
              
              
              2,783
              
              
              32.26
              
              
              515
              
              
              26.17Commercial
              
              
              877
              
              
              14.95
              
              
              286
              
              
              16.13Other loans:Automobile
              
              
              118
              
              
              4.69
              
              
              342
              
              
              5.56Home
      equity
              
              
              11
              
              
              0.14
              
              
              6
              
              
              0.17Other
              
              
              93
              
              
              1.96
              
              
              111
              
              
              1.75Total
      allowance for loan losses
              
              $
              10,740
              
              
              100.00
              %
              $
              4,586
              
              
              100.00
              %
  Page 26
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Contents
  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,
concentrations in geographic regions and prolonged unemployment rates. The
Company also reviewed the debt service coverage ratios, delinquent taxes,
repayment history 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.





The
allowance for loan losses as a percent of total loans was 1.40% at December 31,
2009 as compared to 0.61% at June 30, 2009. The allowance for loan losses as a
percent of non-accrual loans was 47.7% at December 31, 2009 as compared to 51.7%
at June 30, 2009.  The general valuation allowance has increased from
$3.4 million at June 30, 2009 to $7.1 million at December 31,
2009.  The general valuation allowance as a percent of total loans was
0.94% at December 31, 2009 as compared to 0.46% at June 30, 2009.  The
specific valuation allowance increased from $1.2 million at June 30, 2009 to
$3.6 million at December 31, 2009.  The increase in the allowance for
loan losses was primarily attributable to an increase in historical loss
experience as well as the significant increase in real estate loan delinquencies
and troubled debt restructures during the period.  The increase in
delinquencies and troubled debt restructures 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
prolonged and elevated levels of unemployment in our market
area.  Also, impacting the allowance was a $5.5 million increase in
non-accrual income property loans for which specific valuation allowances of
$871,000 have been applied.





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 December 31, 2009, total approved loan commitments
amounted to $7.0 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 December 31, 2009, totaled
$148.5 million, $10.0 million and $62.0 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.


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At
December 31, 2009, we had available additional advances from the FHLB of San
Francisco in the amount of $161.6 million. In fiscal 2009 we established a line
of credit with the Federal Reserve Bank. At December 31, 2009 the available line
of credit was $73.6 million.





Capital





The table
below sets forth Kaiser Federal Bank’s capital position relative to its OTS
capital requirements at December 31, 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
      ProvisionsDecember 31, 2009
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio(Dollars
      in thousands)Total
      risk-based capital (to risk-weighted assets)
            
            $
            84,621
            
            
            
            13.74
            %
            
            $
            49,277
            
            
            
            8.00
            %
            
            $
            61,597
            
            
            
            10.00
            %Tier
      1 risk-based capital (to risk-weighted assets)
            
            
            77,517
            
            
            
            12.58
            
            
            
            24,639
            
            
            
            4.00
            
            
            
            36,958
            
            
            
            6.00Tier
      1 (core) capital (to adjusted tangible assets)
            
            
            77,517
            
            
            
            8.90
            
            
            
            34,832
            
            
            
            4.00
            
            
            
            43,540
            
            
            
            5.00





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 December 31, 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.





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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.





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-term 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 December
31, 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.





Page 29
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December
      31, 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
            
            
            $
            75,457
            
            
            $
            (31,346
            )
            
            
            (29
            )%
            
            
            8.72
            %
            
            
            (294
            )bp+200
      bp
            
            
            
            87,597
            
            
            
            (19,206
            )
            
            
            (18
            )
            
            
            9.91
            
            
            
            (175
            )+100
      bp
            
            
            
            98,639
            
            
            
            (8,164
            )
            
            
            (8
            )
            
            
            10.94
            
            
            
            (72
            )0
      bp
            
            
            
            106,803
            
            
            
            —
            
            
            
            —
            
            
            
            11.66
            
            
            
            —-100
      bp
            
            
            
            110,444
            
            
            
            3,641
            
            
            
            3
            
            
            
            11.92
            
            
            
            26





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.





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
December 31, 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 30
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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 Plan08/1/08
      – 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
            
            
            88,50510/1/09
      – 10/31/09
            
            
            —
            
            
            —
            
            
            —
            
            
            88,50511/1/09
      – 11/30/09
            
            
            175
            
            
            8.66
            
            
            140,024
            
            
            88,33012/1/09
      – 12/31/09
            
            
            12,301
            
            
            8.66
            
            
            152,325
            
            
            76,029





* 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





The
Annual Meeting of Shareholders for K-Fed Bancorp was held on October 24, 2009.
At that meeting, the shareholders elected the following persons to three-year
terms to the Board of Directors: Gerald A. Murbach by a vote of 11,469,071
for and 105,897 withheld, Michael J. Sacher by a vote of 11,439,838 for and
135,130 withheld, and Robert C. Steinbach by a vote of 11,539,856 for and 35,112
withheld. There were 1,729,620 non-voting shares. James L. Breeden, Kay M.
Hoveland, Laura G. Weisshar and Rita H. Zwern also continued to serve as
directors after the meeting.





The
appointment of Crowe Horwath LLP as independent registered public accounting
firm for the fiscal year ending June 30, 2010 was ratified by a vote of
2,695,959 for, 15,257 against and 2,002 abstain.





Item 5. Other Information





None.


Page 31
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 Table of Contents


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





Page 32
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K-FED BANCORP 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:
      February 9, 2010BY:
      /s/ K. M. HovelandK.
      M. HovelandPresident,
      Chief Executive OfficerBY:
      /s/ Dustin LutonDustin
      LutonChief
      Financial Officer


Page 33
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