Forward-Looking Statements

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

Recent Developments

Legislative Proposal. The U.S. Treasury Department recently released a legislative proposal that would implement sweeping changes to the current bank regulatory structure. The proposal would create a new federal banking regulator, the National Bank Supervisor, and merge our current primary federal regulator, the Office of Thrift Supervision ("OTS"), as well as the Office of the Comptroller of the Currency (the primary federal regulator for national banks) into this new federal bank regulator. The proposal would also eliminate federal savings associations and require all federal savings associations, such as Kaiser Federal Bank, to elect, within six months of the effective date of the legislation, to convert to a national bank, state bank or state savings association. A federal savings association that does not make the election would, by operation of law, be converted into a national bank within one year of the effective date of the legislation. The proposal would also require thrift holding companies such as K-Fed Bancorp to be regulated as bank holding companies subject to the regulation and supervision of the Federal Reserve Board. Unlike a bank holding company, a thrift holding company is not required to maintain any minimum level of regulatory capital.

U.S. Treasury's Troubled Asset Relief Program-Capital Purchase Program. On October 3, 2008, Congress enacted the Emergency Economic Stabilization Act ("EESA") of 2008 that provides the U.S. Secretary of the Treasury broad authority to implement certain actions to help restore stability and liquidity to U.S. markets. One of the provisions resulting from the legislation is the Troubled Asset Relief Program Capital Purchase Program, which provides direct equity investment in perpetual preferred stock by the U.S. Treasury Department in qualified financial institutions. The program is voluntary and requires an institution to comply with a number of restrictions and provisions, including limits on executive compensation, stock redemptions and declaration of dividends. After careful consideration and given that the Bank is well capitalized and profitable with strong credit quality the Company elected not to participate.

Federal Deposit Insurance Corporation Coverage/Assessments. The EESA temporarily increased the limit on FDIC coverage for deposits to $250,000 from $100,000 through December 31, 2009 which was recently extended to 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 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. This program, originally set to expire on December 31, 2009, was recently extended to June 30, 2010. An annualized 10 basis point assessment on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 will be assessed on a quarterly basis.

The Company did not opt out and is participating in this component of the TLGP. As of September 30, 2009 the Company had three accounts with total balances of $993,000 in non-interest bearing transaction accounts in excess of $250,000. Institutions have until November 2, 2009 to decide whether they will opt out of the extension which takes 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. We currently intend to opt into the extension.

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 established by the FDIC at 1.15% to 1.50% of estimated insured deposits. Recent bank failures coupled with deteriorating economic conditions have significantly reduced the deposit insurance fund's reserve ratio. On February 27, 2009, the FDIC issued a final rule that altered the way the FDIC calculates federal deposit insurance assessment rates beginning in the second quarter of 2009 and thereafter. Under the rule, the Federal Deposit Insurance Corporation first establishes an institution's initial base assessment rate. This initial base assessment rate ranges, depending on the risk category of the institution, from 12 to 45 basis points. The Federal Deposit Insurance Corporation would then adjust the initial base assessment (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate are based upon an institution's levels of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate ranges from 7 to 77.5 basis points of the institution's deposits. Additionally, the Federal Deposit Insurance Corporation on May 22, 2009, issued a final rule that imposed a special 5 basis point assessment on each FDIC-insured depository institution's assets, minus its Tier 1 capital on June 30, 2009, which was collected on September 30, 2009. The special assessment is capped at 10 basis points of an institution's domestic deposits. On September 30, 2009, the Bank paid $407,000 related to this special assessment. Future special assessments could also be assessed.

On September 29, 2009, the Federal Deposit Insurance Corporation issued a proposed rule pursuant to which all insured depository institutions would be required to prepay their estimated assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012. Under the proposed rule, this pre-payment would be due on December 30, 2009. Under the proposed rule, the assessment rate for the fourth quarter of 2009 and for 2010 would be based on each institution's total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter, and the assessment rate for 2011 and 2012 would be equal to the modified third quarter assessment rate plus an additional 3 basis points. In addition, each institution's base assessment rate for each period would be calculated using its third quarter assessment base, adjusted quarterly for an estimated 5% annual growth rate in the assessment base through the end of 2012. Based on our deposits and assessment rate at September 30, 2009, we estimate that our prepayment amount will be approximately $3.8 million. We expect that we will be able to make the prepayment from available cash on hand.

Comparison of Financial Condition at September 30, 2009 and June 30, 2009.

Assets. Total assets decreased $26.9 million, or 3.0% to $868.2 million at September 30, 2009 from $895.1 million at June 30, 2009 due primarily to a decrease in total cash and cash equivalents. Total cash and cash equivalents decreased $40.2 million, or 54.5% to $33.5 million at September 30, 2009 from $73.7 million at June 30, 2009. The decrease was a result of the repayment of FHLB advances that matured during the quarter.

Our investment securities portfolio decreased $1.2 million, or 12.7% to $8.5 million at September 30, 2009 from $9.8 million at June 30, 2009. The decrease was attributable to maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

Our gross loan portfolio increased by $12.5 million, or 1.7% to $759.4 million at September 30, 2009 from $746.9 million at June 30, 2009. One-to-four family real estate loans decreased $9.2 million, or 2.4% to $368.0 million at September 30, 2009 from $377.2 million at June 30, 2009. Commercial real estate loans decreased $5.0 million, or 4.2% to $116.1 million at September 30, 2009 from $121.1 million at June 30, 2009. Multi-family loans increased $31.2 million, or 15.9% to $227.8 million at September 30, 2009 from $196.6 million at June 30, 2009. Other loans which are comprised primarily of automobile loans decreased $3.7 million, or 6.6% to $52.5 million at September 30, 2009 from $56.2 million at June 30, 2009. Real estate loans comprised 93.1% of the total loan portfolio at September 30, 2009, compared with 92.5% at June 30, 2009. The decrease in one-to-four family and increase in multi-family loans was due to our focus on originating income producing property loans as a means of diversifying the loan portfolio.

Deposits. Total deposits increased $31.9 million or 5.6% to $598.1 million at September 30, 2009 from $566.2 million at June 30, 2009. The change was comprised of increases of $22.1 million in certificates of deposit, $4.3 million in money market accounts, $4.0 million in noninterest-bearing demand accounts and $1.5 million in savings accounts. The increase in certificate of deposit accounts was a result of promotions for these types of accounts.

Borrowings. Advances from the FHLB of San Francisco decreased $60.0 million, or 29.0% to $147.0 million at September 30, 2009 from $207.0 million at June 30, 2009. The decline was the result of scheduled maturities in August and September 2009 and was funded with available liquidity as well as increased deposits.

Stockholders' Equity. Stockholders' equity increased $1.2 million, to $93.8 million at September 30, 2009 from $92.6 million at June 30, 2009 primarily as a result of $1.4 million in net income for the three months ended September 30, 2009 and the allocation of ESOP shares, stock awards, and stock options earned totaling $295,000. This increase was offset in part by cash payments of $6,000 for the repurchase of shares of common stock and $463,000 in dividends ($0.11 per share) paid to stockholders of record for the three months ended September 30, 2009, excluding shares held by K-Fed Mutual Holding Company which waved receipt of its dividend payment.

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

The following table sets forth certain information for the quarter ended
September 30, 2009 and 2008, respectively.

                                                    For the three months ended September 30,
                                              2009 (1)                                    2008 (1)
                                                             Average                                     Average
                                Average                       Yield/        Average                       Yield/
                                Balance       Interest         Cost         Balance       Interest         Cost
                                                             (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(2)            $ 754,024     $   11,033           5.85 %   $ 743,437     $   10,900           5.86 %
Securities(3)                      9,069            102           4.50 %      15,536            174           4.48 %
Federal funds sold                50,180             38           0.30 %      39,876            200           2.01 %
Federal Home Loan Bank stock      12,649             27           0.85 %      12,636            192           6.08 %
Interest-earning deposits in
other financial institutions      35,361            120           1.36 %       7,225             39           2.16 %
Total interest-earning
assets                           861,283         11,320           5.26 %     818,710         11,505           5.62 %
Noninterest earning assets        44,025                                      37,043
Total assets                   $ 905,308                                   $ 855,753

INTEREST-BEARING LIABILITIES
Money market                   $ 112,042     $      309           1.10 %   $  81,709     $      479           2.34 %
Savings deposits                 131,513            192           0.58 %     122,846            384           1.25 %
Certificates of deposit          293,292          2,306           3.14 %     253,059          2,646           4.18 %
Borrowings                       214,502          2,323           4.33 %     255,017          2,721           4.27 %
Total interest-bearing
liabilities                      751,349          5,130           2.73 %     712,631          6,230           3.50 %
Noninterest bearing
liabilities                       60,665                                      52,392
Total liabilities                812,014                                     765,023
Equity                            93,294                                      90,730
Total liabilities and equity   $ 905,308                                   $ 855,753
Net interest/spread                          $    6,190           2.53 %                 $    5,275           2.12 %

Margin(4)                                                         2.87 %                                      2.58 %

Ratio of interest-earning
assets to interest bearing
liabilities                       114.63 %                                    114.89 %

(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.

Comparison of Results of Operations for the Three Months Ended September 30, 2009 and September 30, 2008.

General. Net income was unchanged at $1.4 million for the three months ended September 30, 2009 and 2008, respectively. Earnings per basic and diluted common share were $0.11 for the three months ended September 30, 2009 and 2008, respectively. While overall net income remained unchanged the Company experienced an increase of $915,000 in net interest income for the quarter ended September 30, 2009 as compared to the same quarter last year. The increase in net interest income for the quarter ended September 30, 2009 was offset by increases in the provision for loan losses and noninterest expense of $502,000 and $338,000, respectively.

Interest Income. Interest income decreased by $185,000 or 1.6%, to $11.3 million for the three months ended September 30, 2009 from $11.5 million for the three months ended September 30, 2008. The primary reasons for the decline in interest income were decreases in interest on securities, dividends on FHLB stock and interest on federal funds sold.

Interest income on securities decreased by $72,000 or 41.4%, to $102,000 for the three months ended September 30, 2009 from $174,000 for the three months ended September 30, 2008. The decrease was primarily attributable to a $6.5 million decrease in the average balance of investment securities from $15.5 million for the three months ended September 30, 2008 to $9.1 million for the three months ended September 30, 2009 as a result of maturities and normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

FHLB dividends decreased by $165,000, or 85.9%, to $27,000 for the three months ended September 30, 2009 from $192,000 for the three months ended September 30, 2008. The decrease was attributable to the FHLB significantly reducing its dividend payment as compared to the prior period.

Other interest income decreased by $81,000 or 33.9% to $158,000 for the three months ended September 30, 2009 from $239,000 for the three months ended September 30, 2008. The decrease was a result of a 171 basis point decline in the average yield earned on federal funds sold from 2.01% for the three months ended September 30, 2008 to 0.30% for the three months ended September 30, 2009. The yield earned on federal funds sold was impacted by the actions taken by the Federal Reserve in lowering the targeted federal funds rate.

Interest Expense. Interest expense decreased $1.1 million or 17.7% to $5.1 million for the three months ended September 30, 2009 from $6.2 million for the three months ended September 30, 2008. The decrease was primarily attributable to a 77 basis point decline in the average cost of interest bearing liabilities from 3.50% for the three months ended September 30, 2008 to 2.73% for the three months ended September 30, 2009 as a result of a general decline in interest rates during the period. The decrease was partially offset by an increase in the average balance of interest-bearing liabilities of $38.7 million from $712.6 million for the three months ended September 30, 2008 to $751.3 million for the three months ended September 30, 2009.

The average balance of borrowing decreased $40.5 million, or 15.9%, to $214.5 million for the three months ended September 30, 2009 from $255.0 million for the three months ended September 30, 2008. The decline was the result of scheduled advance repayments and was funded with available liquidity due to increased deposits.

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

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. Significant factors reviewed in determining the allowance for loan losses included loss ratio trends by loan product and concentrations in geographic regions, interest only loans, stated income loans and loans with credit scores less than a specified amount. The Company also reviewed the debt service coverage ratios and seasoning for income property loans. 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 $865,000 for the three months ended September 30, 2009 compared to $363,000 for the three months ended September 30, 2008. The allowance for loan losses as a percent of total loans was 0.69% at September 30, 2009 as compared to 0.44% at September 30, 2008. Net charge-offs totaled $154,000 or 0.08% of average loans for the three months ended September 30, 2009 as compared to $315,000 or 0.17% of average loans for the three months ended September 30, 2008. The increase in provision for loan losses was primarily attributable to an increase in real estate loan delinquencies as well as an increase in loans that were reviewed for impairment. The increase in delinquencies was experienced primarily in our one-to-four family loans as a result of the continued deterioration in the housing market as well as deteriorating general economic conditions and increased unemployment in our market area.

The increase in non-performing loans has impacted the level of the allowance for loan losses at September 30, 2009. Non-performing loans are assessed to determine impairment. Loans that are found to be impaired are individually evaluated and a specific valuation allowance is applied. Accordingly the Company's specific valuation allowance has increased from $1.2 million at June 30, 2009 to $1.8 million at September 30, 2009.

Noninterest Income. Our noninterest income decreased $10,000, or 0.8% to $1.20 million for the three months ended September 30, 2009 compared to $1.21 million for the three months ended September 30, 2008.

Noninterest Expense. Our noninterest expense increased $338,000, or 8.6% to $4.3 million for the three months ended September 30, 2009 compared to $3.9 million for the three months ended September 30, 2008. The increase was primarily due to a $152,000 increase in salaries and benefits and a $164,000 increase in federal deposit insurance premiums.

Salaries and benefits represented 50.1% and 50.6% of total noninterest expense for the three months ended September 30, 2009 and 2008, respectively. Total salaries and benefits increased $152,000, or 7.6 %, to $2.1 million for the three months ended September 30, 2009 from $2.0 million for the three months ended September 30, 2008. The increase was primarily due to annual salary increases and an increase in the number of full-time equivalent employees.

Federal deposit insurance premiums increased $164,000, or 188.5% to $251,000 for the three months ended September 30, 2009 from $87,000 for the year ended September 30, 2008. The increase was due to an increase in the general assessment rate due to ongoing bank failures.

Income Tax Expense. Income tax expense increased $64,000, or 8.2% to $842,000 for the three months ended September 30, 2009 compared to $778,000 for the three months ended September 30, 2008. This increase was primarily the result of a higher effective tax rate for the three months ended September 30, 2009 compared to the three months ended September 30, 2008. The effective tax rate was 37.4% and 35.6% for the three months ended September 30, 2009 and 2008, respectively. The increase in the effective tax rate was attributable to an increase in non-deductible expense related to stock options and stock awards.

Asset Quality

As expected, based on the weakened economy and continued decline in the housing market, the one-to-four family mortgage loan portfolio has shown increased delinquency. Despite this increased delinquency, non-accrual and delinquency ratios are significantly below industry averages. This has been accomplished through our conservative and disciplined lending practices including our strict . . .