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 release to reflect future events or developments.

Recent Developments

Troubled Asset Relief Program-Capital Purchase Program. On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of 2008 ("EESA"), which provides the Secretary of the United States Treasury with broad authority to implement certain actions to help restore stability and liquidity to U.S. financial markets. One of the initiatives resulting from the Act is the Treasury Capital Purchase Program, which provides direct equity investment of perpetual preferred stock by the Treasury in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions. After careful consideration and given that the Bank is well capitalized and profitable with strong credit quality the Company elected not to apply for such funds.

Federal Deposit Insurance Corporation ("FDIC") Coverage/Assessments. The EESA temporarily increased the limit on FDIC coverage for deposits to $250,000 from $100,000 through December 31, 2009. In addition, on October 14, 2008, the FDIC announced the creation of the Temporary Liquidity Guarantee Program ("TLGP") as part of a larger government effort to strengthen confidence and encourage liquidity in the nation's banking system. All eligible institutions were automatically enrolled in the program through December 5, 2008 at no cost. Organizations that did not wish to participate in the TLGP needed to opt out by December 5, 2008. After that time, participating entities will be charged fees. One component of the TLGP provides full FDIC insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount until December 31, 2009. 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 the TLGP; however, as of December 31, 2008 the Company did not have any non-interest bearing transaction accounts in excess of $250,000.

The FDIC currently imposes an assessment against institutions for deposit insurance based on the risk category of the institution. Federal law requires that the designated reserve ratio for the deposit insurance fund be establish by the FDIC at 1.15% to 1.50% of estimated insured deposits. Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund's reserve ratio. As a result of the reduced reserve ratio, on December 22, 2008, the FDIC published a final rule that increases deposit insurance assessment rates in order to restore the insurance fund reserve ratio. The final rule raises the rates uniformly for all institutions by 7 basis points (to a range from 12 to 50 basis points), effective for the first quarter of 2009. The FDIC has also issued a proposed rule that would also alter the way the FDIC differentiates for risk among institutions in setting federal deposit insurance assessment rates beginning in the second calendar quarter of 2009 and thereafter. No assurance can be given as to the final form of such rule. We estimate our deposit insurance assessments to increase approximately $80,000 per quarter under the final rule.

Federal Home Loan Bank ('FHLB") Stock Dividends. On January 8, 2009, the FHLB of San Francisco announced that they will not pay a dividend for the fourth quarter of 2008 and will not repurchase excess capital stock on January 31, 2009, the next regularly scheduled repurchase date. FHLB dividends received by us for the three and six months ended December 31, 2008 were $122,000 and $314,000, respectively.

Comparison of Financial Condition at December 31, 2008 and June 30, 2008.

Assets. Cash and cash equivalents decreased $15.8 million, or 30.9% to $35.4 million at December 31, 2008 from $51.2 million at June 30, 2008. The decrease was a result of pay downs of higher costing FHLB advances that matured during the period and the purchase of $4.1 million in interest earning time deposits in other financial institutions.

Our investment portfolio decreased $1.9 million, or 12.0% to $14.1 million at December 31, 2008 from $16.0 million at June 30, 2008. The decrease was attributable to maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

Our gross loan portfolio increased by $554,000 or 0.07% to $746.0 million at December 31, 2008 from $745.4 million at June 30, 2008. One-to-four family real estate loans decreased $20.6 million, or 4.8% to $408.1 million at December 31, 2008 from $428.7 million at June 30, 2008. Commercial real estate loans increased $1.2 million, or 1.03% to $117.0 million at December 31, 2008 from $115.8 million at June 30, 2008. Multi-family loans increased $24.2 million, or 18.3% to $156.5 million at December 31, 2008 from $132.3 million at June 30, 2008. Other loans which are comprised primarily of automobile loans decreased $4.2 million, or 6.2% to $64.4 million at December 31, 2008 from $68.6 million at June 30, 2008. Real estate loans comprised 91.4% of the total loan portfolio at December 31, 2008, compared with 90.8% at June 30, 2008. The decrease in one-to-four family loans and increase in multi-family loans was due to our focus on income producing property loans as a means of diversifying the mortgage portfolio.

Deposits. Total deposits increased $12.9 million, or 2.6% to $508.0 million at December 31, 2008 from $495.1 million at June 30, 2008. The change was due to increases of $13.5 million in money market accounts, $8.0 million in certificates of deposit and $524,000 in noninterest-bearing demand accounts. The increase in money market and certificates of deposit accounts was a result of promotions for these types of accounts. The increase was partially offset by a reduction of $9.1 million in savings accounts due to the annual distribution of our Holiday Club accounts in November 2008.

Borrowings. Advances from the FHLB of San Francisco decreased $28.0 million, or 11.9% to $207.0 million at December 31, 2008 from $235.0 million at June 30, 2008. The decline was the result of scheduled advance repayments in August and October 2008 and was funded with available liquidity and increased deposits.

Stockholders' Equity. Stockholders' equity increased $985,000, to $91.7 million at December 31, 2008 from $90.7 million at June 30, 2008 primarily as a result of $2.3 million in net income for the six months ended December 31, 2008 and the allocation of ESOP shares, stock awards, and stock options earned totaling $564,000. This increase was offset by cash payments of $994,000 for the repurchase of shares of common stock and $946,000 in dividends ($0.22 per share) paid to stockholders of record for the six months ended December 31, 2008, excluding shares held by K-Fed Mutual Holding Company.

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

                                                For the three months ended December 31,
                                            2008 (4)                              2007 (4)
                                                        Average                               Average
                                 Average                Yield/         Average                Yield/
                                 Balance    Interest     Cost          Balance    Interest     Cost
                                                        (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(1)             $ 736,460   $  10,719      5.82 %     $ 722,873   $  10,634      5.88 %
Securities(2)                      14,590         164      4.50 %        25,454         285      4.48 %
Federal funds sold                 33,684          71      0.84 %        15,968         182      4.56 %
Federal Home Loan Bank stock       12,640         122      3.86 %        10,708         133      4.97 %
Interest-earning deposits in
other financial institutions        9,908          36      1.45 %         1,755          17      3.87 %
Total interest-earning
assets                            807,282      11,112      5.51 %       776,758      11,251      5.79 %
Noninterest earning assets         35,007                                32,869
Total assets                    $ 842,289                             $ 809,627

INTEREST-BEARING LIABILITIES
Money market                    $  78,555   $     492      2.51 %     $  72,920   $     510      2.80 %
Savings deposits                  118,389         333      1.13 %       128,767         523      1.62 %
Certificates of deposit           255,909       2,619      4.09 %       230,846       2,811      4.87 %
Borrowings                        236,513       2,501      4.23 %       235,035       2,644      4.50 %
Total interest-bearing
liabilities                       689,366       5,945      3.45 %       667,568       6,488      3.89 %
Noninterest bearing
liabilities                        61,592                                48,502
Total liabilities                 750,958                               716,070
Equity                             91,331                                93,557
Total liabilities and equity    $ 842,289                             $ 809,627
Net interest/spread                         $   5,167      2.06 %                 $   4,763      1.90 %

Margin(3)                                                  2.56 %                                2.45 %

Ratio of interest-earning
assets to interest bearing
liabilities                        117.10 %                              116.36 %

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

                                                 For the six months ended December 31,
                                            2008 (4)                              2007 (4)
                                                        Average                               Average
                                 Average                Yield/         Average                Yield/
                                 Balance    Interest     Cost          Balance    Interest     Cost
                                                        (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(1)             $ 740,025   $  21,619      5.84 %     $ 713,583   $  20,907      5.86 %
Securities(2)                      15,061         339      4.50 %        29,234         658      4.50 %
Federal funds sold                 35,733         272      1.52 %        15,879         330      4.16 %
Federal Home Loan Bank stock       12,624         314      4.97 %        10,387         251      4.83 %
Interest-earning deposits in
other financial institutions        8,744          74      1.69 %         4,410          92      4.17 %
Total interest-earning
assets                            812,187      22,618      5.57 %       773,493      22,238      5.75 %
Noninterest earning assets         36,103                                32,775
Total assets                    $ 848,290                             $ 806,268

INTEREST-BEARING LIABILITIES
Money market                    $  80,244   $     972      2.42 %     $  74,026   $   1,038      2.80 %
Savings deposits                  120,307         715      1.19 %       132,825       1,125      1.69 %
Certificates of deposit           254,678       5,265      4.13 %       236,902       5,755      4.86 %
Borrowings                        245,158       5,223      4.26 %       225,028       5,030      4.47 %
Total interest-bearing
liabilities                       700,387      12,175      3.48 %       668,781      12,948      3.87 %
Noninterest bearing
liabilities                        56,880                                44,334
Total liabilities                 757,267                               713,115
Equity                             91,023                                93,153
Total liabilities and equity    $ 848,290                             $ 806,268
Net interest/spread                         $  10,443      2.09 %                 $   9,290      1.88 %

Margin(3)                                                  2.57 %                                2.40 %

Ratio of interest-earning
assets to interest bearing
liabilities                        115.96 %                              115.66 %

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

Comparison of Results of Operations for the Three Months Ended December 31, 2008 and December 31, 2007.

General. Net income for the three months ended December 31, 2008 was $931,000, an increase of $525,000 as compared to net income of $406,000 for the three months ended December 31, 2007. Earnings per basic and diluted common share were $0.07 for the three months ended December 31, 2008 compared to $0.03 for the three months ended December 31, 2007. Net income for the three months ended December 31, 2007 included $1.3 million in stock offering costs resulting from the cancellation of the Company's stock offering in November 2007 due to unfavorable market conditions. The recognition of these expenses resulted in a decline of $0.05 per share in basic and diluted earnings per share for the three months ended December 31, 2007.

Interest Income. Interest income decreased by $139,000 or 1.2%, to $11.1 million for the three months ended December 31, 2008 from $11.3 million for the three months ended December 31, 2007. The primary reasons for the decline in interest income were a decrease in interest income on securities and other interest income.

Interest income on securities decreased by $121,000 or 42.5%, to $164,000 for the three months ended December 31, 2008 from $285,000 for the three months ended December 31, 2007. The decrease was attributable to a $10.9 million decrease in the average balance of investment securities from $25.5 million for the three months ended December 31, 2007 to $14.6 million for the three months ended December 31, 2008 as a result of maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

Other interest income decreased by $92,000 or 46.2% to $107,000 for the three months ended December 31, 2008 from $199,000 for the three months ended December 31, 2007. The decrease was a result of a 372 basis point decline in the average yield earned on federal funds sold from 4.56% for the three months ended December 31, 2007 to 0.84% for the three months ended December 31, 2008. The yield earned on federal funds sold was impacted by the actions taken by the Federal Reserve in lowering the targeted federal funds rate.

Interest Expense. Interest expense decreased $543,000 or 8.4% to $5.9 million for the three months ended December 31, 2008 from $6.5 million for the three months ended December 31, 2007. The decrease was primarily attributable to a 44 basis point decline in the average cost of interest bearing liabilities from 3.89% for the three months ended December 31, 2007 to 3.45% for the three months ended December 31, 2008 as a result of a general decline in interest rates during the period. The decrease was partially offset by an increase in the average balance of interest-bearing liabilities of $21.8 million from $667.6 million for the three months ended December 31, 2007 to $689.4 million for the three months ended December 31, 2008.

Provision for Loan Losses. We maintain an allowance for loan losses to absorb probable incurred losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the probable losses inherent in the loan portfolio. Our methodology for assessing the appropriateness of the allowance consists of several key elements, which include loss ratio analysis by type of loan and specific allowances for identified problem loans, including the results of measuring impaired loans as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.

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

The appropriateness of the allowance is reviewed and established by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in nonperforming loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the 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 Kaiser Federal Bank.

Our provision for loan losses increased to $984,000 for the three months ended December 31, 2008 compared to $184,000 for the three months ended December 31, 2007. The allowance for loan losses as a percent of total loans was 0.53% at December 31, 2008 as compared to 0.39% at December 31, 2007. Net charge-offs totaled $330,000 or 0.18% of average loans for the three months ended December 31, 2008 as compared to $244,000 or 0.03% of average loans for the three months ended December 31, 2007. The increase in provision for loan losses was primarily attributable to an increase in real estate loan delinquencies as well as an increase in potential problem loans that are reviewed for impairment.

Noninterest Income. Our noninterest income increased $137,000, or 13.2% to $1.2 million for the three months ended December 31, 2008 compared to $1.0 million for the three months ended December 31, 2007. The increase was primarily the result of increased customer service charges and fees due to increased customer activity coupled with an increase in ATM surcharge fees for non-customers.

Noninterest Expense. Our noninterest expense decreased $1.1 million, or 22.0% to $4.0 million for the three months ended December 31, 2008 compared to $5.1 million for the three months ended December 31, 2007. The decrease resulted from the recognition of $1.3 million in expenses relating to the previously noted cancellation of the stock offering in November 2007. Excluding the stock offering costs noninterest expense increased $154,000 due to increases in general operational costs of the Bank.

Income Tax Expense. Income tax expense increased $332,000 to $464,000 for the three months ended December 31, 2008 compared to $132,000 for the three months ended December 31, 2007. This increase was the result of higher pre-tax income of $1.4 million for the three months ended December 31, 2008 compared to $538,000 for the three months ended December 31, 2007. The effective tax rate was 33.3% and 24.5% for the three months ended December 31, 2008 and 2007, respectively. The increase in the effective tax rate was attributable to non-taxable income from our bank-owned life insurance and low income housing credits which have a reduced impact on our effective tax rate when our taxable income is higher.

Comparison of Results of Operations for the Six Months Ended December 31, 2008 and December 31, 2007.

General. Net income for the six months ended December 31, 2008 was $2.3 million, an increase of $941,000 as compared to net income of $1.4 million for the six months ended December 31, 2007. Earnings per basic and diluted common share were $0.18 for the six months ended December 31, 2008 compared to $0.10 for the six months ended December 31, 2007. Net income for the six months ended December 31, 2007 includes $1.3 million in stock offering costs. The recognition of these expenses resulted in a decline of $0.05 per share in basic and diluted earnings per share for the six months ended December 31, 2007. Excluding the effect of the stock offering costs, the increase in net income was primarily the result of increased net interest income resulting from a lower cost of funds.

Interest Income. Interest income increased by $380,000, or 1.7%, to $22.6 million for the six months ended December 31, 2008 from $22.2 million for the six months ended December 31, 2007. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $26.4 million or 3.71%, from $713.6 million for the six months ended December 31, 2007 to $740.0 million for the six months ended December 31, 2008.

Interest income on securities decreased by $319,000, or 48.5%, to $339,000 for the six months ended December 31, 2008 from $658,000 for the six months ended December 31, 2007. The decrease was attributable to a $14.2 million decrease in the average balance of investment securities from $29.2 million for the six months ended December 31, 2007 to $15.1 million for the six months ended December 31, 2008 as a result of maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

Other interest income decreased by $76,000 or 18.0% to $346,000 for the six months ended December 31, 2008 from $422,000 for the six months ended December 31, 2007. The decrease was a result of a 264 basis point decline in the average yield earned on federal funds sold from 4.16% for the six months ended December 31, 2007 to 1.52% for the six months ended December 31, 2008. The yield earned on federal funds sold was impacted by the actions taken by the Federal Reserve in lowering the targeted federal funds rate.

Interest Expense. Interest expense decreased $773,000, or 6.0% to $12.2 million for the six months ended December 31, 2008 compared to $12.9 million for the six months ended December 31, 2007. The decrease was primarily attributable to a 39 basis point decline in the average cost of interest bearing liabilities from 3.87% for the six months ended December 31, 2007 to 3.48% for the six months ended December 31, 2008 as a result of a general decline in interest rates during the period. The decrease was partially offset by an increase in the average balance of interest-bearing liabilities of $31.6 million from $668.8 million for the six months ended December 31, 2007 to $700.4 million for the six months ended December 31, 2008.

Provision for Loan Losses. Our provision for loan losses increased to $1.3 million for the six months ended December 31, 2008 compared to $352,000 for the six months ended December 31, 2007. Net charge-offs totaled $645,000 or 0.17% of . . .