UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549  FORM 10-Q  (Mark One) xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended:March 31, 2006  OR  oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from _____ to _____  Commission File Number:000-50592  K-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 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. YesxNoo  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange act. (Check one): Large accelerated filero
        Accelerated filero
        Non-accelerated filerx  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNox  APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:  Common Stock, $.01 par value  14,357,570 shares outstanding as of May 9, 2006. 
        Form 10-Q  K-FED BANCORP Table of Contents  PagePart I.
        Financial InformationItem 1:
        Financial Statements (Unaudited)Consolidated Statements of Financial Condition as of March 31, 2006 and June 30, 2005
        1Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended March 31, 2006 and 2005
        2Consolidated Statement of Stockholders Equity and Other Comprehensive Income for the Nine Months Ended March 31, 2006
        3Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2006 and 2005
        4Notes to Consolidated Financial Statements
        5Item 2:
        Managements Discussion and Analysis of Financial Condition and Results of Operations
        8Item 3:
        Quantitative and Qualitative Disclosures About Market Risk
        16Item 4:
        Controls and Procedures
        18Part II.
        Other InformationItem 1:
        Legal Proceedings
        18Item 2:
        Unregistered Sales of Equity Securities and Use of Proceeds
        18Item 3:
        Defaults upon Senior Securities
        18Item 4:
        Submission of Matters to a Vote of Security Holders
        18Item 5:
        Other Information
        18Item 6:
        Exhibits
        19SIGNATURES
        20         Table of contents Part I  FINANCIAL INFORMATION Item 1. Financial Statements K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Financial Condition (Unaudited) (Dollars in thousands, except share data) March 312006
        
        June 302005ASSETSCash and due from banks
        
        $
        8,388
        
        $
        6,990Federal funds sold
        
        
        26,095
        
        
        10,325Total cash and cash equivalents
        
        
        34,483
        
        
        17,315Interest bearing deposits in other financial institutions
        
        
        9,010
        
        
        9,010Securities available-for-sale
        
        
        17,166
        
        
        18,848Securities held-to-maturity, fair value of $25,351 and$30,688 at March 31, 2006 and June 30, 2005, respectively
        
        
        25,949
        
        
        30,834Federal Home Loan Bank stock, at cost
        
        
        8,640
        
        
        4,027Loans receivable
        
        
        647,704
        
        
        539,025Deferred net loan origination fees
        
        
        (89
        )
        
        (32
        )Net premium on purchased loans
        
        
        312
        
        
        982Allowance for loan losses
        
        
        (2,544
        )
        
        (2,408
        )Loans receivable, net
        
        
        645,383
        
        
        537,567Accrued interest receivable
        
        
        2,999
        
        
        2,310Premises and equipment, net
        
        
        2,862
        
        
        1,491Core deposit intangible
        
        
        469
        
        
        568Goodwill
        
        
        3,950
        
        
        3,950Bank-owned life insurance
        
        
        10,410
        
        
        10,089Other assets
        
        
        5,586
        
        
        3,873Total assets
        
        $
        766,907
        
        $
        639,882LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNoninterest bearing
        
        $
        58,067
        
        $
        43,744Interest bearing
        
        
        431,990
        
        
        432,048Total deposits
        
        
        490,057
        
        
        475,792Federal Home Loan Bank advances, short-term
        
        
        10,000
        
        
        11,000Federal Home Loan Bank advances, long-term
        
        
        169,910
        
        
        59,777Accrued expenses and other liabilities
        
        
        3,294
        
        
        2,553Total liabilities
        
        
        673,261
        
        
        549,122Commitments 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;March 31, 2006  14,706,040 shares issued.June 30, 2005  14,711,800 shares issued.
        
        
        147
        
        
        147Additional paid-in capital
        
        
        57,818
        
        
        57,541Retained earnings
        
        
        45,422
        
        
        42,689Accumulated other comprehensive loss, net of tax
        
        
        (242
        )
        
        (168
        )Unearned employee stock ownership plan shares
        
        
        (3,639
        )
        
        (3,981
        )Unearned employee stock awards
        
        
        (1,595
        )
        
        (2,015
        )Treasury stock, at cost (March 31, 2006  343,470 shares;June 30, 2005  278,470 shares)
        
        
        (4,265
        )
        
        (3,453
        )Total stockholders equity
        
        
        93,646
        
        
        90,760Total liabilities and stockholders equity
        
        $
        766,907
        
        $
        639,882The accompanying notes are an integral part of these financial statements   1        Table of contents K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Income and Comprehensive Income (Unaudited) (Dollars in thousands, except per share data)  Three Months Ended
March 31
        
        Nine Months Ended
March 312006
        
        2005
        
        2006
        
        2005Interest IncomeInterest and fees on loans
        
        $
        8,776
        
        $
        6,431
        
        $
        24,072
        
        $
        18,861Interest on securities, taxable
        
        
        410
        
        
        476
        
        
        1,237
        
        
        1,481Federal Home Loan Bank dividends
        
        
        86
        
        
        38
        
        
        174
        
        
        113Other interest
        
        
        202
        
        
        171
        
        
        690
        
        
        400Total interest income
        
        
        9,474
        
        
        7,116
        
        
        26,173
        
        
        20,855Interest ExpenseInterest on Federal Home Loan Bank advances
        
        
        1,904
        
        
        464
        
        
        4,219
        
        
        1,438Interest on deposits
        
        
        2,868
        
        
        2,246
        
        
        8,298
        
        
        6,301Total interest expense
        
        
        4,772
        
        
        2,710
        
        
        12,517
        
        
        7,739Net interest income
        
        
        4,702
        
        
        4,406
        
        
        13,656
        
        
        13,116Provision for loan losses
        
        
        128
        
        
        123
        
        
        488
        
        
        275Net interest income after provisionfor loan losses
        
        
        4,574
        
        
        4,283
        
        
        13,168
        
        
        12,841Noninterest incomeService charges and fees
        
        
        428
        
        
        444
        
        
        1,382
        
        
        1,385ATM fees and charges
        
        
        371
        
        
        338
        
        
        1,108
        
        
        988Referral commissions
        
        
        53
        
        
        49
        
        
        168
        
        
        157Loss on equity investment
        
        
        (101
        )
        
        (71
        )
        
        (443
        )
        
        (434
        )Bank-owned life insurance
        
        
        107
        
        
        
        
        
        321
        
        
        Other noninterest income
        
        
        15
        
        
        22
        
        
        32
        
        
        50Total noninterest income
        
        
        873
        
        
        782
        
        
        2,568
        
        
        2,146Noninterest expenseSalaries and benefits
        
        
        1,850
        
        
        1,748
        
        
        5,436
        
        
        5,036Occupancy and equipment
        
        
        448
        
        
        390
        
        
        1,263
        
        
        1,072ATM expense
        
        
        282
        
        
        260
        
        
        862
        
        
        774Advertising and promotional
        
        
        93
        
        
        83
        
        
        296
        
        
        295Professional services
        
        
        180
        
        
        147
        
        
        560
        
        
        611Postage
        
        
        77
        
        
        72
        
        
        219
        
        
        198Telephone
        
        
        86
        
        
        74
        
        
        262
        
        
        227Other operating expense
        
        
        353
        
        
        318
        
        
        1,029
        
        
        902Total noninterest expense
        
        
        3,369
        
        
        3,092
        
        
        9,927
        
        
        9,115Income before income tax expense
        
        
        2,078
        
        
        1,973
        
        
        5,809
        
        
        5,872Income tax expense
        
        
        723
        
        
        746
        
        
        2,078
        
        
        2,226Net income
        
        $
        1,355
        
        $
        1,227
        
        $
        3,731
        
        $
        3,646Comprehensive Income
        
        $
        1,356
        
        $
        1,112
        
        $
        3,657
        
        $
        3,603Earnings per common share:Basic
        
        $
        0.10
        
        $
        0.09
        
        $
        0.27
        
        $
        0.26Diluted
        
        $
        0.10
        
        $
        0.09
        
        $
        0.27
        
        $
        0.26The accompanying notes are an integral part of these financial statements   2        Table of contents K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Stockholders Equity And Other Comprehensive Income (Unaudited) (Dollars in thousands, except share data)  Common Stock
        
        
        
        
        
        
        
        
        
        
        
        Treasury StockComprehensiveIncome
        
        Shares
        
        Amount
        
        AdditionalPaid-inCapital
        
        RetainedEarnings
        
        AccumulatedOtherComprehensiveLoss, net
        
        UnearnedESOPShares
        
        UnearnedStockAwards
        
        Shares
        
        Amount
        
        TotalBalance June 30, 2005
        
        
        
        
        14,711,800
        
        $
        147
        
        $
        57,541
        
        $
        42,689
        
        $
        (168
        )
        $
        (3,981
        )
        $
        (2,015
        )
        (278,470
        )
        $
        (3,453
        )
        $
        90,760Comprehensive incomeNet income for the nine months ended March 31, 2006
        
        $
        3,731
        
        
        
        
        
        
        
        
        
        
        3,731
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        3,731Other comprehensive income  unrealized loss onsecurities, net of tax
        
        
        (74
        )
        
        
        
        
        
        
        
        
        
        
        
        
        (74
        )
        
        
        
        
        
        
        
        
        
        
        
        
        (74
        )Total comprehensive income
        
        $
        3,657Dividends paid ($0.20 per share) *
        
        
        
        
        
        
        
        
        
        
        
        
        
        (998
        )
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (998
        )Purchase of treasury stock
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        (65,000
        )
        
        (812
        )
        
        (812
        )Stock options earned
        
        
        
        
        
        
        
        
        
        
        277
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        277Allocation of stock awards
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        339
        
        
        
        
        
        
        
        339Forfeiture of stock awards
        
        
        
        
        (5,760
        )
        
        
        
        
        (81
        )
        
        
        
        
        
        
        
        
        
        
        81
        
        
        
        
        
        
        
        Allocation of ESOP common stock
        
        
        
        
        
        
        
        
        
        
        81
        
        
        
        
        
        
        
        
        342
        
        
        
        
        
        
        
        
        
        
        423Balance March 31, 2006
        
        
        
        
        14,706,040
        
        $
        147
        
        $
        57,818
        
        $
        45,422
        
        $
        (242
        )
        $
        (3,639
        )
        $
        (1,595
        )
        (343,470
        )
        $
        (4,265
        )
        $
        93,646*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 financial statements   3       Table of contents K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) Nine Months Ended
March 312006
        
        2005Operating ActivitiesNet income
        
        $
        3,731
        
        $
        3,646Adjustments to reconcile net income to cash provided by operating activities:Amortization of net premiums on securities
        
        
        81
        
        
        126Amortization of net premiums on loan purchases
        
        
        430
        
        
        1,063Accretion of net loan origination fees
        
        
        (54
        )
        
        (51
        )Provision for loan losses
        
        
        488
        
        
        275Federal Home Loan Bank stock dividend
        
        
        (174
        )
        
        (113
        )Depreciation and amortization
        
        
        346
        
        
        327Amortization of core deposit intangible
        
        
        99
        
        
        72Loss on equity investment
        
        
        443
        
        
        434Increase in cash surrender value of bank-owned life insurance
        
        
        (321
        )
        
        Accretion of net premiums on purchased certificates of deposits
        
        
        (47
        )
        
        (79
        )Amortization of debt exchange costs
        
        
        133
        
        
        175Allocation of ESOP common stock
        
        
        423
        
        
        478Allocation of stock awards
        
        
        339
        
        
        173Stock options earned
        
        
        277
        
        
        Net change in accrued interest receivable
        
        
        (689
        )
        
        (306
        )Net change in other assets
        
        
        (1,550
        )
        
        (24
        )Net changes in accrued expenses and other liabilities
        
        
        355
        
        
        (326
        )Net cash provided by operating activities
        
        
        4,310
        
        
        5,870Investing ActivitiesProceeds from maturities of available-for-sale securities
        
        
        1,518
        
        
        1,581Purchases of held-to-maturity investments
        
        
        (2,000
        )
        
        (5,000
        )Proceeds from maturities of held-to-maturity securities
        
        
        6,842
        
        
        13,281Net change in time deposits with other financial institutions
        
        
        
        
        
        (6,040
        )Purchases of loans
        
        
        (161,071
        )
        
        (102,607
        )Net change in loans, excluding loan purchases
        
        
        52,391
        
        
        78,764Purchase of FHLB stock
        
        
        (4,440
        )
        
        (1,196
        )Proceeds from FHLB stock repurchase
        
        
        
        
        
        961Purchase of equity investment
        
        
        (167
        )
        
        (165
        )Net cash received from branch acquisition
        
        
        
        
        
        56,491Purchases of premises and equipment
        
        
        (1,717
        )
        
        (295
        )Net cash (used in) provided by investing activities
        
        
        (108,644
        )
        
        35,775Financing ActivitiesProceeds from FHLB advances
        
        
        128,000
        
        
        165,916Repayment of FHLB advances
        
        
        (19,000
        )
        
        (185,916
        )Dividends paid on common stock
        
        
        (998
        )
        
        (524
        )Purchase of treasury stock
        
        
        (812
        )
        
        (143
        )Debt exchange costs
        
        
        
        
        
        (473
        )Net change in deposits
        
        
        14,312
        
        
        (12,604
        )Net cash provided by (used in) financing activities
        
        
        121,502
        
        
        (33,744
        )Net change in cash and cash equivalents
        
        
        17,168
        
        
        7,901Cash and cash equivalents, at beginning of year
        
        
        17,315
        
        
        12,158Cash and cash equivalents, at end of period
        
        $
        34,483
        
        $
        20,059The accompanying notes are an integral part of these financial statements   4       Table of contents K-FED BANCORP 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. 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 six branch locations throughout California. While the Bank originates all types of retail and commercial real estate loans, the majority of its residential real estate loans have been purchased from other financial institutions.  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 principals generally accepted in the United States (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 a fair presentation of the financial condition and results of operations for the interim periods included herein have been made.  The results of operations for the three and nine month periods ended March 31, 2006 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending June 30, 2006. 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 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.  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, the valuation of financial instruments, and mortgage-loan prepayment assumptions used to determine the effective
interest amortization of loan purchase premiums and discounts.  New Accounting Standards:In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R (FAS-123R),Share-Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123 (FAS-123), Accounting for Stock-Based Compensation.  5        Table of contents FAS-123R eliminates accounting for share-based compensation transactions using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB-25),Accounting for Stock Issued to Employees, and requires instead that such transactions be accounted for using a fair-value-based method. FAS-123R is effective as of the first interim or annual reporting period that begins after June 15, 2005. The Company adopted FAS-123R effective July 1, 2005 applying the modified prospective transition method. Under the modified prospective transition method, the financial statements will not reflect restated amounts. Existing options that will vest after June 30, 2005 will result in expense of $370,000 for the years ending June 30, 2006, 2007, 2008, 2009, and $139,000 for the year ending June 30, 2010. The effect of this pronouncement on future operations
will depend on the fair value of future options issued and accordingly, cannot be determined at this time.  The following table illustrates the pro forma effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 and SFAS 148 to stock-based employee compensation for periods prior to the Companys adoption of SFAS 123(R): March 31, 2005Three Months Ended
        
        
        
        Nine Months Ended(Dollars in thousands)Net income as reported
        
        $
        1,227
        
        
        
        $
        3,646Add: Stock-based compensation recorded, net of tax
        
        
        
        
        
        
        
        Less: Total stock-based compensation costs determined under the fair value based method, net of tax
        
        
        (82
        )
        
        
        
        (123
        )Net income, pro forma
        
        $
        1,145
        
        
        
        $
        3,523Earnings per share  as reportedBasic
        
        $
        0.09
        
        
        
        $
        0.26Diluted
        
        $
        0.09
        
        
        
        $
        0.26Earnings per share  pro formaBasic
        
        $
        0.08
        
        
        
        $
        0.25Diluted
        
        $
        0.08
        
        
        
        $
        0.25  Note 2 Employee Stock Ownership Plan  In connection with the stock offering of the Company in 2004, the Bank established an Employee Stock Ownership Plan (ESOP) for the benefit of its employees. The Company issued 454,940 shares of common stock to the ESOP in exchange for a ten-year note in the amount of approximately $4.5 million. The $4.5 million loan for the ESOP purchase was borrowed from the Company.  Shares issued to the ESOP are allocated to ESOP participants based on principal and interest payments made by the ESOP on the loan from the Company. The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Companys contributions to the ESOP and earnings on ESOP assets. The $4.5 million loan for the ESOP purchase was borrowed from the Company and requires quarterly payments to be made by the Bank of approximately $139,000, which represents principal plus interest at 4.00%.  As shares are released from collateral, the Company will report compensation expense equal to the current market price of the shares and the shares will become outstanding for earnings-per-share (EPS) computations. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce accrued interest.  6        Table of contents Note 3 Employee Stock Compensation  Stock Option Plan (SOP). The Companys SOP provides for issue of options to directors, officers and employees.  Pursuant to the Companys 2004 SOP, 568,675 shares of the Companys common stock may be awarded.  The options become exercisable in equal installments over a five-year period from the date of grant.  The options expire ten years from the date of grant.  The Company assumes 3% in forfeitures as a component for determining expense related to the SOP.  As of March 31, 2006 the Company has 362,400 options outstanding of which 11,200 were forfeited during the nine months ending March 31, 2006.  Compensation expense, net of tax effects related to the SOP was $82,000 for the three months ended March 31, 2006 and $247,000 for the nine months ended March 31, 2006.  Recognition and Retention Plan (RRP).The Companys RRP provides for issue of shares to directors, officers, and employees.  Compensation expense is recognized over the vesting period of the shares for the difference between the exercise price and the market value at issue date.  Pursuant to its 2004 stock-based incentive plan, the Company awarded 166,300 shares of restricted stock during the year ended June 30, 2005 of which 3,000 shares were forfeited during the year ended June 30, 2005 and 5,760 shares were forfeited during the nine months ended March 31, 2006.  These shares vest over a five year period.  The unamortized cost of the shares not yet earned (vested) is reported as a reduction of stockholders equity.  Compensation expense related to the RRP awards was $108,000 and $339,000 for the three months and nine months ended March 31, 2006,
respectively. Compensation expense related to the RRP awards was $114,000 and $173,000 for the three months and nine months ended March 31, 2005, respectively.  There were 124,880 restricted shares outstanding and the Company had an aggregate of 69,930 restricted shares available for future issuance under the RRP at March 31, 2006.  Note 4 Earnings Per Share  Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and stock awards. Three months endedMarch 31,
        
        
        
        Nine months endedMarch 31,2006
        
        
        
        2005
        
        
        
        2006
        
        
        
        2005(Dollars in thousands)Net income as reported
        
        $
        1,355
        
        
        
        $
        1,227
        
        
        
        $
        3,731
        
        
        
        $
        3,646Weighted average common shares outstanding
        
        
        13,867,828
        
        
        
        
        14,124,165
        
        
        
        
        13,872,284
        
        
        
        
        14,115,168Basic earnings per share
        
        $
        0.10
        
        
        
        $
        0.09
        
        
        
        $
        0.27
        
        
        
        $
        0.26Earnings per share assuming dilutionNet income available to common shareholders
        
        $
        1,355
        
        
        
        $
        1,227
        
        
        
        $
        3,731
        
        
        
        $
        3,646Weighted average common shares outstandingDilutive effect of stock options
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        Dilutive effect of stock awards
        
        
        
        
        
        
        
        866
        
        
        
        
        
        
        
        
        
        Average common shares and dilutive potential common shares
        
        
        13,867,828
        
        
        
        
        14,125,031
        
        
        
        
        13,872,284
        
        
        
        
        14,115,168Diluted earnings per share
        
        $
        0.10
        
        
        
        $
        0.09
        
        
        
        $
        0.27
        
        
        
        $
        0.26  The effect of stock options and stock awards was not included in the calculation of diluted earnings per share for the three and nine months ended March 31, 2006 because to due so would have been anti-dilutive.  The effect of stock options was not included in the calculation of diluted earnings per share for the three months ended March 31, 2005 and the effect of stock options and stock awards was not included in the calculation of diluted earnings per share for the nine months ended March 31, 2005 because to do so would have been anti-dilutive.  7        Table of contents  Item 2.
        MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Forward-Looking Information  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. In addition, in portions of this document the words anticipate, believe, estimate, expect, intend, should and similar expressions or the negative thereof, as they relate to the Company or the Bank or their management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company and/or the Bank with respect to forward-looking events and are subject to certain risks, uncertainties and assumptions. 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 as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.  Comparison of Financial Condition at March 31, 2006 and June 30, 2005.  General:Our total assets increased by $127.0 million, or 19.9%, to $766.9 million at March 31, 2006 from $639.9 million at June 30, 2005. The increase primarily reflects growth in our net loan portfolio of $107.8 million to $645.4 million from $537.6 million. To fund the increase in assets, advances from the Federal Home Loan Bank increased $109.1 million to $179.9 million at March 31, 2006 from $70.8 million at June 30, 2005.  Assets:Cash and cash equivalents increased $17.2 million to $34.5 million at March 31, 2006 from $17.3 million at June 30, 2005. The majority of the increase related to federal funds sold, which increased $15.8 million to $26.1 million at March 31, 2006 from $10.3 million at June 30, 2005.  Our investment portfolio decreased $6.6 million, or 13.2%, to $43.1 million at March 31, 2006 from $49.7 million at June 30, 2005. The decrease is attributable to normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.  Our net loan portfolio increased $107.8 million, or 20.1%, to $645.4 million at March 31, 2006 from $537.6 million at June 30, 2005. This increase was primarily attributable to increases in one-to-four family and commercial real estate loans. One-to-four family real estate loans increased $83.4 million, or 22.4% to $455.5 million at March 31, 2006 from $372.1 million at June 30, 2005 and commercial loans increased $19.6 million, or 60.6% to $52.0 million at March 31, 2006 from $32.4 million at June 30, 2005. The overall loan mix remained relatively constant, with real estate loans comprising 92.1% of the total loan portfolio at March 31, 2006, compared with 91.3% at June 30, 2005.  Premises and equipment increased $1.4 million to $2.9 million at March 31, 2006 from $1.5 million at June 30, 2005.  The majority of the increase is attributable to the purchase of a building in Riverside that we intend to open as a financial service center during the first quarter of fiscal 2007. Additionally, we plan to lease and open a financial service center in Harbor City during April 2006 with an additional leased financial service center located in Los Angeles to follow in June 2006.  Deposits:Total deposits increased $14.3 million, or 3.0%, to $490.1 million at March 31, 2006 from $475.8 million at June 30, 2005. This increase is primarily due to increases of $14.3 million in checking accounts and $11.0 million in money market accounts offset by reductions of $4.7 million in savings accounts and $6.3 million in certificates of deposits. The increase in checking account balances was primarily attributable to Kaiser Permanentes payroll cycle coinciding with the March 31, 2006 quarter end date. Based on our historical experience with Kaiser Permanentes bi-weekly payroll cycle, deposits inflows coinciding with a third payroll cycle in one month are withdrawn at a faster than normal rate and we expect this to occur in subsequent months.  Money market account balances grew as a result of an introductory high yield, high minimum balance product starting
in October 2005.  Borrowings:Advances from the Federal Home Loan Bank of San Francisco increased $109.1 million, or 154.2% to $179.9 million at March 31, 2006 from $70.8 million at June 30, 2005. The increase is primarily attributable to our strategic efforts to leverage our capital to fund lending activities in order to enhance our interest-earning assets position and further maximize efficiencies of our current operations.   8        Table of contents Equity:Equity increased $2.8 million to $93.6 million at March 31, 2006 from $90.8 million at June 30, 2005 primarily as a result of $3.7 million in income earned for the nine months ended March 31, 2006 in addition to the allocation of ESOP shares, stock awards, and stock options earned during the same period totaling $1.0 million. This increase was partially offset by the repurchase of 65,000 of our outstanding common shares at an average price of $12.44 and a total cost of $812,000 and the payment of $998,000 in cash dividends to shareholders of record, excluding shares held by K-Fed Mutual Holding Company, or $0.20 per share for the nine months ended March 31, 2006.  Average Balances, Net Interest Income, Yields Earned and Rates Paid  For the three months ended March 31,2006(4)
        
        
        
        
        
        2005(4)Average Balance
        
        Interest
        
        Average
Yield/
Cost
        
        Average Balance
        
        Interest
        
        Average
Yield/
Cost(Dollars in thousands)INTEREST-EARNING ASSETSLoans receivable (1)
        
        $
        643,812
        
        $
        8,776
        
        5.45
        %
        $
        511,437
        
        $
        6,431
        
        5.03
        %Securities(2)
        
        
        43,985
        
        
        410
        
        3.73
        %
        
        53,636
        
        
        476
        
        3.55
        %Fed Funds
        
        
        10,535
        
        
        110
        
        4.18
        %
        
        14,121
        
        
        107
        
        3.02
        %Federal Home Loan Bank stock
        
        
        8,570
        
        
        86
        
        4.01
        %
        
        3,609
        
        
        38
        
        4.18
        %Interest-bearing deposits in other financial institutions
        
        
        9,010
        
        
        80
        
        3.55
        %
        
        8,985
        
        
        63
        
        2.82
        %Other interest-earning assets
        
        
        1,214
        
        
        12
        
        3.95
        %
        
        202
        
        
        1
        
        1.32
        %Total interest-earning assets
        
        
        717,126
        
        
        9,474
        
        5.28
        %
        
        591,990
        
        
        7,116
        
        4.81
        %Noninterest earning assets
        
        
        31,264
        
        
        
        
        
        
        
        18,819Total assets
        
        $
        748,390
        
        
        
        
        
        
        $
        610,809INTEREST-BEARING LIABILITIESMoney Market accounts
        
        $
        113,301
        
        $
        632
        
        2.23
        %
        $
        107,539
        
        $
        337
        
        1.25
        %Savings deposits
        
        
        91,116
        
        
        92
        
        0.40
        %
        
        94,595
        
        
        97
        
        0.41
        %Certificate of deposits
        
        
        220,364
        
        
        2,144
        
        3.89
        %
        
        221,970
        
        
        1,812
        
        3.27
        %FHLB advances
        
        
        179,890
        
        
        1,904
        
        4.23
        %
        
        49,662
        
        
        464
        
        3.73
        %Total interest-bearing liabilities
        
        
        604,671
        
        
        4,772
        
        3.16
        %
        
        473,766
        
        
        2,710
        
        2.29
        %Noninterest bearing liabilities
        
        
        50,722
        
        
        
        
        
        
        
        44,869Total liabilities
        
        
        655,393
        
        
        
        
        
        
        
        518,635Equity
        
        
        92,997
        
        
        
        
        
        
        
        92,174Total liabilities and equity
        
        $
        748,390
        
        
        
        
        
        
        $
        610,809Net interest/spread
        
        
        
        
        $
        4,702
        
        2.12
        %
        
        
        
        $
        4,406
        
        2.52
        %Margin(3)
        
        
        
        
        
        
        
        2.62
        %
        
        
        
        
        
        
        2.98
        %Ratio of interest-earning assets to interest-bearing liabilities
        
        
        118.60
        %
        
        
        
        
        
        
        124.95
        %(1) Calculated net of deferred fees and loss reserves and includes non-accrual loans(2) Calculated based on amortized cost(3) Net interest income divided by interest-earning assets(4) Rates have been annualized   9        Table of contents Average Balances, Net Interest Income, Yields Earned and Rates Paid  For the nine months ended March 31,2006(4)
        
        
        
        
        
        2005(4)Average Balance
        
        Interest
        
        Average
Yield/
Cost
        
        Average Balance
        
        Interest
        
        Average
Yield/
Cost(Dollars in thousands)INTEREST-EARNING ASSETSLoans receivable (1)
        
        $
        602,463
        
        $
        24,072
        
        5.33
        %
        $
        503,639
        
        $
        18,861
        
        4.99
        %Securities(2)
        
        
        45,929
        
        
        1,237
        
        3.59
        %
        
        56,911
        
        
        1,481
        
        3.47
        %Fed Funds
        
        
        15,544
        
        
        423
        
        3.63
        %
        
        17,097
        
        
        272
        
        2.12
        %Federal Home Loan Bank stock
        
        
        6,645
        
        
        174
        
        3.49
        %
        
        3,818
        
        
        113
        
        3.96
        %Interest-bearing deposits in other financial institutions
        
        
        9,010
        
        
        220
        
        3.26
        %
        
        5,970
        
        
        126
        
        2.82
        %Other interest-earning assets
        
        
        1,311
        
        
        47
        
        4.78
        %
        
        81
        
        
        2
        
        3.00
        %Total interest-earning assets
        
        
        680,902
        
        
        26,173
        
        5.13
        %
        
        587,516
        
        
        20,855
        
        4.73
        %Noninterest earning assets
        
        
        30,243
        
        
        
        
        
        
        
        17,266Total assets
        
        $
        711,145
        
        
        
        
        
        
        $
        604,782INTEREST-BEARING LIABILITIESMoney Market accounts
        
        $
        110,995
        
        $
        1,645
        
        1.98
        %
        $
        107,370
        
        $
        985
        
        1.22
        %Savings deposits
        
        
        95,465
        
        
        298
        
        0.42
        %
        
        95,598
        
        
        300
        
        0.42
        %Certificate of deposits
        
        
        223,516
        
        
        6,355
        
        3.79
        %
        
        207,902
        
        
        5,016
        
        3.22
        %FHLB advances
        
        
        138,950
        
        
        4,219
        
        4.05
        %
        
        58,935
        
        
        1,438
        
        3.25
        %Total interest-bearing liabilities
        
        
        568,926
        
        
        12,517
        
        2.93
        %
        
        469,805
        
        
        7,739
        
        2.20
        %Noninterest bearing liabilities
        
        
        50,192
        
        
        
        
        
        
        
        43,940Total liabilities
        
        
        619,118
        
        
        
        
        
        
        
        513,745Equity
        
        
        92,027
        
        
        
        
        
        
        
        91,037Total liabilities and equity
        
        $
        711,145
        
        
        
        
        
        
        $
        604,782Net interest/spread
        
        
        
        
        $
        13,656
        
        2.20
        %
        
        
        
        $
        13,116
        
        2.53
        %Margin(3)
        
        
        
        
        
        
        
        2.67
        %
        
        
        
        
        
        
        2.98
        %Ratio of interest-earning assets to interest-bearing liabilities
        
        
        119.68
        %
        
        
        
        
        
        
        125.06
        %(1) Calculated net of deferred fees and loss reserves and includes non-accrual loans(2) Calculated based on amortized cost(3) Net interest income divided by interest-earning assets(4) Rates have been annualized   10        Table of contents Comparison of Results of Operations for the Three Months Ended March 31, 2006 and March 31, 2005.  General.Net income for the three months ended March 31, 2006 was $1.4 million, an increase of $128,000, or 10.4%, from the net income of $1.2 million for the three months ended March 31, 2005. Earnings per basic and diluted common share were $0.10 for the three months ended March 31, 2006 compared to $0.09 for the three months ended March 31, 2005. The increase in net income resulted from the fluctuations described below.  Interest Income.Interest income increased by $2.4 million or 33.1%, to $9.5 million for the three months ended March 31, 2006 from $7.1 million for the three months ended March 31, 2005. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $132.4 million, or 25.9%, from $511.4 million for the three months ended March 31, 2005 to $643.8 million for the three months ended March 31, 2006. This increase was primarily due to whole loan purchases of one-to-four family residential real estate loans. Interest income was also positively impacted by a 42 basis point increase in the average yield on loans receivable, from 5.03% for the three months ended March 31, 2005 to 5.45% for the three months ended March 31, 2006, resulting from the impact of adding higher-yielding loans to our portfolio, commensurate with increases in
general market rates.  Interest income on securities decreased by $66,000 or 13.9%, to $410,000 for the three months ended March 31, 2006 from $476,000 for the three months ended March 31, 2005. The decrease resulted from a $9.7 million, or 18.0% decrease in the average balance of securities as a result of principal repayments. The decrease was partially offset by an 18 basis point increase in the average yield on the securities investment portfolio from 3.55% for the three months ended March 31, 2005 to 3.73% for the three months ended March 31, 2006, commensurate with increases in general market rates and the addition of higher-rate securities.  Interest Expense. Interest expense increased $2.1 million, or 76.1%, for the three months ended March 31, 2006 to $4.8 million as compared to $2.7 million for the three months ended March 31, 2005. The increase is primarily attributable to an increase in average deposits and FHLB advances, combined with higher interest rates. The average interest rates on interest-bearing liabilities increased 87 basis points to 3.16% for the three months ended March 31, 2006 from 2.29% for the three months ended March 31, 2005. Average interest-bearing liabilities increased $130.9 million or 27.6% to $604.7 million for the three months ended March 31, 2006 from $473.8 million for the three months ended March 31, 2005. 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 Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan  Income Recognition and Disclosures.  These accounting standards prescribe the measurement methods, income
recognition and disclosures related to impaired loans. The loss ratio analysis component of the allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of the loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based both on our historical loss experience as well as on significant factors that, in managements judgment, affect the collectibility of the portfolio as of the evaluation date.  11        Table of contents The appropriateness of the allowance is reviewed and established by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectibility 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 Kaiser Federal Bank will be unable to collect all amounts due according to the terms of the loan agreement, Kaiser Federal Bank determines 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 homogenous 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 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 collectibility 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 and the FDIC, which may require the establishment of additional general or specific
allowances based upon their judgment of the information available to them at the time of their examination of Kaiser Federal Bank.  Our provision for loan losses was $128,000 for the three months ended March 31, 2006 compared to $123,000 for the three months ended March 31, 2005. The allowance for loan losses as a percent of total loans was 0.39% at March 31, 2006 as compared to 0.45% at June 30, 2005. The decrease in our allowance for loan losses as a percent of total loans is primarily attributable to increases in our one-to-four family real estate loans. One-to-four family loans increased $83.4 million, or 22.4% to $455.5 million at March 31, 2006 from $372.1 million at June 30, 2005. In assessing the adequacy of the allowance, no additional allowances have been established for this growth. The assumptions are based both on current industry and economic trends in addition to incurring no losses within our real estate portfolio since 1997.  We used the same methodology and generally similar assumptions in assessing the adequacy of the
allowance for consumer and real estate loans for both periods.  Noninterest Income.Our noninterest income increased $91,000, or 11.6%, to $873,000 for the three months ended March 31, 2006 from $782,000 for the three months ended March 31, 2005. The increase is primarily the result of income totaling $107,000 from bank-owned life insurance purchased in April 2005.  Noninterest Expense.Our noninterest expense increased $277,000, or 9.0% to $3.4 million for the three months ended March 31, 2006 from $3.1 million for the three months ended March 31, 2005. The increase was primarily due to a $102,000 increase in salaries and benefits, a $33,000 increase in professional services, a $58,000 increase in occupancy and equipment expense, and a $35,000 increase in other operating expense.     12        Table of contents Salaries and benefits represented 54.9% of total noninterest expense for the three months ended March 31, 2006 compared to 56.5% for the three months ended March 31, 2005. Total salaries and benefits increased $102,000, or 5.8%, to $1.9 million for the three months ended March 31, 2006 from $1.7 million for the three months ended March 31, 2005. The increase was primarily due to the addition of $92,000 in stock option expense related to the adoption of FAS-123R partially offset by a reduction in fair market value costs related to our employee stock ownership plan.  Professional services increased $33,000, or 22.4% to $180,000 for the three months ended March 31, 2006 from $147,000 for the three months ended March 31, 2005.  The increase in professional services was primarily due to increased audit fees and increased costs related to loan quality reviews.  Occupancy and equipment expense increased $58,000, or 14.9% to $448,000 for the three months ended March 31, 2006 from $390,000 for the three months ended March 31, 2005. The increase was primarily due to costs associated with the current relocation of our Pasadena Branch and non-capitalizable costs related to build-outs of financial service centers in Bellflower and Harbor City in addition to increased equipment maintenance expense.  Other operating expense increased $35,000, or 11.0% to $353,000 for the three months ended March 31, 2006 from $318,000 for the three months ended March 31, 2005. The increase in other expense was primarily due to increased operational costs to support continued growth of the Bank.  Income Tax Expense. Income tax expense for the three months ended March 31, 2006 was $723,000 compared to $746,000 for the three months ended March 31, 2005. This decrease is primarily the result of a decrease in our effective tax rate. The effective tax rate was 34.8% and 37.8% for the three months ended March 31, 2006 and 2005, respectively. The decrease in the effective tax rate is due primarily to the income received from our bank-owned life insurance, which is non-taxable.  Comparison of Results of Operations for the Nine Months Ended March 31, 2006 and March 31, 2005.  General.Net income was $3.7 million for the nine months ended March 31, 2006 compared to $3.6 million for the nine months ended March 31, 2005. Earnings per basic and diluted common share were $0.27 for the nine months ended March 31, 2006 compared to $0.26 for the nine months ended March 31, 2005.  Interest Income.Interest income increased by $5.3 million, or 25.5%, to $26.2 million for the nine months ended March 31, 2006 from $20.9 million for the nine months ended March 31, 2005. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $98.8 million, or 19.6%, from $503.6 million for the nine months ended March 31, 2005 to $602.5 million for the nine months ended March 31, 2006. The increase was primarily due to whole loan purchases of one-to-four family residential real estate loans. Interest income was also positively impacted by a 34 basis point increase in the average yield on loans receivable, from 4.99% for the nine months ended March 31, 2005 to 5.33% for the nine months ended March 31, 2006.  Interest income on securities decreased by $244,000 or 16.5%, to $1.2 million for the nine months ended March 31, 2006 from $1.5 million for the nine months ended March 31, 2005. The decrease resulted from an $11.0 million, or 19.3% decrease in the average balance of securities as a result of principal repayments. The decrease was partially offset by a 12 basis point increase in the average yield on the securities investment portfolio from 3.47% for the nine months ended March 31, 2005 to 3.59% for the nine months ended March 31, 2006.  Interest Expense. Interest expense increased $4.8 million, or 61.7%, for the nine months ended March 31, 2006 to $12.5 million as compared to $7.7 million for the nine months ended March 31, 2005. The increase is primarily attributable to an increase in average deposits and FHLB advances, combined with higher interest rates. The average interest rates on interest-bearing liabilities increased 73 basis points to 2.93% for the nine months ended March 31, 2006 from 2.20% for the nine months ended March 31, 2005. Average interest-bearing liabilities increased $99.1 million or 21.1% to $568.9 million for the nine months ended March 31, 2006 from $469.8 million for the nine months ended March 31, 2005.  13        Table of contents Provision for Loan Losses. Our provision for loan losses increased $213,000 to $488,000 for the nine months ended March 31, 2006 compared to $275,000 for the nine months ended March 31, 2005. The increase in the provision is primarily attributable to $352,000 in net charge-offs incurred in our auto loan portfolio during the nine months ended March 31, 2006. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for consumer and real estate loans for both periods.  Noninterest Income.Our noninterest income increased $422,000, or 19.7%, to $2.6 million for the nine months ended March 31, 2006 from $2.1 million for the nine months ended March 31, 2005. The increase is primarily the result of income totaling $321,000 from bank-owned life insurance purchased in April 2005 and a $120,000 increase in ATM fees and charges due to increased usage and deployment of additional ATMs partially offset by declines in other noninterest income.  Noninterest Expense.Our noninterest expense increased $812,000, or 8.9%, to $9.9 million for the nine months ended March 31, 2006 from $9.1 million for the nine months ended March 31, 2005. The increase was primarily due to a $400,000 increase in salaries and benefits, a $191,000 increase in occupancy and equipment expense and a $127,000 increase in other operating expense.  Salaries and benefits represented 54.8% and 55.2% of total noninterest expense for the nine months ended March 31, 2006 and March 31, 2005, respectively. Total salaries and benefits increased $400,000, or 7.9%, to $5.4 million for the nine months ended March 31, 2006 from $5.0 million for the nine months ended March 31, 2005. The increase was primarily due to an increase of $166,000 in stock award expense and the addition of $277,000 in stock option expense related to the to the adoption of FAS-123R partially offset by a reduction in fair market value costs related to our employee stock ownership plan.  Occupancy and equipment expense increased $191,000, or 17.8% to $1.3 million for the nine months ended March 31, 2006 from $1.1 million for the nine months ended March 31, 2005.  The increase was primarily due to non-capitalizable costs related to build-outs of financial service centers in Bellflower and Harbor City in addition to costs associated with the current relocation of our Pasadena Branch and increased equipment maintenance expense.  Other operating expense increased $127,000, or 14.1% to $1.0 million for the nine months ended March 31, 2006 from $902,000 for the nine months ended March 31, 2005. The increase in other expense was primarily due to increased operational costs to support continued growth of the Bank.  Income Tax Expense. Income tax expense for the nine months ended March 31, 2006 was $2.1 million compared to $2.2 million for the nine months ended March 31, 2005. This decrease is primarily a result of a decrease in pre-tax income of $63,000 and a decrease in our effective tax rate. The effective tax rate was 35.8% and 37.9% for the nine months ended March 31, 2006 and 2005, respectively. The decrease in the effective tax rate is due primarily to the income received from our bank-owned life insurance, which is non-taxable.  Liquidity 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 imposed by Office of Thrift Supervision 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 Consolidated Financial Statements included in this document.  14        Table of contents Our liquidity, represented by cash and cash equivalents and mortgage-backed and related securities, is a product of 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 Federal Home Loan Bank advances
to leverage our capital base and provide funds for our lending and investment activities and 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. 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 time deposits and savings withdrawals, to fund loan commitments and to maintain our portfolio of mortgage-backed and related securities. At March 31, 2006, the total approved loan commitments unfunded amounted to $7.5 million, which includes the unadvanced portion of loans of $7.2 million.  Time deposits and advances from the Federal Home Loan Bank of San Francisco scheduled to mature in one year or less at March 31, 2006, totaled $114.1 million and $10.0 million, respectively. Based on historical experience, management believes that a significant portion of maturing deposits will remain with Kaiser Federal Bank. We anticipate that we will continue to have sufficient funds, through deposits and borrowings, to meet our current commitments.  At March 31, 2006, we had available additional advances from the Federal Home Loan Bank of San Francisco in the amount of $119.7 million.  Capital  The table below sets forth Kaiser Federal Banks capital position relative to its Office of Thrift Supervision capital requirements at March 31, 2006. The definitions of the terms used in the table are those provided in the capital regulations issued by the Office of Thrift Supervision. Actual
        
        Minimum Capital Requirements
        
        Minimum Required to be Well Capitalized Under Prompt Corrective Actions ProvisionsAmount
        
        Ratio
        
        Amount
        
        Ratio
        
        Amount
        
        Ratio(Dollars in thousands)Total capital (to risk-weighted assets)
        
        $69,936
        
        15.76
        %
        $35,493
        
        8.00
        %
        $44,366
        
        10.00
        %Tier 1 capital (to risk-weighted assets)
        
        67,392
        
        15.19
        
        17,747
        
        4.00
        
        26,620
        
        6.00Tier 1 (core) capital (to adjusted tangible assets)
        
        67,392
        
        9.05
        
        29,793
        
        4.00
        
        37,242
        
        5.00  Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a well capitalized institution in accordance with 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.  15        Table of contents The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that we have made. We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk  Our Risk When Interest Rates Change.The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our loans generally have longer maturities than our 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 directors 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 quarterly.  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 and purchasing adjustable rate loans; (2) originating a reasonable volume of short- and intermediate-term consumer loans; (3) managing our deposits to establish stable deposit relationships; and (4) using Federal Home Loan Bank 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. In the future, we intend to continue our existing strategy of originating and purchasing 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.  16        Table of contents The Office of Thrift Supervision provides Kaiser Federal Bank with the information presented in the following table, which is based on information provided to the Office of Thrift Supervision by Kaiser Federal Bank. It presents the change in Kaiser Federal Banks net portfolio value at March 31, 2006 that would occur upon an immediate change in interest rates based on Office of Thrift Supervision assumptions but without giving effect to any steps that management might take to counteract that change.  March 31, 2006Change 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
        
        $
        58,484
        
        
        
        $
        (28,449
        )
        
        
        (33
        )%
        
        
        8.33
        %
        
        
        (317
        )bp+200 bp
        
        
        68,445
        
        
        
        
        (18,489
        )
        
        
        (21
        )
        
        
        9.50
        
        
        
        (200
        )+100 bp
        
        
        78,188
        
        
        
        
        (8,745
        )
        
        
        (10
        )
        
        
        10.59
        
        
        
        (91
        )0 bp
        
        
        86,934
        
        
        
        
        
        
        
        
        
        
        
        
        11.50
        
        
        
        -100 bp
        
        
        91,556
        
        
        
        
        4,622
        
        
        
        5
        
        
        
        11.90
        
        
        
        40-200 bp
        
        
        87,559
        
        
        
        
        625
        
        
        
        1
        
        
        
        11.30
        
        
        
        (20
        )  The Office of Thrift Supervision 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.  17       Table of contents 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 Rules 13a-15(e) or 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 Rules 13a-15(f) or 15(d)-15(f) under the Act) that occurred during the most recent fiscal quarter that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  PART II. OTHER INFORMATION  Item 1. Legal Proceedings  None.  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  Issuer Purchases of Equity Securities Period
        
        Total Number of Shares Purchased
        
        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 Plan7/1/05  7/31/05
        
        5,000
        
        $
        12.47
        
        5,000
        
        225,1298/1/05  8/31/05
        
        10,000
        
        
        13.01
        
        10,000
        
        215,1299/1/05  9/30/05
        
        15,000
        
        
        12.60
        
        15,000
        
        200,12910/1/05  10/31/05
        
        10,000
        
        
        12.27
        
        10,000
        
        190,12911/1/05  11/30/05
        
        10,000
        
        
        12.29
        
        10,000
        
        180,12912/1/05  12/31/05
        
        5,000
        
        
        12.20
        
        5,000
        
        175,1291/1/06  1/31/06
        
        10,000
        
        
        12.06
        
        10,000
        
        165,1292/1/06  2/28/06
        
        
        
        
        
        
        
        
        165,1293/1/06  3/31/06
        
        
        
        
        
        
        
        
        165,129  * On April 27, 2005, the Company announced its intention to repurchase 5% of its outstanding publicly held common stock, or 281,129 shares of stock.  Item 3. Defaults Upon Senior Securities  None.  Item 4. Submission of Matters to a Vote of Security Holders  None.   Item 5. Other Information  None.    18        Table of contents Item 6. Exhibits  31.1
        Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act31.1
        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    19        Table of contents 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 BancorpRegistrant    Date:May 10, 2006
        /s/ Kay M. HovelandKay M. HovelandPresident and Chief Executive Officer   Date:May 10, 2006
        /s/ Daniel A. CanoDaniel A. CanoChief Financial Officer   20        Table of contents EXHIBIT 31.1  Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  I, Kay M. Hoveland, certify that:  1.
        I have reviewed this Quarterly Report on Form 10-Q of K-Fed Bancorp;  2.
        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  3.
        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  4.
        The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:  (a)
        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;  (b)
        Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c)
        Disclosed in this report any changes in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrants internal control over financial reporting; and  5.
        The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):  (a)
        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and  (b)
        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.   Date:May 10, 2006
        /s/ Kay M. Hoveland Kay M. Hoveland President and Chief Executive Officer              Table of contents EXHIBIT 31.2  Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  I, Daniel A. Cano, certify that:  1.
        I have reviewed this Quarterly Report on Form 10-Q of K-Fed Bancorp;  2.
        Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  3.
        Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  4.
        The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:  (a)
        Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;  (b)
        Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  (c)
        Disclosed in this report any changes in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrants internal control over financial reporting; and  5.
        The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):  (a)
        All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and  (b)
        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.   Date:May 10, 2006
        /s/ Daniel A. Cano­­­­­­­ Daniel A. Cano Chief Financial Officer               Table of contents EXHIBIT 32.1  Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  In connection with the Quarterly Report of K-Fed Bancorp (the Company) on Form 10-Q for the period ending March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Kay M. Hoveland, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this quarterly report on Form 10-Q that:  1.
        The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and  2.
        The information contained in the report fairly presents, in all material respects, the companys financial condition and results of operations.   Date:May 10, 2006
        /s/ Kay M. Hoveland Kay M. Hoveland Chief Executive Officer            Table of contents EXHIBIT 32.2  Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  In connection with the Quarterly Report of K-Fed Bancorp (the Company) on Form 10-Q for the period ending March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Daniel A. Cano, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this quarterly report on Form 10-Q that:  1.
        The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and  2.
        The information contained in the report fairly presents, in all material respects, the companys financial condition and results of operations.   Date:May 10, 2006
        /s/ Daniel A. Cano Daniel A. Cano Chief Financial Officer