- Quarterly Report (10-Q)

UNITED STATES
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: March 31, 2010

OR

o 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 check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

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

Yes o No o

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

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

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

Yes o No x

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

Common Stock, $.01 par value – 13,291,325 shares outstanding as of April 30, 2010.

Form 10-Q

K-FED BANCORP

Table of Contents

		Page
Part I.	FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition at March 31, 2010 and June 30, 2009	1
	Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended March 31, 2010 and 2009	2
	Consolidated Statement of Stockholders’ Equity for the Nine Months Ended March 31, 2010	3
	Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2010 and 2009	4
	Notes to Consolidated Financial Statements	5

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	28

Item 4:	Controls and Procedures	29

Part II.	OTHER INFORMATION

Item 1:	Legal Proceedings	29
Item 1A:	Risk Factors	29
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3:	Defaults upon Senior Securities	30
Item 4:	Reserved and Removed	30
Item 5:	Other Information	30
Item 6:	Exhibits	31

	SIGNATURES	32

Table of Contents

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

K-FED BANCORP AND SUBSIDIARY

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except per share data)

	March 31, 2010			June 30, 2009
ASSETS
Cash and due from banks	$	8,697		$	32,685
Federal funds sold		57,440			41,020
Total cash and cash equivalents		66,137			73,705
Interest earning time deposits in other financial institutions		24,146			25,508
Securities available-for-sale, at fair value		2,748			4,236
Securities held-to-maturity, fair value of $4,215 and $5,625 at March 31, 2010 and June 30, 2009, respectively		4,101			5,528
Federal Home Loan Bank stock, at cost		12,649			12,649
Loans receivable, net of allowance for loan losses of $12,820 and $4,586 at March 31, 2010 and June 30, 2009, respectively		752,607			746,875
Accrued interest receivable		3,154			3,402
Premises and equipment, net		2,167			2,562
Core deposit intangible		99			147
Goodwill		3,950			3,950
Bank-owned life insurance		12,250			11,884
Real estate owned		976			496
Other assets		8,150			4,155
Total assets	$	893,134		$	895,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest bearing	$	65,032		$	50,161
Interest bearing		583,706			516,032
Total deposits		648,738			566,193
Federal Home Loan Bank advances, short-term		62,000			70,000
Federal Home Loan Bank advances, long-term		85,000			137,004
State of California time deposit		—			25,000
Accrued expenses and other liabilities		4,375			4,342
Total liabilities		800,113			802,539
Commitments and contingent liabilities
Stockholders’ equity
Nonredeemable 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, 2010 — 14,728,440 shares issued June 30, 2009 — 14,728,440 shares issued		147			147
Additional paid-in capital		59,473			59,134
Retained earnings		53,433			53,512
Accumulated other comprehensive income, net of tax		54			77
Unearned employee stock ownership plan (ESOP) shares		(1,820	)		(2,161	)
Treasury stock, at cost (March 31, 2010 — 1,437,115 shares; June 30, 2009 — 1,423,852 shares)		(18,266	)		(18,151	)
Total stockholders’ equity		93,021			92,558
Total liabilities and stockholders’ equity	$	893,134		$	895,097
The accompanying notes are an integral part of these unaudited consolidated financial statements

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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 31,
	2010			2009			2010			2009
Interest income
Interest and fees on loans	$	11,049		$	11,059		$	33,101		$	32,678
Interest on securities, taxable		83			146			278			485
Federal Home Loan Bank dividends		8			—			35			314
Other interest		111			79			374			425
Total interest income		11,251			11,284			33,788			33,902
Interest expense
Interest on deposits		2,676			3,145			8,229			10,098
Interest on borrowings		1,665			2,333			5,697			7,556
Total interest expense		4,341			5,478			13,926			17,654
Net interest income		6,910			5,806			19,862			16,248
Provision for loan losses		2,272			660			8,787			2,007
Net interest income after provision for loan losses		4,638			5,146			11,075			14,241
Noninterest income
Service charges and fees		528			514			1,722			1,755
ATM fees and charges		457			380			1,377			1,256
Referral commissions		74			76			232			230
Loss on equity investment		(75	)		(75	)		(225	)		(207	)
Bank-owned life insurance		123			120			366			357
Other noninterest income		8			23			36			35
Total noninterest income		1,115			1,038			3,508			3,426
Noninterest expense
Salaries and benefits		1,993			2,095			6,254			6,077
Occupancy and equipment		588			588			1,770			1,777
ATM expense		456			450			1,294			1,172
Advertising and promotional		68			106			279			300
Professional services		283			176			682			635
Federal deposit insurance premiums		279			195			771			373
Postage		71			67			207			211
Telephone		173			160			523			412
Other operating expense		339			381			1,063			1,163
Total noninterest expense		4,250			4,218			12,843			12,120
Income before income tax expense		1,503			1,966			1,740			5,547
Income tax expense		394			772			427			2,013
Net income	$	1,109		$	1,194		$	1,313		$	3,534
Comprehensive income	$	1,103		$	1,226		$	1,290		$	3,587
Earnings per common share:
Basic	$	0.08		$	0.09		$	0.10		$	0.27
Diluted	$	0.08		$	0.09		$	0.10		$	0.27
The accompanying notes are an integral part of these unaudited consolidated financial statements

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K-FED BANCORP AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Dollars in thousands, except per share data)

				Common Stock																Treasury Stock
	Comprehensive Income			Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income, net			Unearned ESOP Shares			Shares			Amount			Total
Balance June 30, 2009					14,728,440	$	147	$	59,134		$	53,512		$	77		$	(2,161	)		(1,423,852	)	$	(18,151	)	$	92,558
Comprehensive income
Net income for the nine months ended March 31, 2010	$	1,313			—		—		—			1,313			—			—			—			—			1,313
Other comprehensive income – unrealized loss on securities, net of tax		(23	)		—		—		—			—			(23	)		—			—			—			(23	)
Total comprehensive income	$	1,290
Dividends declared ($0.33 per share) *					—		—		—			(1,392	)		—			—			—			—			(1,392	)
Purchase of treasury stock					—		—		—			—			—			—			(13,263	)		(115	)		(115	)
Stock options earned					—		—		203			—			—			—			—			—			203
Allocation of stock awards					—		—		176			—			—			—			—			—			176
Allocation of ESOP common stock					—		—		(40	)		—			—			341			—			—			301
Balance March 31, 2010					14,728,440	$	147	$	59,473		$	53,433		$	54		$	(1,820	)		(1,437,115	)	$	(18,266	)	$	93,021


* K-Fed Mutual Holding Company waived its receipt of dividends on the 8,861,750 shares it owns.








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

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K-FED BANCORP AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Nine Months Ended March 31,
	2010			2009
OPERATING ACTIVITIES
Net income	$	1,313		$	3,534
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premiums on securities		2			7
(Accretion) Amortization of net discounts on loan purchases		(17	)		39
Amortization (Accretion) of net loan origination costs		52			(43	)
Provision for loan losses		8,787			2,007
Federal Home Loan Bank stock (FHLB) dividend		—			(314	)
Depreciation and amortization		588			646
Amortization of core deposit intangible		48			60
Loss on equity investment		225			207
Increase in cash surrender value of bank-owned life insurance		(366	)		(357	)
Accretion of debt exchange costs		(4	)		(11	)
Allocation of ESOP common stock		301			285
Allocation of stock awards		176			306
Stock options earned		203			265
Net change in accrued interest receivable		248			16
Net change in other assets		(4,340	)		497
Net change in accrued expenses and other liabilities		33			(268	)
Net cash provided by operating activities		7,249			6,876

INVESTING ACTIVITIES
Proceeds from maturities and principal repayments of available-for-sale securities		1,453			3,698
Proceeds from maturities and principal repayments of held-to-maturity securities		1,426			562
Net change in interest earning time deposits with other financial institutions		1,362			(9,042	)
Net change in loans		(15,929	)		(13,153	)
Proceeds from sale of real estate owned		1,026			1,565
Redemption of FHLB stock		—			205
Purchases of premises and equipment		(193	)		(279	)
Net cash used in investing activities		(10,855	)		(16,444	)

FINANCING ACTIVITIES
Repayment of FHLB advances		(60,000	)		(28,000	)
Dividends paid on common stock		(1,392	)		(1,414	)
Purchase of treasury stock		(115	)		(1,762	)
Net change in deposits		82,545			59,192
Repayment of State of California time deposit		(25,000	)		—
Net cash (used in) provided by financing activities		(3,962	)		28,016

Net decrease in cash and cash equivalents		(7,568	)		18,448
Beginning cash and cash equivalents		73,705			51,240
Ending cash and cash equivalents	$	66,137		$	69,688

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

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

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

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

The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the fiscal year ending June 30, 2010. Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. Therefore, these consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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

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

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

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Adoption of New Accounting Standards:

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

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

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

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

Newly Issued Accounting Standards:

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

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In June 2009, the FASB issued new authoritative guidance under Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46R.” In December 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-17 which provides updates to ASC Topic 810, “Consolidations” This guidance changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting or similar rights should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. The new guidance under ASC Topic 810 will be effective at the start of the fiscal year beginning after November 15, 2009. Early application is not permitted. The adoption of this guidance is not expected to have a material impact upon the Company.

Note 2 – Earnings Per Share

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

	Three months ended March 31,				Nine months ended March 31,
	2010		2009		2010		2009
Basic	(Dollars in thousands, except per share data)
Net income	$	1,109	$	1,194	$	1,313	$	3,534
Weighted average common shares outstanding		13,098,226		13,114,939		13,093,989		13,145,925
Basic earnings per share	$	0.08	$	0.09	$	0.10	$	0.27

Diluted
Net income	$	1,109	$	1,194	$	1,313	$	3,534

Weighted average common shares outstanding		13,098,226		13,114,939		13,093,989		13,145,925
Dilutive effect of stock options		—		—		—		119,968
Average shares and dilutive potential common shares		13,098,226		13,114,939		13,093,989		13,265,893
Diluted earnings per share	$	0.08	$	0.09	$	0.10	$	0.27

For the three and nine months ended March 31, 2010 outstanding stock options to purchase 484,400 shares were anti-dilutive and not considered in computing diluted earnings per common share. For the three and nine months ended March 31, 2009 outstanding stock options to purchase 491,900 shares were anti-dilutive and not considered in computing diluted earnings per common share.

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Note 3 – Fair Value Measurements

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

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

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

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

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

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

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

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

			Fair Value Measurements at March 31, 2010 Using
Assets at March 31, 2010:	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Available-for-sale securities
Mortgage-backed securities (residential)	$	390		$	—		$	390		$	—
Collateralized mortgage obligations (residential)	$	2,358		$	—		$	2,358		$	—

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

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

			Fair Value Measurements at March 31, 2010 Using
Assets at March 31, 2010:	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans	$	18,307	$	—	$	—	$	18,307
Real estate owned	$	976	$	—	$	—	$	976

			Fair Value Measurements at June 30, 2009 Using
Assets at June 30, 2009:	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Impaired loans	$	3,855	$	—	$	—	$	3,855
Real estate owned	$	496	$	—	$	—	$	496

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $23.0 million at March 31, 2010 as compared to $5.1 million at June 30, 2009. The fair value of collateral is calculated using a third party appraisal. The valuation allowance for these loans was $4.7 million at March 31, 2010 as compared to $1.2 million at June 30, 2009. An additional provision for loan losses of $3.9 million was made for the nine months ended March 31, 2010 relating to impaired loans.

Real estate owned is measured at the lower of carrying amount or fair value less costs to sell at transfer. If the fair value of the asset declines, a write-down is recorded through expense. During the three and nine months ended March 31, 2010, the Company did not incur any charges to reduce real estate owned to fair value.

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Fair Value of Financial Instruments

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

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

Investments

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

Securities available-for-sale that are previously reported are excluded from the fair value disclosure below.

Loans

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

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

Deposits

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

FHLB Advances

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

Other On-Balance Sheet Financial Instruments

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

Off-Balance Sheet Financial Instruments

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

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

	March 31, 2010				June 30, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	66,137	$	66,137	$	73,705	$	73,705
Interest earning time deposits in other financial institutions		24,146		24,146		25,508		25,508
Securities held-to-maturity		4,101		4,215		5,528		5,625
Federal Home Loan Bank Stock		12,649	NA			12,649	NA
Loans receivable, net		734,300		765,117		743,020		767,255
Accrued interest receivable		3,154		3,154		3,402		3,402
Financial liabilities:
Deposits		648,738		658,202		566,193		575,638
Borrowings		147,000		153,821		207,004		215,677
State of California time deposit		—		—		25,000		25,320

Note 4 – Investments

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

	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses		Amortized Cost
	(In thousands)
March 31, 2010
Mortgage-backed (residential):
Freddie Mac	$	390	$	12	$	—	$	378
Collateralized mortgage obligations (residential):
Freddie Mac		2,358		80		—		2,278
Total	$	2,748	$	92	$	—	$	2,656

June 30, 2009
Mortgage-backed (residential):
Freddie Mac	$	524	$	13	$	—	$	511
Collateralized mortgage obligations (residential):
Freddie Mac		3,712		117		—		3,595
Total	$	4,236	$	130	$	—	$	4,106

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

	Carrying Amount		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
	(In thousands)
March 31, 2010
Mortgage-backed
Fannie Mae	$	167	$	1	$	─		$	168
Freddie Mac		138		6		─			144
Ginnie Mae		100		3		─			103
Collateralized mortgage obligations
Fannie Mae		1,487		36		─			1,523
Freddie Mac		2,209		89		(21	)		2,277
Total	$	4,101	$	135	$	(21	)	$	4,215

June 30, 2009
Mortgage-backed
Fannie Mae	$	191	$	1	$	─		$	192
Freddie Mac		156		─		─			156
Ginnie Mae		111		4		─			115
Collateralized mortgage obligations
Fannie Mae		1,819		14		(1	)		1,832
Freddie Mac		3,251		93		(14	)		3,330
Total	$	5,528	$	112	$	(15	)	$	5,625

There were no sales of securities during the nine months ended March 31, 2010 or March 31, 2009.

Securities with unrealized losses at March 31, 2010 and June 30, 2009, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 months					12 months or more				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
	(In thousands)
March 31, 2010
Description of Securities
Collateralized mortgage obligations		571		(21	)		─		─		571		(21	)
Total temporarily impaired	$	571	$	(21	)	$	─	$	─	$	571	$	(21	)

June 30, 2009
Description of Securities
Collateralized mortgage obligations		1,353		(15	)		─		─		1,353		(15	)
Total temporarily impaired	$	1,353	$	(15	)	$	─	$	─	$	1,353	$	(15	)

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

The unrealized losses relate principally to the general change in interest rates and liquidity, and not credit quality, that has occurred since the securities purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future. As management has the intent and ability to hold debt securities until recovery, which may be maturity, and it is not more than likely it will be required to sell the securities before their anticipated recovery, no declines in fair value are deemed to be other-than-temporary as of March 31, 2010 and June 30, 2009.

Note 5 – Loans

The composition of loans consists of the following:

	March 31, 2010			June 30, 2009
	(In thousands)
Real Estate:
One-to-four family residential, fixed rate	$	283,305		$	303,287
One-to-four family residential, variable rate		60,056			73,943
Multi-family residential, variable rate		260,243			196,575
Commercial real estate, variable rate		113,989			121,143
		717,593			694,948
Consumer:
Automobile		32,371			41,798
Home equity		1,105			1,299
Other consumer loans, primarily unsecured		13,830			13,119
		47,306			56,216
Total loans		764,899			751,164
Deferred net loan origination costs		590			376
Net discounts on purchased loans		(62	)		(79	)
Allowance for loan losses		(12,820	)		(4,586	)
	$	752,607		$	746,875

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

	Three months ended March 31,								Nine months ended March 31,
	2010				2009				2010				2009
	(In thousands)
Balance, beginning of period		$	10,740			$	3,932			$	4,586			$	3,229
Provision for loan losses			2,272				660				8,787				2,007
Recoveries			16				50				62				189
Loans charged off			(208	)			(339	)			(615	)			(1,122	)
Balance, end of period		$	12,820			$	4,303			$	12,820			$	4,303

At March 31, 2010, non-accrual loans totaled $28.9 million, compared to $8.9 million at June 30, 2009. At March 31, 2010 and June 30, 2009, there were no loans past due more than 90 days and still accruing interest. Included in non-accrual loans are troubled debt restructurings of $8.4 million and $2.1 million at March 31, 2010 and June 30, 2009, respectively. At March 31, 2010 there was a troubled debt restructured loan in the amount of $1.7 million that was accruing interest and not included in non-accrual loans. The Company has no further commitments to customers whose loans are troubled debt restructurings.

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

Individually impaired loans were as follows:

	March 31, 2010		June 30, 2009
	(In thousands)
Loans with no allocated allowance	$	4,531	$	3,522
Troubled debt restructured loans with no allocated allowance		3,085		282
Loans with allocated allowance		15,953		3,244
Troubled debt restructured loans with allocated allowance		7,034		1,812
	$	30,603	$	8,860

Amount of allowance allocated	$	3,015	$	648
Amount of allowance allocated for troubled debt restructured loans		1,665		553
Total allowance for loan losses allocated	$	4,680	$	1,201

For the three and nine months ended March 31, 2010, the Company’s average investment in impaired loans was $26.5 million and $18.8 million, respectively. For the three and nine months ended March 31, 2009, the Company’s average investment in impaired loans was $5.8 million and $5.3 million, respectively.

Payments received on impaired loans are recorded as a reduction of principal or as interest income depending on management’s assessment of the ultimate collectability of the loan principal. Generally, interest income on an impaired loan is recorded on a cash basis when the outstanding principal is brought current. For the three and nine months ended March 31, 2010, income recorded on impaired loans totaled $114,000 and $256,000, respectively. For the three and nine months ended March 31, 2009, income recorded on impaired loans totaled $18,000 and $52,000, respectively. Interest income recorded on impaired loans for all periods presented was recorded on a cash basis.

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

Forward-Looking Statements

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

Recent Developments

Federal Deposit Insurance Corporation Coverage/Assessments. The Emergency Economic Stabilization Act (“EESA”) of 2008 temporarily increased the limit on Federal Deposit Insurance Corporation (“FDIC”) coverage for deposits to $250,000 from $100,000 through December 31, 2013. In addition, on October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program (“TLGP”) as part of a larger government effort to strengthen confidence and encourage liquidity in the nation’s banking system. All eligible institutions were automatically enrolled in the program through December 5, 2008 at no cost. Organizations that did not wish to participate in the TLGP needed to opt out by December 5, 2008. After that time, participating entities were charged fees. One component of the TLGP provides full FDIC insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount.

This program, originally set to expire on March 31, 2010, was recently extended to June 30, 2010. An annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis. The Company did not opt out and is participating in this component of the TLGP. As of March 31, 2010 the Company had no non-interest bearing transaction accounts in excess of $250,000. We opted into the extension which took effect on January 1, 2010. An annualized assessment rate between 15 and 25 basis points on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed depending on the institution’s risk category. On April 13, 2010, the FDIC announced its intention to extend the program again until December 31, 2010 and retained the discretion to further extend the program until December 31, 2011. Institutions must elect to opt out of the extension before it takes effect on July 1, 2010. The assessment rate remains the same from the prior extension. We anticipate opting into the extension.

Market Area

Economic conditions remain weak both nationally and in our market area of California. We continue to experience a downward pressure on home prices and California remains one of the top in the nation for foreclosure activity. California, in particular has experienced significant declines in real estate values and elevated unemployment rates. Unemployment rates in California increased to 12.6% in March 2010 as compared to 12.4% in December 2009 and 11.6% in June 2009.

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Comparison of Financial Condition at March 31, 2010 and June 30, 2009.

Assets. Total assets decreased $2.0 million, or 0.2% to $893.1 million at March 31, 2010 from $895.1 million at June 30, 2009 due primarily to a decrease in total cash and cash equivalents and to a lesser extent, a decrease in our investment securities portfolio, partially offset by an increase in our net loans. Total cash and cash equivalents decreased $7.6 million, or 10.3% to $66.1 million at March 31, 2010 from $73.7 million at June 30, 2009. The decrease was a result of the repayment of $60.0 million in FHLB advances that matured during the period. The repayment was funded with available liquidity and strong deposit growth.

Our investment securities portfolio decreased $2.9 million, or 29.9% to $6.8 million at March 31, 2010 from $9.8 million at June 30, 2009. The decrease was attributable to maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

Our net loan portfolio increased by $5.7 million, or 0.8% to $752.6 million at March 31, 2010 from $746.9 million at June 30, 2009 due primarily to an increase in multi-family loans partially offset by an increase in the allowance for loan losses. Multi-family loans increased $63.7 million, or 32.4% to $260.2 million at March 31, 2010 from $196.6 million at June 30, 2009. One-to-four family real estate loans decreased $33.9 million, or 9.0% to $343.4 million at March 31, 2010 from $377.2 million at June 30, 2009. Commercial real estate loans decreased $7.2 million, or 5.9% to $114.0 million at March 31, 2010 from $121.1 million at June 30, 2009. Other loans which are comprised primarily of automobile loans decreased $8.9 million, or 15.8% to $47.3 million at March 31, 2010 from $56.2 million at June 30, 2009. Real estate loans comprised 93.8% of the total loan portfolio at March 31, 2010, compared with 92.5% at June 30, 2009. The decrease in one-to-four family real estate loans and increase in multi-family loans was due to our focus on originations of multi-family loans as a means of diversifying the loan portfolio.

Other assets increased by $4.0 million to $8.2 million at March 31, 2010 from $4.2 million at June 30, 2009. The increase in other assets was primarily a result of the FDIC prepayment of insurance premiums of $3.6 million paid in December 2009. As of March 31, 2010 the FDIC prepayment balance was $3.3 million.

Deposits. Total deposits increased $82.5 million, or 14.6% to $648.7 million at March 31, 2010 from $566.2 million at June 30, 2009. The growth was comprised of increases of $50.8 million in certificates of deposit, $17.6 million in checking and savings accounts and $14.1 million in money market accounts. The increase in certificate of deposit accounts was a result of promotions for these types of accounts as well as an increase in non-promotional individual retirement account balances. The increase in checking and savings balances was primarily a result of a higher than normal payroll experienced by a significant number of our customers at the end of March. In addition, money market accounts have steadily increased throughout the year.

Borrowings. Advances from the FHLB of San Francisco decreased $60.0 million, or 29.0% to $147.0 million at March 31, 2010 from $207.0 million at June 30, 2009. The decline was the result of scheduled maturities in August and September 2009 and was funded with available liquidity as well as increased deposits. In addition the entire $25.0 million was paid down on the outstanding State of California time deposit at maturity.

Stockholders’ Equity. Stockholders’ equity increased $463,000 to $93.0 million at March 31, 2010 from $92.6 million at June 30, 2009 primarily as a result of $1.3 million in net income for the nine months ended March 31, 2010 and the allocation of ESOP shares, stock awards, and stock options totaling $680,000. This increase was partially offset by the payment of dividends of $1.4 million ($0.33 per share) and stock repurchases of $115,000.

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

The following table sets forth certain information for the quarter ended March 31, 2010 and 2009, respectively.

	For the three months ended March 31,
				2010 (1)								2009 (1)
						Average								Average
	Average					Yield/			Average					Yield/
	Balance			Interest		Cost			Balance			Interest		Cost
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable (2)	$	756,472		$	11,049		5.84	%	$	750,189		$	11,059		5.90	%
Securities (3)		7,269			83		4.57	%		12,903			146		4.53	%
Federal funds sold		50,690			25		0.20	%		26,568			13		0.20	%
Federal Home Loan Bank stock		12,649			8		0.25	%		12,649			—		0.00	%
Interest-earning deposits in other financial institutions		22,679			86		1.52	%		18,380			66		1.44	%
Total interest-earning assets		849,759			11,251		5.30	%		820,689			11,284		5.50	%
Noninterest earning assets		40,252								37,401
Total assets	$	890,011							$	858,090

INTEREST-BEARING LIABILITIES
Money market	$	120,573		$	254		0.84	%	$	95,057		$	412		1.73	%
Savings deposits		129,973			139		0.43	%		119,071			238		0.80	%
Certificates of deposit		323,470			2,283		2.82	%		262,251			2,495		3.81	%
Borrowings		154,500			1,665		4.31	%		232,009			2,333		4.02	%
Total interest-bearing liabilities		728,516			4,341		2.38	%		708,388			5,478		3.09	%
Noninterest bearing liabilities		68,888								57,922
Total liabilities		797,404								766,310
Equity		92,607								91,780
Total liabilities and equity	$	890,011							$	858,090
Net interest/spread				$	6,910		2.92	%				$	5,806		2.41	%

Margin (4)							3.25	%							2.83	%

Ratio of interest-earning assets to interest bearing liabilities		116.64	%							115.85	%


(1) Yields earned and rates paid have been annualized.
(2) Calculated net of deferred fees, loss reserves and includes non-accrual loans.
(3) Calculated based on amortized cost.
(4) Net interest income divided by interest-earning assets.

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	For the nine months ended March 31,
				2010 (1)								2009 (1)
						Average								Average
	Average					Yield/			Average					Yield/
	Balance			Interest		Cost			Balance			Interest		Cost
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable (2)	$	755,941		$	33,101		5.84	%	$	743,877		$	32,678		5.86	%
Securities (3)		8,160			278		4.54	%		14,292			485		4.52	%
Federal funds sold		47,614			82		0.23	%		34,373			285		1.11	%
Federal Home Loan Bank stock		12,649			35		0.37	%		12,632			314		3.31	%
Interest-earning deposits in other financial institutions		27,717			292		1.40	%		11,707			140		1.59	%
Total interest-earning assets		852,081			33,788		5.29	%		816,881			33,902		5.53	%
Noninterest earning assets		40,825								36,671
Total assets	$	892,906							$	853,552

INTEREST-BEARING LIABILITIES
Money market	$	116,148		$	848		0.97	%	$	89,211		$	1,384		2.07	%
Savings deposits		130,418			488		0.50	%		120,494			874		0.97	%
Certificates of deposit		307,369			6,893		2.99	%		257,318			7,840		4.06	%
Borrowings		182,001			5,697		4.17	%		241,213			7,556		4.18	%
Total interest-bearing liabilities		735,936			13,926		2.52	%		708,236			17,654		3.32	%
Noninterest bearing liabilities		63,764								54,059
Total liabilities		799,700								762,295
Equity		93,206								91,257
Total liabilities and equity	$	892,906							$	853,552
Net interest/spread				$	19,862		2.77	%				$	16,248		2.21	%

Margin (4)							3.11	%							2.65	%

Ratio of interest-earning assets to interest bearing liabilities		115.78	%							115.34	%


(1) Yields earned and rates paid have been annualized.
(2) Calculated net of deferred fees, loss reserves and includes non-accrual loans.
(3) Calculated based on amortized cost.
(4) Net interest income divided by interest-earning assets.

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Comparison of Results of Operations for the Three Months Ended March 31, 2010 and March 31, 2009.

General. Net income for the three months ended March 31, 2010 was $1.1 million, a decrease of $85,000 as compared to net income of $1.2 million for the three months ended March 31, 2009. Earnings per basic and diluted common share were $0.08 for the three months ended March 31, 2010, compared to $0.09 for the three months ended March 31, 2009. The decrease in net income primarily resulted from an increase in the provision for loan losses partially offset by an increase in net interest income.

Interest Income. Interest income remained unchanged for the three months ended March 31, 2010 and 2009 at $11.3 million as interest and fees on loans was $11.1 million for the three months ended March 31, 2010 and 2009.

Interest Expense . Interest expense decreased $1.1 million, or 20.8% to $4.3 million for the three months ended March 31, 2010 from $5.5 million for the three months ended March 31, 2009. The decrease was primarily attributable to a 71 basis point decline in the average cost of interest bearing liabilities from 3.09% for the three months ended March 31, 2009 to 2.38% for the three months ended March 31, 2010 as a result of low interest rates during the period. The decrease was partially offset by an increase in the average balance of interest-bearing liabilities of $20.1 million from $708.4 million for the three months ended March 31, 2009 to $728.5 million for the three months ended March 31, 2010 due primarily to an increase in the average balance of deposits.

The decrease in interest expense was also the result of a decline in the average balance of borrowings of $77.5 million, or 33.4%, to $154.5 million for the three months ended March 31, 2010 from $232.0 million for the three months ended March 31, 2009. The decline was the result of scheduled FHLB advance repayments and was funded with available liquidity and increased deposits.

Provision for Loan Losses . Our provision for loan losses increased to $2.3 million for the three months ended March 31, 2010 compared to $660,000 for the three months ended March 31, 2009. The provision for loan losses for the three months ended March 31, 2010 was comprised of $1.1 million in general valuation allowances and $1.2 million in specific valuation allowances. The increase in provision for loan losses was primarily attributable to the significant increase in real estate loan delinquencies and troubled debt restructurings during the period. The increase in delinquencies and troubled debt restructurings was experienced primarily in our one-to-four family residential mortgage loans as a result of the continued deterioration in the housing market as well as deteriorating general economic conditions and prolonged and elevated levels of unemployment in our market area.

Noninterest Income. Our noninterest income increased by $77,000, or 7.4% to $1.1 million for the three months ended March 31, 2010 from $1.0 million for the three months ended March 31, 2009. The increase in noninterest income was primarily a result of an increase in ATM fees and charges due to increased transaction volume.

Noninterest Expense. Our noninterest expense increased slightly to $4.3 million for the three months ended March 31, 2010 from $4.2 million for the three months ended March 31, 2009.

Income Tax Expense. Income tax expense decreased $378,000, or 49.0% to $394,000 for the three months ended March 31, 2010 compared to $772,000 for the three months ended March 31, 2009. This decrease was primarily the result of lower pretax income for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The effective tax rate was 26.2% and 39.3% for the three months ended March 31, 2010 and 2009, respectively. The change in the effective tax rate was a result of the impact of tax credits on lower projected taxable income.

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Comparison of Results of Operations for the Nine Months Ended March 31, 2010 and March 31, 2009.

General. Net income for the nine months ended March 31, 2010 was $1.3 million, a decrease of $2.2 million as compared to net income of $3.5 million for the nine months ended March 31, 2009. Earnings per basic and diluted common share were $0.10 for the nine months ended March 31, 2010 compared to $0.27 for the nine months ended March 31, 2009. The decrease in net income primarily resulted from an increase in the provision for loan losses partially offset by an increase in net interest income.

Interest Income. Interest income decreased by $114,000, or 0.3%, to $33.8 million for the nine months ended March 31, 2010 from $33.9 million for the nine months ended March 31, 2009. The primary reasons for the decline in interest income were decreases in interest on securities, dividends on FHLB stock and interest on federal funds sold. These decreases were partially offset by an increase in interest and fees on loans.

Interest and fees on loans increased $423,000, or 1.3%, to $33.1 million for the nine months ended March 31, 2010 from $32.7 million for the nine months ended March 31, 2009. The primary factor for the increase was an increase in the average loan receivable balance of $12.1 million, or 1.6% to $755.9 million for the nine months ended March 31, 2010 from $743.9 million for the nine months ended March 31, 2009 due to increased origination of multi-family loans during the period.

Interest income on securities decreased by $207,000, or 42.7%, to $278,000 for the nine months ended March 31, 2010 from $485,000 for the nine months ended March 31, 2009. The decrease was primarily attributable to a $6.1 million decrease in the average balance of investment securities from $14.3 million for the nine months ended March 31, 2009 to $8.2 million for the nine months ended March 31, 2010 as a result of maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

FHLB dividends decreased by $279,000, or 88.9%, to $35,000 for the nine months ended March 31, 2010 from $314,000 for the nine months ended March 31, 2009. The decrease was attributable to the FHLB paying only a nominal dividend as compared to the prior period. Based on announcements from the FHLB we are not expecting significant levels of dividend payments for the foreseeable future.

Other interest income decreased by $51,000, or 12.0% to $374,000 for the nine months ended March 31, 2010 from $425,000 for the nine months ended March 31, 2009. The decrease was a result of an 88 basis point decline in the average yield earned on federal funds sold from 1.11% for the nine months ended March 31, 2009 to 0.23% for the nine months ended March 31, 2010. The yield earned on federal funds sold was impacted by the low targeted federal funds rate.

Interest Expense . Interest expense decreased $3.8 million, or 21.1% to $13.9 million for the nine months ended March 31, 2010 from $17.7 million for the nine months ended March 31, 2009. The decrease was primarily attributable to an 80 basis point decline in the average cost of interest bearing liabilities from 3.32% for the nine months ended March 31, 2009 to 2.52% for the nine months ended March 31, 2010 as a result of low interest rates during the period. The decrease was partially offset by an increase in the average balance of interest-bearing liabilities of $27.7 million from $708.2 million for the nine months ended March 31, 2009 to $735.9 million for the nine months ended March 31, 2010 due primarily to an increase in the average balance of deposits during the period.

The decrease in interest expense was also the result of a decline in the average balance of borrowings which decreased $59.2 million, or 24.5%, to $182.0 million for the nine months ended March 31, 2010 from $241.2 million for the nine months ended March 31, 2009. The decline was the result of scheduled FHLB advance repayments and was funded with available liquidity due to increased deposits.

Provision for Loan Losses . Our provision for loan losses increased to $8.8 million for the nine months ended March 31, 2010 compared to $2.0 million for the nine months ended March 31, 2009. The provision for loan losses for the nine months ended March 31, 2010 was comprised of $4.9 million in general valuation allowances and $3.9 million in specific valuation allowances. The increase in provision for loan losses was primarily attributable to an increase in real estate loan delinquencies and troubled debt restructurings during the period. – See-“Comparison of Results of Operations for the Three Months Ended March 31, 2010 and March 31, 2009-Provision for Loan Losses.” Also, impacting the provision for loan losses for the nine months ended March 31, 2010 were one commercial real estate and two multi-family property loans totaling $5.9 million that were added to non-accrual status.

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Noninterest Income. Our noninterest income increased by $82,000, or 2.4% to $3.5 million for the nine months ended March 31, 2010 from $3.4 million for the nine months ended March 31, 2009. The increase in noninterest income was primarily a result of an increase in ATM fees and charges due to increased transaction volume.

Noninterest Expense. Our noninterest expense increased $723,000, or 6.0% to $12.8 million for the nine months ended March 31, 2010 compared to $12.1 million for the nine months ended March 31, 2009. The increase was primarily due to a $177,000 increase in salaries and benefits and a $398,000 increase in federal deposit insurance premiums.

Salaries and benefits represented 48.7% and 50.1% of total noninterest expense for the nine months ended March 31, 2010 and 2009, respectively. Total salaries and benefits increased $177,000, or 2.9%, to $6.3 million for the nine months ended March 31, 2010 from $6.1 million for the nine months ended March 31, 2009. The increase was primarily due to annual salary increases and an increase in the number of full-time equivalent employees.

Federal deposit insurance premiums increased $398,000, or 106.7% to $771,000 for the nine months ended March 31, 2010 from $373,000 for the nine months ended March 31, 2009. The increase was due to an increase in the general assessment rate due to ongoing bank failures.

Income Tax Expense . Income tax expense decreased to $427,000 for the nine months ended March 31, 2010 compared to $2.0 million for the nine months ended March 31, 2009. This decrease was primarily the result of lower pretax income for the nine months ended March 31, 2010 compared to the nine months ended March 31, 2009. The effective tax rate was 24.5% and 36.3% for the nine months ended March 31, 2010 and 2009, respectively. The change in the effective tax rate was a result of the impact of tax credits on lower projected taxable income.

Asset Quality

As a result of the prolonged distressed economic environment, elevated unemployment levels and a depressed real estate market, our loan portfolio continues to show increased delinquencies. While delinquency ratios have increased we continue our conservative and disciplined lending practices including our strict adherence to a long standing disciplined credit culture that emphasizes the consistent application of underwriting standards to all loans. In this regard, the Bank fully underwrites all loans based on an applicant’s employment history, credit history and an appraised value of the subject property. With respect to purchased loans, the Bank underwrites each loan based upon our own underwriting standards prior to making the purchase. However, we have not purchased any loans since June 2007.

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

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

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

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

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

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

	Loans Delinquent :
	60-89 Days			90 Days or More			Total Delinquent Loans
	Number of Loans	Amount		Number of Loans	Amount		Number of Loans	Amount
	(Dollars in thousands)
At March 31, 2010
Real estate loans:
One-to-four family	7	$	2,595	31	$	13,182	38	$	15,777
Multi-family	—		—	2		2,786	2		2,786
Commercial	—		—	—		—	—		—
Other loans:
Automobile	2		29	2		27	4		56
Home equity	—		—	—		—	—		—
Other	4		7	1		1	5		8
Total loans	13	$	2,631	36	$	15,996	49	$	18,627

At June 30, 2009
Real estate loans:
One-to-four family	6	$	2,212	14	$	6,220	20	$	8,432
Multi-family	—		—	—		—	—		—
Commercial	—		—	—		—	—		—
Other loans:
Automobile	3		16	—		—	3		16
Home equity	—		—	—		—	—		—
Other	11		16	6		11	17		27
Total loans	20	$	2,244	20	$	6,231	40	$	8,475

At June 30, 2008
Real estate loans:
One-to-four family	—	$	—	4	$	1,583	4	$	1,583
Multi-family	—		—	—		—	—		—
Commercial	—		—	—		—	—		—
Other loans:
Automobile	10		159	8		132	18		291
Home equity	—		—	—		—	—		—
Other	22		34	9		15	31		49
Total loans	32	$	193	21	$	1,730	53	$	1,923

As a result of the distressed economic environment, elevated unemployment levels and a depressed real estate market, the real estate loan portfolio has shown increased delinquency. Delinquent loans 60 days or more past due increased to $18.6 million or 2.44% of total loans at March 31, 2010 from $8.5 million or 1.13% of total loans at June 30, 2009. Delinquent one-to-four family residential loans increased from $8.4 million at June 30, 2009 to $15.8 million at March 31, 2010. In addition there were two multi-family loans totaling $2.8 million that were over 90 days delinquent at March 31, 2010 and are in the process of foreclosure.

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N on-Performing Assets. The following table sets forth the amounts and categories of non-performing assets in our loan portfolio. Non-performing assets consist of non-accrual loans and foreclosed assets. Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days and over past due. All loans past due 90 days and over are classified as non-accrual. On non-accrual loans, interest income is not recognized until actually collected. At the time the loan is placed on non-accrual status, interest previously accrued but not collected is reversed and charged against current income. Non-accrual loans also include troubled debt restructurings. Real estate owned and repossessed assets consist of real estate and other assets which have been acquired through foreclosure on loans. At the time of foreclosure, assets are recorded at the lower of their estimated fair value less selling costs or the loan balance, with any write-down charged against the allowance for loan losses. The fair value of real estate owned is determined by a third party appraisal of the property.

	At March 31,			At June 30,			At June 30,
	2010			2009			2008
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One-to-four family	$	14,997		$	6,766		$	1,583
Multi-family		2,786			—			—
Commercial		2,673			—			—
Other loans:
Automobile		27			—			132
Home equity		—			—			—
Other		1			11			15
Troubled debt restructurings:
One-to-four family		7,698			1,859			—
Multi-family		689			235			—
Commercial		—			—			—
Total non-accrual loans		28,871			8,871			1,730

Real estate owned and repossessed assets:
Real estate:
One-to-four family		976			496			1,045
Multi-family		—			—			—
Commercial		—			—			—
Other:
Automobile		27			3			161
Home equity		—			—			—
Other		—			—			—
Total real estate owned and repossessed assets		1,003			499			1,206

Total non-performing assets	$	29,874		$	9,370		$	2,936
Ratios:
Non-accrual loans to total loans (1)		3.77	%		1.18	%		0.23	%

Non-performing assets to total assets		3.34	%		1.05	%		0.35	%

(1) Total loans are net of deferred fees and costs

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The increase in non-accrual loans was a result of the increased delinquencies in our real estate loans as a result of the continued decline in the housing market as well as deteriorating general economic conditions and increased and prolonged unemployment in our market area. The Bank continues to work with responsible borrowers to keep their properties and as a result has restructured $10.1 million in mortgage loans of which $8.5 million are paying according to their revised contractual terms at March 31, 2010. This compares to $2.1 million in restructured loans at June 30, 2009. Of the $10.1 million in restructured loans, $8.4 million were reported as non-accrual at March 31, 2010. At March 31, 2010 there were $6.1 million of income property loans, consisting of commercial and multi-family real estate loans, on non-accrual for which specific valuation allowances of $1.0 million have been applied. Included in the $6.1 million of income property loans on non-accrual at March 31, 2010 were multi-family loans totaling $3.4 million and a commercial real estate loan totaling $2.7 million. The commercial real estate loan was current at March 31, 2010 but had previously experienced cash flow problems and remains on non-accrual. There were no delinquent or non-accrual income property loans at June 30, 2009. The increase in non-accrual loans has impacted our determination of the allowance for loan losses at March 31, 2010. Non-accrual loans are assessed to determine impairment. Loans that are found to be impaired are individually evaluated and a specific valuation allowance is applied.

Classified Assets. We regularly review potential problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. The total amount of classified assets represented 5.40% of our total assets at March 31, 2010, as compared to 2.39% of our total assets at June 30, 2009. The aggregate amount of our classified and special mention assets at the dates indicated were as follows:

	March 31, 2010		June 30, 2009
	(Dollars in thousands)
Classified and Special Mention Assets:
Loss	$	4	$	20
Doubtful		58		126
Substandard		36,750		13,964
Special Mention		11,412		7,316
Total	$	48,224	$	21,426

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

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

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

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The appropriateness of the allowance is reviewed and established by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan. Senior management reviews these conditions quarterly in discussions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

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

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

The distribution of the allowance for losses on loans at the dates indicated is summarized as follows.

	March 31, 2010				June 30, 2009
	Amount		Percent of Loans in Each Category to Total Loans		Amount		Percent of Loans in Each Category to Total Loans
	(Dollars in thousands)
Real estate loans :
One-to-four family	$	7,664	44.90	%	$	3,326	50.22	%
Multi-family		3,715	34.02			515	26.17
Commercial		1,191	14.90			286	16.13
Other loans :
Automobile		168	4.23			342	5.56
Home equity		9	0.14			6	0.17
Other		73	1.81			111	1.75
Total allowance for loan losses	$	12,820	100.00	%	$	4,586	100.00	%

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Changes in asset quality were considered in the allowance for loan losses based on a detailed analysis of loans, including delinquent loans. Each delinquent loan was evaluated for impairment based on the loan balance, the borrower’s ability to pay and collateral value. The other factors reviewed in determining the allowance for loan losses included loss ratio trends by loan product, concentrations in geographic regions and prolonged unemployment rates. The Company also reviewed the debt service coverage ratios, delinquent taxes, repayment history and seasoning for income property loans. The Company has not changed its estimation methods or assumptions related to the allowance for loan losses during the periods presented.

The allowance for loan losses as a percent of total loans was 1.68% at March 31, 2010 as compared to 0.61% at June 30, 2009. The allowance for loan losses as a percent of non-accrual loans was 44.4% at March 31, 2010 as compared to 51.7% at June 30, 2009. The general valuation allowance has increased from $3.4 million at June 30, 2009 to $8.1 million at March 31, 2010. The general valuation allowance as a percent of total loans was 1.08% at March 31, 2010 as compared to 0.46% at June 30, 2009. The specific valuation allowance increased from $1.2 million at June 30, 2009 to $4.7 million at March 31, 2010. The increase in the allowance for loan losses was primarily attributable to an increase in historical loss experience as well as the significant increase in real estate loan delinquencies and troubled debt restructurings during the period. The increase in delinquencies and troubled debt restructures was experienced primarily in our one-to-four family real estate loans as a result of the continued deterioration in the housing market as well as deteriorating general economic conditions and prolonged and elevated levels of unemployment in our market area. Also, impacting the allowance was a $6.1 million increase in non-accrual income property loans for which specific valuation allowances of $1.0 million have been applied.

Liquidity, Capital Resources and Commitments

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

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

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits as well as interest earning time deposits in other financial institutions. On a longer-term basis, we maintain a strategy of investing in various lending products. We use our sources of funds primarily to meet ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, to fund loan commitments and to maintain our portfolio of mortgage-backed and related securities. At March 31, 2010, total approved loan commitments amounted to $6.6 million, which included the unfunded portion of loans of $2.5 million.

Certificates of deposit and advances from the FHLB of San Francisco scheduled to mature in one year or less at March 31, 2010, totaled $174.9 million and $62.0 million, respectively. Based on historical experience, management believes that a significant portion of maturing deposits will remain with Kaiser Federal Bank and we anticipate that we will continue to have sufficient funds, through deposits and borrowings, to meet our current commitments.

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At March 31, 2010, we had available additional advances from the FHLB of San Francisco in the amount of $215.8 million. We also had an available line of credit with the Federal Reserve Bank of $80.9 million at March 31, 2010.

Capital

The table below sets forth Kaiser Federal Bank’s capital position relative to its OTS capital requirements at March 31, 2010 and June 30, 2009. The definitions of the terms used in the table are those provided in the capital regulations issued by the OTS.

	Actual				Minimum Capital Requirements				Minimum required to be Well Capitalized Under Prompt Corrective Actions Provisions
March 31, 2010	Amount		Ratio		Amount		Ratio		Amount		Ratio
		(Dollars in thousands)
Total risk-based capital (to risk-weighted assets)	$	86,535	13.99	%	$	49,487	8.00	%	$	61,899	10.00	%
Tier 1 risk-based capital (to risk-weighted assets)		78,798	12.74			24,759	4.00			37,139	6.00
Tier 1 (core) capital (to adjusted tangible assets)		78,798	8.89			35,473	4.00			44,342	5.00

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

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to continue as a “well capitalized” institution in accordance with regulatory standards. At March 31, 2010, Kaiser Federal Bank was a “well-capitalized” institution under regulatory standards.

Impact of Inflation

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

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

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

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

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

The asset/liability management committee generally meets on a weekly basis to discuss, 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 economic 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 economic value of portfolio equity that are authorized by the board of directors of Kaiser Federal Bank. The asset/liability management committee recommends appropriate strategy changes based on this review. The chairman or his designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors at least monthly.

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

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

The OTS provides Kaiser Federal Bank with the information presented in the following table, which is based on information provided to the OTS by Kaiser Federal Bank. It presents the change in Kaiser Federal Bank’s net portfolio value at March 31, 2010 that would occur upon an immediate change in interest rates based on OTS assumptions but without giving effect to any steps that management might take to counteract that change.

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			March 31, 2010
Change 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		$	78,330		$	(30,009	)		(28	)%		8.88	%		(273	)bp
	+200	bp			89,909			(18,430	)		(17	)		9.99			(162	)
	+100	bp			100,581			(7,758	)		(7	)		10.96			(65	)
	0	bp			108,339			—			—			11.61			—
	-100	bp			111,383			3,044			3			11.81			20

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

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

Item 4. Controls and Procedures

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

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	Weighted Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans *	Maximum Number of Shares That May Yet be Purchased Under the Plan
08/1/08 – 08/31/08	—	$	—	—	228,354
09/1/08 – 09/30/08	14,024		9.96	14,024	214,330
10/1/08 – 10/31/08	—		—	—	214,330
11/1/08 – 11/30/08	14,536		8.14	28,560	199,794
12/1/08 – 12/31/08	75		7.41	28,635	199,719
01/1/09 – 01/31/09	15,150		8.04	43,785	184,569
02/1/09 – 02/28/09	46,983		7.56	90,768	137,586
03/1/09 – 03/31/09	37,956		7.68	128,724	99,630
04/1/09 – 04/30/09	—		—	—	99,630
05/1/09 – 05/31/09	10,125		7.82	138,849	89,505
06/1/09 – 06/30/09	400		9.95	139,249	89,105
07/1/09 – 07/31/09	—		—	—	89,105
08/1/09 – 08/31/09	—		—	—	89,105
09/1/09 – 09/30/09	600		9.17	139,849	88,505
10/1/09 – 10/31/09	—		—	—	88,505
11/1/09 – 11/30/09	175		8.66	140,024	88,330
12/1/09 – 12/31/09	12,301		8.66	152,325	76,029
01/1/10 – 01/31/10	—		—	—	76,029
02/1/10 – 02/28-10	107		8.70	152,432	75,922
03/1/10 – 03/31/10	80		8.78	152,512	75,842

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

Item 3. Defaults Upon Senior Securities

None.

Item 4. Reserved and Removed

Item 5. Other Information

None.

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Table of Contents

Item 6. Exhibits

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act

Page 31 of 32

Table of Contents

K-FED BANCORP AND SUBSIDIARY

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

K-FED BANCORP



Dated: May 13, 2010
	BY: /s/ K. M. Hoveland
	K. M. Hoveland
	President, Chief Executive Officer

	BY: /s/ Dustin Luton
	Dustin Luton
	Chief Financial Officer

Page 32 of 32

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