SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549  FORM 10-Q  (Mark One) [ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934  For the quarterly period ended:December 31, 2005  OR  [    ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of THE SECURITIES EXCHANGE ACT OF 1934  For the transition period from _____ to _____  Commission File Number:000-50592  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 checkmark 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. YesX
        No _  Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  _
        NoX  Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  _
        NoX  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  14,368,330 shares outstanding as of February 7, 2006. 
        Form 10-Q  K-FED BANCORP Table of Contents  Part I.
        Financial Information
        PageItem 1:
        Financial Statements (Unaudited)Consolidated Statements of Financial Condition as of December 31, 2005 and June 30, 2005
        1Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended December 31, 2005 and 2004
        2Consolidated Statement of Stockholders Equity and Other Comprehensive Income for the Six Months Ended December 31, 2005
        3Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2005 and 2004
        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
        19Item 6:
        Exhibits
        19SIGNATURES
        20         K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Financial Condition (Unaudited) (Dollars in thousands, except share data)  December 312005
        
        June 302005ASSETSCash and due from banks
        
        $
        10,267
        
        $
        6,990Federal funds sold
        
        
        7,915
        
        
        10,325Total cash and cash equivalents
        
        
        18,182
        
        
        17,315Interest bearing deposits in other financial institutions
        
        
        9,010
        
        
        9,010Securities available-for-sale
        
        
        17,513
        
        
        18,848Securities held-to-maturity, fair value of $26,934 and$30,688 at December 31, 2005 and June 30, 2005, respectively
        
        
        27,424
        
        
        30,834Federal Home Loan Bank stock, at cost
        
        
        8,531
        
        
        4,027Loans receivable
        
        
        644,937
        
        
        539,025Deferred net loan origination fees
        
        
        (4
        )
        
        (32
        )Net premium on purchased loans
        
        
        441
        
        
        982Allowance for loan losses
        
        
        (2,542
        )
        
        (2,408
        )Loans receivable, net
        
        
        642,832
        
        
        537,567Accrued interest receivable
        
        
        2,845
        
        
        2,310Premises and equipment, net
        
        
        1,554
        
        
        1,491Core deposit intangible
        
        
        507
        
        
        568Goodwill
        
        
        3,950
        
        
        3,950Bank-owned life insurance
        
        
        10,303
        
        
        10,089Other assets
        
        
        4,936
        
        
        3,873Total assets
        
        $
        747,587
        
        $
        639,882LIABILITIES AND STOCKHOLDERS EQUITYLiabilitiesDepositsNoninterest bearing
        
        $
        46,722
        
        $
        43,744Interest bearing
        
        
        424,835
        
        
        432,048Total deposits
        
        
        471,557
        
        
        475,792Federal Home Loan Bank advances, short-term
        
        
        10,000
        
        
        11,000Federal Home Loan Bank advances, long-term
        
        
        169,869
        
        
        59,777Accrued expenses and other liabilities
        
        
        3,741
        
        
        2,553Total liabilities
        
        
        655,167
        
        
        549,122Commitments and contingent liabilitiesStockholders equityNonredeemable serial preferred stock, $.01 par value;2,000,000 shares authorized; issued and outstanding  noneCommon stock, $.01 par value; 18,000,000 authorized;December 31, 2005 14,711,800 shares issued.June 30, 2005  14,711,800 shares issued.
        
        
        147
        
        
        147Additional paid-in capital
        
        
        57,781
        
        
        57,541Retained earnings
        
        
        44,416
        
        
        42,689Accumulated other comprehensive loss, net of tax
        
        
        (243
        )
        
        (168
        )Unearned employee stock ownership plan shares
        
        
        (3,753
        )
        
        (3,981
        )Unearned employee stock awards
        
        
        (1,784
        )
        
        (2,015
        )Treasury stock, at cost (December 31, 2005  333,470 shares;June 30, 2005  278,470 shares)
        
        
        (4,144
        )
        
        (3,453
        )Total stockholders equity
        
        
        92,420
        
        
        90,760Total liabilities and stockholders equity
        
        $
        747,587
        
        $
        639,882The accompanying notes are an integral part of these financial statements   1        K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Income and Comprehensive Income (Unaudited) (Dollars in thousands, except per share data)  Three Months Ended
December 31
        
        Six Months Ended
December 312005
        
        2004
        
        2005
        
        2004Interest IncomeInterest and fees on loans
        
        $
        8,266
        
        $
        6,204
        
        $
        15,296
        
        $
        12,430Interest on securities, taxable
        
        
        401
        
        
        486
        
        
        827
        
        
        1,006Federal Home Loan Bank dividends
        
        
        47
        
        
        39
        
        
        88
        
        
        75Other interest
        
        
        299
        
        
        188
        
        
        488
        
        
        229Total interest income
        
        
        9,013
        
        
        6,917
        
        
        16,699
        
        
        13,740Interest ExpenseInterest on Federal Home Loan Bank advances
        
        
        1,644
        
        
        462
        
        
        2,315
        
        
        975Interest on deposits
        
        
        2,785
        
        
        2,129
        
        
        5,430
        
        
        4,054Total interest expense
        
        
        4,429
        
        
        2,591
        
        
        7,745
        
        
        5,029Net interest income
        
        
        4,584
        
        
        4,326
        
        
        8,954
        
        
        8,711Provision for loan losses
        
        
        195
        
        
        32
        
        
        360
        
        
        152Net interest income after provisionfor loan losses
        
        
        4,389
        
        
        4,294
        
        
        8,594
        
        
        8,559Noninterest incomeService charges and fees
        
        
        481
        
        
        478
        
        
        954
        
        
        942ATM fees and charges
        
        
        363
        
        
        328
        
        
        737
        
        
        650Referral commissions
        
        
        61
        
        
        53
        
        
        115
        
        
        107Loss on equity investment
        
        
        (71
        )
        
        (279
        )
        
        (342
        )
        
        (362
        )Bank-owned life insurance
        
        
        107
        
        
        
        
        
        214Other noninterest income
        
        
        10
        
        
        15
        
        
        17
        
        
        27Total noninterest income
        
        
        951
        
        
        595
        
        
        1,695
        
        
        1,364Noninterest expenseSalaries and benefits
        
        
        1,804
        
        
        1,717
        
        
        3,586
        
        
        3,288Occupancy and equipment
        
        
        422
        
        
        366
        
        
        814
        
        
        682ATM expense
        
        
        282
        
        
        257
        
        
        580
        
        
        514Advertising and promotional
        
        
        101
        
        
        104
        
        
        204
        
        
        212Professional services
        
        
        152
        
        
        204
        
        
        381
        
        
        464Postage
        
        
        76
        
        
        65
        
        
        141
        
        
        126Telephone
        
        
        90
        
        
        79
        
        
        176
        
        
        153Other operating expense
        
        
        324
        
        
        306
        
        
        676
        
        
        585Total noninterest expense
        
        
        3,251
        
        
        3,098
        
        
        6,558
        
        
        6,024Income before income tax expense
        
        
        2,089
        
        
        1,791
        
        
        3,731
        
        
        3,899Income tax expense
        
        
        767
        
        
        678
        
        
        1,355
        
        
        1,480Net income
        
        $
        1,322
        
        $
        1,113
        
        $
        2,376
        
        $
        2,419Comprehensive Income
        
        $
        1,303
        
        $
        1,063
        
        $
        2,301
        
        $
        2,491Earnings per common share:Basic
        
        $
        0.10
        
        $
        0.08
        
        $
        0.17
        
        $
        0.17Diluted
        
        $
        0.10
        
        $
        0.08
        
        $
        0.17
        
        $
        0.17The accompanying notes are an integral part of these financial statements   2        K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Stockholders Equity And Other Comprehensive Income (Unaudited) (Dollars in thousands, except share data)   Common Stock
        
        
        
        
        
        Treasury StockComprehensive
Income
        Shares
        Amount
        Additional
Paid-in
Capital
        Retained
Earnings
        Accumulated
Other
Comprehensive
Loss, net
        Unearned
ESOP
Shares
        Unearned
Stock
Awards
        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 six months ended December 31, 2005
        $              2,376
        -
        -
        -
        2,376
        -
        -
        -
        -
        -
        2,376Other comprehensive income   unrealized loss on  securities, net of tax
        (75)
        -
        -
        -
        -
        (75)
        -
        -
        -
        -
        (75)Total comprehensive income
        $              2,301Dividends paid ($0.13 per  share) *
        
        -
        -
        -
        (649)
        -
        -
        -
        -
        -
        (649)Purchase of treasury stock
        
        -
        -
        -
        -
        -
        -
        -
        (55,000)
        (691)
        (691)Allocation of ESOP common  stock
        
        -
        -
        55
        -
        -
        228
        -
        -
        -
        283Allocation of stock awards
        
        -
        -
        -
        -
        -
        -
        231
        -
        -
        231Stock options earned
        
        -
        -
        185
        -
        -
        -
        -
        -
        -
        185Balance, December 31, 2005
        
        14,711,800
        $      147
        $        57,781
        $      44,416
        $                (243)
        $   (3,753)
        $  (1,784)
        (333,470)
        $  (4,144)
        $    92,420______________________________*  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       K-FED BANCORP AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited) Dollars in thousands  Six Months Ended December 312005
        
        2004Operating ActivitiesNet income
        $          2,376
        
        $          2,419Adjustments to reconcile net income to cash provided
by operating activities:Amortization of net premiums on securities
        68
        
        83Amortization of net premiums on loan purchases
        313
        
        746Accretion of net loan origination fees
        (50)
        
        (29)Provision for loan losses
        360
        
        152Federal Home Loan Bank stock dividend
        (88)
        
        (75)Depreciation and amortization
        224
        
        215Amortization of core deposit intangible
        61
        
        36Loss on equity investment
        342
        
        362Increase in cash surrender value of bank-owned life insurance
        (214)Accretion of net premiums on purchased certificates of deposits
        (33)
        
        (45)Amortization of debt exchange costs
        92
        
        96Allocation of ESOP common stock
        283
        
        319Allocation of stock awards
        231
        
        59Stock options earned
        185Net change in accrued interest receivable
        (535)
        
        (24)Net change in other assets
        (801)
        
        (520)Net changes in accrued expenses and other liabilities
        802
        
        228Net cash provided by operating activities
        3,616
        
        4,022Investing ActivitiesProceeds from maturities of available-for-sale securities
        1,180
        
        1,074Purchases of held-to-maturity investments
        (2,000)
        
        (5,000)Proceeds from maturities of held-to-maturity securities
        5,371
        
        11,223Net change in time deposits with other financial institutions
        
        
        (5,940)Purchases of loans
        (148,009)
        
        (63,528)Net change in loans, excluding loan purchases
        42,121
        
        54,555Purchase of FHLB stock
        (4,416)
        
        (1,195)Proceeds from FHLB stock repurchase
        
        
        961Purchase of equity investment
        (167)
        
        (165)Net cash received from branch acquisition
        
        
        56,491Purchases of premises and equipment
        (287)
        
        (237)Net cash (used in) provided by investing activities
        (106,207)
        
        48,239Financing ActivitiesProceeds from FHLB advances
        124,500
        
        165,916Repayment of FHLB advances
        (15,500)
        
        (185,916)Dividends paid on common stock
        (649)
        
        (262)Purchase of treasury stock
        (691)Debt exchange costs
        
        
        (473)Net change in deposits
        (4,202)
        
        (18,848)Net cash provided by (used in) financing activities
        103,458
        
        (39,583)Net change in cash and cash equivalents
        867
        
        12,678Cash and cash equivalents, at beginning of year
        17,315
        
        12,158Cash and cash equivalents, at end of period
        $          18,182
        
        $          24,836The accompanying notes are an integral part of these financial statements    4       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 five branch locations throughout California. We plan to open financial service centers in Bellflower and Harbor City during March 2006 with additional financial service centers located in Los Angeles and Riverside to follow. 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 U.S. generally accepted accounting principals (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 six month periods ended December 31, 2005 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.  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.  5        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): December 31, 2004Three Months Ended
        
        
        
        Six Months Ended(Dollars in thousands)Net income as reported
        
        $
        1,113
        
        
        
        $
        2,419Add: Stock-based compensation recorded, net of taxLess: Total stock-based compensation costs determined under the fair value based method, net of tax
        
        
        (41
        )
        
        
        
        (41
        )Net income, pro forma
        
        $
        1,072
        
        
        
        $
        2,378Earnings per share - as reportedBasic
        
        $
        0.08
        
        
        
        $
        0.17Diluted
        
        $
        0.08
        
        
        
        $
        0.17Earnings per share  pro formaBasic
        
        $
        0.08
        
        
        
        $
        0.17Diluted
        
        $
        0.08
        
        
        
        $
        0.17  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.  Note 3 Employee Stock Compensation  Stock Option Plan (SOP). On November 16, 2004, the Company granted 275,600 incentive stock options to certain employees and 98,000 non-qualified stock options to directors, for a total of 373,600 stock options granted. The fair market value of the Companys common stock for purposes of determining the exercise price of the option on the grant date was $14.50, based on the closing price of the Companys stock as of the previous business day per the terms of the plan. The Company implemented the SOP to promote the long-term interests of the Company and its shareholders by providing an incentive to those key employees who contribute to the operational success of the Company. The maximum number of options that may be issued under the SOP is 568,675. Options were granted at the then fair market value and vest over five years. Options expire 10 years from the date
of grant and are subject to certain restrictions and limitations. Compensation expense, net of tax effects related to the SOP was $82,000 for the three months ended December 31, 2005 and $165,000 for the six months ended December 31, 2005.  At December 31, 2005, the Company had an aggregate of 195,075 options available for future issuance under the SOP.  Recognition and Retention Plan (RRP).The purpose of the RRP is to promote the long-term interests of the Company and its shareholders by providing restricted stock as a means for attracting and retaining directors and certain employees. The Company granted restricted stock awards of 166,300 shares to its directors and certain employees on November 16, 2004, of which 3,000 shares were forfeited during the year ended June 30, 2005. The  6       fair market price of the restricted stock awards was at the $14.10 per share price on November 16, 2004 and totaled $2.3 million. These restricted stock awards vest over a five year period, and therefore, the unamortized cost of shares not yet earned (vested) is reported as a reduction of shareholders equity and will be amortized ratably over a five year period as compensation expense. Compensation expense related to the RRP awards was $116,000 and $231,000 for the three months and six months ended December 31, 2005, respectively. Compensation expense related to the RRP awards was $59,000 for the three and six months ended December 31, 2004. There were 133,640 restricted shares outstanding and the Company had an aggregate of 64,170 restricted shares available for future issuance under the RRP at December 31, 2005.  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 endedDecember 31,
        
        
        
        Six months endedDecember 31,2005
        
        
        
        2004
        
        
        
        2005
        
        
        
        2004(Dollars in thousands)Net income as reported
        
        $
        1,322
        
        
        
        $
        1,113
        
        
        
        $
        2,376
        
        
        
        $
        2,419Weighted average common shares outstanding
        
        
        13,868,046
        
        
        
        
        14,116,476
        
        
        
        
        13,874,553
        
        
        
        
        14,110,767Basic earnings per share
        
        $
        0.10
        
        
        
        $
        0.08
        
        
        
        $
        0.17
        
        
        
        $
        0.17Earnings per share assuming dilutionNet income available to common shareholders
        
        $
        1,322
        
        
        
        $
        1,113
        
        
        
        $
        2,376
        
        
        
        $
        2,419Weighted average common shares outstandingDilutive effect of stock options
        
        
        
        
        
        
        
        1,669
        
        
        
        
        
        
        
        
        
        Dilutive effect of stock awards
        
        
        
        
        
        
        
        1,796
        
        
        
        
        
        
        
        
        
        Average common shares and dilutive potential common shares
        
        
        13,868,046
        
        
        
        
        14,119,941
        
        
        
        
        13,874,553
        
        
        
        
        14,110,767Diluted earnings per share
        
        $
        0.10
        
        
        
        $
        0.08
        
        
        
        $
        0.17
        
        
        
        $
        0.17  The effect of stock options and stock awards was not included in the calculation of diluted earnings per share for the three and six months ended December 31, 2005 and for the six months ended December 31, 2004 because to do so would have been anti-dilutive.  7         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 December 31, 2005 and June 30, 2005.  General:Our total assets increased by $107.7 million, or 16.8%, to $747.6 million at December 31, 2005 from $639.9 million at June 30, 2005. The increase primarily reflects growth in our net loan portfolio of $105.2 million to $642.8 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 December 31, 2005 from $70.8 million at June 30, 2005.  Assets:Cash and cash equivalents increased $867,000 to $18.2 million at December 31, 2005 from $17.3 million at June 30, 2005.  Our investment portfolio decreased $4.8 million, or 9.6%, to $44.9 million at December 31, 2005 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 $105.2 million, or 19.6%, to $642.8 million at December 31, 2005 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 $84.6 million, or 22.7% to $456.7 million at December 31, 2005 from $372.1 million at June 30, 2005 and commercial loans increased $14.0 million, or 43.3% to $46.4 million at December 31, 2005 from $32.4 million at June 30, 2005. The overall loan mix remained relatively constant, with real estate loans comprising 92.0% of the total loan portfolio at December 31, 2005, compared with 91.3% at June 30, 2005.  Deposits:Total deposits decreased $4.2 million, or 0.9%, to $471.6 million at December 31, 2005 from $475.8 million at June 30, 2005. This decrease is primarily due to a $9.4 million decrease in savings accounts offset by a $5.2 million increase in money market accounts. The decrease in savings account balances is attributable to customers seeking higher yielding returns while 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 154.1% to $179.9 million at December 31, 2005 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.  Equity:Equity increased $1.6 million to $92.4 million at December 31, 2005 from $90.8 million at June 30, 2005 primarily as a result of $2.4 million in income earned for the six months ended December 31, 2005 in addition to the allocation of ESOP shares, stock awards, and stock options earned during the quarter totaling $699,000. This increase was partially offset by the repurchase of 55,000 of our outstanding common shares at an average price of $12.51 and a total cost of $691,000 and the payment of $649,000 in cash dividends to shareholders of record, excluding shares held by K-Fed Mutual Holding Company, or $0.13 per share for the six months ended December 31, 2005.  8        Average Balances, Net Interest Income, Yields Earned and Rates Paid   For the three months ended December 31,2005 (4)
        
        
        
        
        
        
        
        2004 (4)Average
        
        
        
        
        
        
        
        AverageAverage
        
        
        
        Yield/
        
        
        
        Average
        
        
        
        Yield/Balance
        
        Interest
        
        Cost
        
        
        
        Balance
        
        Interest
        
        Cost(Dollars in thousands)INTEREST-EARNING ASSETSLoans receivable(1)
        
        $
        617,837
        
        $
        8,266
        
        5.35
        %
        
        
        $
        495,572
        
        $
        6,204
        
        5.01
        %Securities(2)
        
        
        45,589
        
        
        401
        
        3.52
        %
        
        
        
        56,779
        
        
        486
        
        3.42
        %Fed Funds
        
        
        23,246
        
        
        190
        
        3.27
        %
        
        
        
        29,489
        
        
        141
        
        1.91
        %Federal Home Loan Bank stock
        
        
        7,145
        
        
        47
        
        2.63
        %
        
        
        
        3,820
        
        
        39
        
        4.10
        %Interest-bearing deposits in other financial institutions
        
        
        9,010
        
        
        76
        
        3.37
        %
        
        
        
        5,940
        
        
        47
        
        3.16
        %Other interest-earning assets
        
        
        2,557
        
        
        33
        
        5.16
        %
        
        
        
        
        
        
        
        
        Total interest-earning assets
        
        
        705,384
        
        
        9,013
        
        5.11
        %
        
        
        
        591,600
        
        
        6,917
        
        4.68
        %Noninterest earning assets
        
        
        30,116
        
        
        
        
        
        
        
        
        
        19,398Total assets
        
        $
        735,500
        
        
        
        
        
        
        
        
        $
        610,998INTEREST-BEARING  LIABILITIESMoney Market
        
        $
        111,761
        
        $
        557
        
        1.99
        %
        
        
        $
        111,114
        
        $
        346
        
        1.25
        %Savings deposits
        
        
        95,494
        
        
        99
        
        0.41
        %
        
        
        
        96,737
        
        
        101
        
        0.42
        %Certificates of deposit
        
        
        224,485
        
        
        2,129
        
        3.79
        %
        
        
        
        215,061
        
        
        1,682
        
        3.13
        %FHLB advances
        
        
        159,852
        
        
        1,644
        
        4.11
        %
        
        
        
        49,588
        
        
        462
        
        3.72
        %Total interest-bearing liabilities
        
        
        591,592
        
        
        4,429
        
        2.99
        %
        
        
        
        472,500
        
        
        2,591
        
        2.19
        %Noninterest bearing liabilities
        
        
        52,000
        
        
        
        
        
        
        
        
        
        47,393Total liabilities
        
        
        643,592
        
        
        
        
        
        
        
        
        
        519,893Equity
        
        
        91,908
        
        
        
        
        
        
        
        
        
        91,105Total liabilities and equity
        
        $
        735,500
        
        
        
        
        
        
        
        
        $
        610,998Net interest/spread
        
        
        
        
        $
        4,584
        
        2.12
        %
        
        
        
        
        
        $
        4,326
        
        2.49
        %Margin(3)
        
        
        
        
        
        
        
        2.60
        %
        
        
        
        
        
        
        
        
        2.92
        %Ratio of interest-earning assets to interest bearing liabilities
        
        
        119.23
        %
        
        
        
        
        
        
        
        
        125.21
        %(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       Average Balances, Net Interest Income, Yields Earned and Rates Paid   For the six months ended December 31,2005 (4)
        
        
        
        
        
        
        
        2004 (4)Average
        
        
        
        
        
        
        
        AverageAverage
        
        
        
        Yield/
        
        
        
        Average
        
        
        
        Yield/Balance
        
        Interest
        
        Cost
        
        
        
        Balance
        
        Interest
        
        Cost(Dollars in thousands)INTEREST-EARNING ASSETSLoans receivable(1)
        
        $
        584,601
        
        $
        15,296
        
        5.23
        %
        
        
        $
        499,282
        
        $
        12,430
        
        4.98
        %Securities(2)
        
        
        46,897
        
        
        827
        
        3.53
        %
        
        
        
        58,524
        
        
        1,006
        
        3.44
        %Fed Funds
        
        
        17,316
        
        
        313
        
        3.62
        %
        
        
        
        18,694
        
        
        166
        
        1.77
        %Federal Home Loan Bank stock
        
        
        5,814
        
        
        88
        
        3.03
        %
        
        
        
        3,906
        
        
        75
        
        3.83
        %Interest-bearing deposits in other financial institutions
        
        
        9,010
        
        
        141
        
        3.13
        %
        
        
        
        4,667
        
        
        63
        
        2.69
        %Other interest-earning assets
        
        
        1,564
        
        
        34
        
        4.35
        %
        
        
        
        
        
        
        
        
        Total interest-earning assets
        
        
        665,202
        
        
        16,699
        
        5.02
        %
        
        
        
        585,073
        
        
        13,740
        
        4.70
        %Noninterest earning assets
        
        
        29,866
        
        
        
        
        
        
        
        
        
        16,891Total assets
        
        $
        695,068
        
        
        
        
        
        
        
        
        $
        601,964INTEREST-BEARING  LIABILITIESMoney Market
        
        $
        109,858
        
        $
        1,012
        
        1.84
        %
        
        
        $
        107,799
        
        $
        648
        
        1.20
        %Savings deposits
        
        
        97,216
        
        
        206
        
        0.42
        %
        
        
        
        95,947
        
        
        203
        
        0.42
        %Certificates of deposit
        
        
        225,137
        
        
        4,212
        
        3.74
        %
        
        
        
        200,921
        
        
        3,203
        
        3.19
        %FHLB advances
        
        
        121,401
        
        
        2,315
        
        3.81
        %
        
        
        
        62,903
        
        
        975
        
        3.10
        %Total interest-bearing liabilities
        
        
        553,612
        
        
        7,745
        
        2.80
        %
        
        
        
        467,570
        
        
        5,029
        
        2.15
        %Noninterest bearing liabilities
        
        
        49,928
        
        
        
        
        
        
        
        
        
        43,908Total liabilities
        
        
        603,540
        
        
        
        
        
        
        
        
        
        511,478Equity
        
        
        91,528
        
        
        
        
        
        
        
        
        
        90,486Total liabilities and equity
        
        $
        695,068
        
        
        
        
        
        
        
        
        $
        601,964Net interest/spread
        
        
        
        
        $
        8,954
        
        2.22
        %
        
        
        
        
        
        $
        8,711
        
        2.55
        %Margin(3)
        
        
        
        
        
        
        
        2.69
        %
        
        
        
        
        
        
        
        
        2.98
        %Ratio of interest-earning assets to interest bearing liabilities
        
        
        120.16
        %
        
        
        
        
        
        
        
        
        125.13
        %(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       Comparison of Results of Operations for the Three Months Ended December 31, 2005 and December 31, 2004.  General.Net income for the three months ended December 31, 2005 was $1.3 million, an increase of $209,000, or 18.8%, from the net income of $1.1 million for the three months ended December 31, 2004. Earnings per basic and diluted common share were $0.10 for the three months ended December 31, 2005 compared to $0.08 for the three months ended December 31, 2004. The increase in net income resulted from the fluctuations described below.  Interest Income.Interest income increased by $2.1 million or 30.3%, to $9.0 million for the three months ended December 31, 2005 from $6.9 million for the three months ended December 31, 2004. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $122.2 million, or 24.7%, from $495.6 million for the three months ended December 31, 2004 to $617.8 million for the three months ended December 31, 2005. 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 5.01% for the three months ended December 31, 2004 to 5.35% for the three months ended December 31, 2005, 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 $85,000 or 17.5%, to $401,000 for the three months ended December 31, 2005 from $486,000 for the three months ended December 31, 2004. The decrease resulted from an $11.2 million, or 19.7% decrease in the average balance of securities as a result of principal repayments. The decrease was partially offset by a 9 basis point increase in the average yield on the securities investment portfolio from 3.42% for the three months ended December 31, 2004 to 3.51% for the three months ended December 31, 2005.  Interest Expense. Interest expense increased $1.8 million, or 70.9%, for the three months ended December 31, 2005 to $4.4 million as compared to $2.6 million for the three months ended December 31, 2004. 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 80 basis points to 2.99% for the three months ended December 31, 2005 from 2.19% for the three months ended December 31, 2004. Average interest-bearing liabilities increased $119.1 million or 25.2% to $591.6 million for the three months ended December 31, 2005 from $472.5 million for the three months ended December 31, 2004. 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. 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.  11        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 increased $163,000 to $195,000 for the three months ended December 31, 2005 compared to $32,000 for the three months ended December 31, 2004. The increase in the provision is primarily attributable to $173,000 in net charge-offs incurred in our auto loan portfolio during the three months ended December 31, 2005. The allowance for loan losses as a percent of total loans was 0.39% at December 31, 2005 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 $84.6 million, or 22.7% to $456.7 million at December 31, 2005 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 $356,000, or 59.8%, to $951,000 for the three months ended December 31, 2005 from $595,000 for the three months ended December 31, 2004. The increase is primarily the result of a $208,000 decrease in the loss on our equity investment in a California Affordable Housing Program tax credit fund, and income totaling $107,000 from bank-owned life insurance purchased in April 2005.  Noninterest Expense.Our noninterest expense increased $153,000, or 4.9% to $3.3 million for the three months ended December 31, 2005 from $3.1 million for the three months ended December 31, 2004. The increase was primarily due to an $87,000 increase in salaries and benefits and a $56,000 increase in occupancy and equipment expense.  Salaries and benefits represented 55.5% of total noninterest expense for the three months ended December 31, 2005 compared to 55.4% for the three months ended December 31, 2004. Total salaries and benefits increased $87,000, or 5.1%, to $1.8 million for the three months ended December 31, 2005 from $1.7 million for the three months ended December 31, 2004. The increase was primarily due to an increase of $57,000 in stock award expense and $92,000 in stock option expense related to the establishment of these plans in November 2004 partially offset by a reduction in fair market value costs related to our employee stock ownership plan and reductions in compensation costs as a result of fewer full-time equivalent employees.  Occupancy and equipment expense increased $56,000, or 15.3% to $422,000 for the three months ended December 31, 2005 from $366,000 for the three months ended December 31, 2004. The increase was primarily due to costs associated with the current relocation of our Pasadena Branch in addition to increased equipment maintenance expense.  Income Tax Expense. Income tax expense for the three months ended December 31, 2005 was $767,000 compared to $678,000 for the three months ended December 31, 2004. This increase is primarily the result of an increase in pre-tax income of $298,000. The effective tax rate was 36.7% and 37.9% for the three months ended December 31, 2005  12       and 2004, 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 Six Months Ended December 31, 2005 and December 31, 2004.  General.Net income was $2.4 million for the six months ended December 31, 2005 and six months ended December 31, 2004. Earnings per basic and diluted common share were $0.17 for the six months ended December 31, 2005 and six months ended December 31, 2004.  Interest Income.Interest income increased by $3.0 million, or 21.5%, to $16.7 million for the six months ended December 31, 2005 from $13.7 million for the six months ended December 31, 2004. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $85.3 million, or 17.1%, from $499.3 million for the six months ended December 31, 2004 to $584.6 million for the six months ended December 31, 2005. 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 25 basis point increase in the average yield on loans receivable, from 4.98% for the six months ended December 31, 2004 to 5.23% for the six months ended December 31, 2005.  Interest income on securities decreased by $179,000 or 17.8%, to $827,000 for the six months ended December 31, 2005 from $1.0 million for the six months ended December 31, 2004. The decrease resulted from an $11.6 million, or 19.9% decrease in the average balance of securities as a result of principal repayments. The decrease was partially offset by a 9 basis point increase in the average yield on the securities investment portfolio from 3.44% for the six months ended December 31, 2004 to 3.53% for the six months ended December 31, 2005.  Interest Expense. Interest expense increased $2.7 million, or 54.0%, for the six months ended December 31, 2005 to $7.7 million as compared to $5.0 million for the six months ended December 31, 2004. 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 65 basis points to 2.80% for the six months ended December 31, 2005 from 2.15% for the six months ended December 31, 2004. Average interest-bearing liabilities increased $86.0 million or 18.4% to $553.6 million for the six months ended December 31, 2005 from $467.6 million for the six months ended December 31, 2004.  Provision for Loan Losses. Our provision for loan losses increased $208,000 to $360,000 for the six months ended December 31, 2005 compared to $152,000 for the six months ended December 31, 2004. The increase in the provision is primarily attributable to $225,000 in net charge-offs incurred in our sub-prime auto loan portfolio during the six months ended December 31, 2005. 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 $331,000, or 24.3%, to $1.7 million for the six months ended December 31, 2005 from $1.4 million for the six months ended December 31, 2004. The increase is primarily the result of income totaling $214,000 from bank-owned life insurance purchased in April 2005 and an $87,000 increase in ATM fees and charges due to increased usage.  Noninterest Expense.Our noninterest expense increased $534,000, or 8.9%, to $6.6 million for the six months ended December 31, 2005 from $6.0 million for the six months ended December 31, 2004. The increase was primarily due to a $298,000 increase in salaries and benefits, a $132,000 increase in occupancy and equipment expense and a $91,000 increase in other operating expense.  Salaries and benefits represented 54.7% and 54.6% of total noninterest expense for the six months ended December 31, 2005 and December 31, 2004, respectively. Total salaries and benefits increased $298,000, or 9.1%, to $3.6 million for the six months ended December 31, 2005 from $3.3 million for the six months ended December 31, 2004. The increase was primarily due to an increase of $172,000 in stock award expense and $185,000 in stock option expense related to the establishment of these plans in November 2004 partially offset by a reduction in fair market value costs related to our employee stock ownership plan and reductions in compensation costs as a result of fewer full-time equivalent employees.  Occupancy and equipment expense increased $132,000 to $814,000 for the six months ended December 31, 2005 from $682,000 for the six months ended December 31, 2004. The increase was primarily due to increased costs associated with the acquisition of the Panorama City branch from Pan American Bank in September 2004 in addition to costs associated with the current relocation of our Pasadena Branch and increased equipment maintenance expense.  13        Other operating expense increased $91,000 to $676,000 for the six months ended December 31, 2005 from $585,000 for the six months ended December 31, 2004. 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 six months ended December 31, 2005 was $1.4 million compared to $1.5 million for the six months ended December 31, 2004. This decrease is primarily a result of a decrease in pre-tax income of $168,000 and a decrease in our effective tax rate. The effective tax rate was 36.3% and 38.0% for the six months ended December 31, 2005 and 2004, 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.  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 December 31, 2005, the total approved loan commitments unfunded amounted to $7.9 million, which includes the unadvanced portion of loans of $6.9 million.  Time deposits and advances from the Federal Home Loan Bank of San Francisco scheduled to mature in one year or less at December 31, 2005, totaled $112.9 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 December 31, 2005, we had available additional advances from the Federal Home Loan Bank of San Francisco in the amount of $111.8 million.  14        Capital  The table below sets forth Kaiser Federal Banks capital position relative to its Office of Thrift Supervision capital requirements at December 31, 2005. 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)
        
        $68,261
        
        15.70
        %
        $34,783
        
        8.00
        %
        $43,478
        
        10.00
        %Tier 1 capital (to risk-weighted assets)
        
        65,718
        
        15.11
        
        17,397
        
        4.00
        
        26,096
        
        6.00Tier 1 (core) capital (to adjusted tangible assets)
        
        65,718
        
        9.06
        
        29,015
        
        4.00
        
        36,268
        
        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.  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.  15        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 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 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.  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 December 31, 2005 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.    16         December 31, 2005Change 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
        
        $
        52,615
        
        
        
        $
        (28,149
        )
        
        
        (35
        )%
        
        
        7.72
        %
        
        
        (327
        )bp+200 bp
        
        
        62,635
        
        
        
        
        (18,129
        )
        
        
        (22
        )
        
        
        8.95
        
        
        
        (204
        )+100 bp
        
        
        72,323
        
        
        
        
        (8,441
        )
        
        
        (10
        )
        
        
        10.08
        
        
        
        (91
        )0 bp
        
        
        80,764
        
        
        
        
        
        
        
        
        
        
        
        
        10.99
        
        
        
        -100 bp
        
        
        84,041
        
        
        
        
        3,277
        
        
        
        4
        
        
        
        11.24
        
        
        
        25-200 bp
        
        
        78,755
        
        
        
        
        (2,009
        )
        
        
        (2
        )
        
        
        10.47
        
        
        
        (52
        )  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        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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities  Issuer Purchases of Equity Securities Period
        
        Total Number of Shares Purchased
        
        Average Price 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
        
        175,129 ______________________ *  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  The Annual Meeting of Shareholders for K-Fed Bancorp was held on October 25, 2005. At that meeting, the shareholders elected the following persons to three-year terms to the Board of Directors:  Marilyn T. Owsley by a vote of 12,839,533 for and 8,189 against, and Rita H. Zwern by a vote of 12,574,133 for and 273,589 against. There were 293,470 non-voting shares. James L. Breeden, Robert Steinbach, Gerald Murbach, Frank G. Nicewicz, and Kay M. Hoveland also continue to serve as directors after the meeting.  The appointment of Crowe Chizek and Company LLP as independent auditors for the fiscal year ending June 30, 2006 was ratified by a vote of 12,693,788 for and 151,088 against.   18        Item 5. Other Information  None.  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        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:February 8, 2006
        /s/ Kay M. HovelandKay M. HovelandPresident and Chief Executive Officer   Date:February 8, 2006
        /s/ Daniel A. CanoDaniel A. CanoChief Financial Officer   20        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:February 8, 2006
        /s/ Kay M. Hoveland Kay M. Hoveland President and Chief Executive Officer               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:February 8, 2006
        /s/ Daniel A. Cano­­­­­­­ Chief Financial Officer                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 December 31, 2005 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:February 8, 2006
        /s/ Kay M. Hoveland Kay M. Hoveland Chief Executive Officer            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 December 31, 2005 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:February 8, 2006
        /s/ Daniel A. Cano Daniel A. Cano Chief Financial Officer