- 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: September 30, 2009

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 – 13,303,988 shares outstanding as of October 30, 2009.

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 September 30, 2009 and June 30, 2009	1
	Consolidated Statements of Income and Comprehensive Income for the Three Months Ended September 30, 2009 and 2008	2
	Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the Three Months Ended September 30, 2009	3
	Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2009 and 2008	4
	Notes to Consolidated Financial Statements	5

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3:	Quantitative and Qualitative Disclosures about Market Risk	24

Item 4:	Controls and Procedures	26

Part II.	OTHER INFORMATION

Item 1:	Legal Proceedings	26
Item 1A:	Risk Factors	26
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3:	Defaults upon Senior Securities	27
Item 4:	Submission of Matters to a Vote of Security Holders	27
Item 5:	Other Information	27
Item 6:	Exhibits	27

	SIGNATURES	28

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)

	September 30 2009			June 30 2009
ASSETS
Cash and due from banks	$	13,847		$	32,685
Federal funds sold		19,660			41,020
Total cash and cash equivalents		33,507			73,705
Interest earning time deposits in other financial institutions		28,122			25,508
Securities available-for-sale, at fair value		3,591			4,236
Securities held-to-maturity, fair value of $5,063 and $5,625 at September 30, 2009 and June 30, 2009, respectively		4,932			5,528
Federal Home Loan Bank stock, at cost		12,649			12,649
Loans receivable, net of allowance for loan losses of $5,297 and $4,586 at September 30, 2009 and June 30, 2009, respectively		759,406			746,875
Accrued interest receivable		3,401			3,402
Premises and equipment, net		2,426			2,562
Core deposit intangible		128			147
Goodwill		3,950			3,950
Bank-owned life insurance		12,006			11,884
Real estate owned		—			496
Other assets		4,042			4,155
Total assets	$	868,160		$	895,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest bearing	$	54,170		$	50,161
Interest bearing		543,946			516,032
Total deposits		598,116			566,193
Federal Home Loan Bank advances, short-term		10,000			70,000
Federal Home Loan Bank advances, long-term		137,000			137,004
State of California time deposit		25,000			25,000
Accrued expenses and other liabilities		4,255			4,342
Total liabilities		774,371			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; September 30, 2009 — 14,728,440 shares issued June 30, 2009 — 14,728,440 shares issued		147			147
Additional paid-in capital		59,315			59,134
Retained earnings		54,459			53,512
Accumulated other comprehensive income, net of tax		72			77
Unearned employee stock ownership plan (ESOP) shares		(2,047	)		(2,161	)
Treasury stock, at cost (September 30, 2009 — 1,424,452 shares; June 30, 2009 — 1,423,852 shares)		(18,157	)		(18,151	)
Total stockholders’ equity		93,789			92,558
Total liabilities and stockholders’ equity	$	868,160		$	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 September 30
	2009			2008
Interest Income
Interest and fees on loans	$	11,033		$	10,900
Interest on securities, taxable		102			174
Federal Home Loan Bank dividends		27			192
Other interest		158			239
Total interest income		11,320			11,505
Interest Expense
Interest on deposits		2,807			3,509
Interest on borrowings		2,323			2,721
Total interest expense		5,130			6,230
Net interest income		6,190			5,275
Provision for loan losses		865			363
Net interest income after provision for loan losses		5,325			4,912
Noninterest income
Service charges and fees		617			622
ATM fees and charges		450			453
Referral commissions		81			76
Loss on equity investment		(75	)		(66	)
Bank-owned life insurance		122			119
Other noninterest income		5			6
Total noninterest income		1,200			1,210
Noninterest expense
Salaries and benefits		2,142			1,990
Occupancy and equipment		598			596
ATM expense		411			365
Advertising and promotional		104			102
Professional services		183			222
Federal deposit insurance premiums		251			87
Postage		64			67
Telephone		181			121
Other operating expense		339			385
Total noninterest expense		4,273			3,935
Income before income tax expense		2,252			2,187
Income tax expense		842			778
Net income	$	1,410		$	1,409
Comprehensive Income	$	1,405		$	1,412
Earnings per common share:
Basic	$	0.11		$	0.11
Diluted	$	0.11		$	0.11
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 three months ended September 30, 2009	$	1,410		—		—		—			1,410			—			—		—			—			1,410
Other comprehensive income – unrealized loss on securities, net of tax		(5	)	—		—		—			—			(5	)		—		—			—			(5	)
Total comprehensive income	$	1,405
Dividends declared ($0.11 per share) *				—		—		—			(463	)		—			—		—			—			(463	)
Purchase of treasury stock				—		—		—			—			—			—		(600	)		(6	)		(6	)
Stock options earned				—		—		85			—			—			—		—			—			85
Allocation of stock awards				—		—		108			—			—			—		—			—			108
Allocation of ESOP common stock				—		—		(12	)		—			—			114		—			—			102
Balance September 30, 2009				14,728,440	$	147	$	59,315		$	54,459		$	72		$	(2,047	)	(1,424,452	)	$	(18,157	)	$	93,789


* 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)

	Three Months Ended September 30
	2009			2008
OPERATING ACTIVITIES
Net income	$	1,410		$	1,409
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premiums on securities		1			4
(Accretion) Amortization of net discounts on loan purchases		(1	)		22
Amortization (Accretion) of net loan origination costs		16			(55	)
Provision for loan losses		865			363
Federal Home Loan Bank stock (FHLB) dividend		—			(192	)
Depreciation and amortization		196			213
Amortization of core deposit intangible		19			23
Loss on equity investment		75			66
Increase in cash surrender value of bank-owned life insurance		(122	)		(119	)
Accretion of net premiums on purchased certificates of deposits		—			(37	)
Accretion of debt exchange costs		(4	)		(4	)
Allocation of ESOP common stock		102			111
Allocation of stock awards		108			101
Stock options earned		85			79
Net change in accrued interest receivable		1			(65	)
Net change in other assets		31			(89	)
Net change in accrued expenses and other liabilities		(87	)		644
Net cash provided by operating activities		2,695			2,474

INVESTING ACTIVITIES
Proceeds from maturities and principal repayments of available-for-sale securities sesddfsfssecurities		638			766
Proceeds from maturities and principal repayments of held-to-maturity securities		596			201
Net change in interest earning time deposits with other financial institutions		(2,614	)		(7,325	)
Net change in loans		(13,411	)		2,221
Proceeds from sale of real estate owned		504			225
Purchases of premises and equipment		(60	)		(12	)
Net cash used in investing activities		(14,347	)		(3,924	)

FINANCING ACTIVITIES
Repayment of FHLB advances		(60,000	)		(10,000	)
Dividends paid on common stock		(463	)		(473	)
Purchase of treasury stock		(6	)		(874	)
Net change in deposits		31,923			14,153
Net cash provided by (used in) financing activities		(28,546	)		2,806

Net (decrease) increase in cash and cash equivalents		(40,198	)		1,356
Beginning cash and cash equivalents		73,705			51,240
Ending cash and cash equivalents	$	33,507		$	52,596

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 months ended September 30, 2009 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 and the valuation of financial instruments.

Subsequent Events: Management has reviewed events occurring through November 9, 2009, the date the financial statements were issued and determined no subsequent events requiring accrual or disclosure occurred.

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 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.

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.

In June 2009, the FASB issued new authoritative guidance under Statement of Financial Accounting Standard (“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46R.” Under FASB’s Codification at ASC 105-10-65-1d, SFAS No. 167 will remain authoritative until integrated into the FASB Codification. SFAS 167 amends FIN 46 (Revised December 2003), “Consolidation of Variable Interest Entities,” to change 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. SFAS No. 167 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. SFAS No. 167 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 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 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 September 30,
	2009		2008
Basic	(Dollars in thousands, except per share data)
Net income	$	1,410	$	1,409
Weighted average common shares outstanding		13,088,485		13,165,194
Basic earnings per share	$	0.11	$	0.11

Diluted
Net income	$	1,410	$	1,409

Weighted average common shares outstanding		13,088,485		13,165,194
Dilutive effect of stock options		—		—
Average shares and dilutive potential common shares		13,088,485		13,165,194
Diluted earnings per share	$	0.11	$	0.11

For the three months ended September 30, 2009 and 2008, outstanding stock options to purchase 484,400 and 322,400 shares, respectively, were anti-dilutive and not considered in computing diluted earnings per common share.

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.

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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.

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

			Fair Value Measurements at September 30, 2009 Using
Assets at September 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)	$	476		$	—		$	476		$	—
Collateralized mortgage obligations (residential)	$	3,115		$	—		$	3,115		$	—

			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		$	—

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

			Fair Value Measurements at September 30, 2009 Using
Assets at September 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	$	11,466		$	—		$	—		$	11,466

			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	$	7,659		$	—		$	—		$	7,659

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Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $13,301,000 at September 30, 2009 as compared to $8,860,000 at June 30, 2009. The fair value of collateral is calculated using a third party appraisal. The valuation allowance for these loans was $1,835,000 at September 30, 2009 as compared to $1,201,000 at June 30, 2009. An additional provision for loan losses of $738,000 was made for the three months ended September 30, 2009 relating to impaired loans.

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.

Loans

The estimated fair value for all fixed rate loans and variable rate loans with an initial fixed rate feature 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.

The estimated fair value for variable rate loans with no initial fixed rate feature is the carrying amount.

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, 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

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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.

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

	September 30, 2009				June 30, 2009
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	33,507	$	33,507	$	73,705	$	73,705
Interest earning time deposits in other financial institutions		28,122		28,122		25,508		25,508
Securities available-for-sale		3,591		3,591		4,236		4,236
Securities held-to-maturity		4,932		5,063		5,528		5,625
Federal Home Loan Bank Stock		12,649	NA			12,649	NA
Loans receivable, net		746,105		777,762		738,015		763,451
Accrued interest receivable		3,401		3,401		3,402		3,402
Financial liabilities:
Deposits		598,116		592,135		566,193		549,207
Borrowings		147,000		155,012		207,004		215,677
State of California time deposit		25,000		25,268		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)
September 30, 2009
Mortgage-backed (residential):
Freddie Mac	$	476	$	15	$		─	$	461
Collateralized mortgage obligations (residential):
Freddie Mac		3,115		108		─			3,007
Total	$	3,591	$	123	$	─		$	3,468

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)
September 30, 2009
Mortgage-backed
Fannie Mae	$	173	$	1	$	─		$	174
Freddie Mac		150	─			─			150
Ginnie Mae		107		4		─			111
Collateralized mortgage obligations
Fannie Mae		1,673		25		─			1,698
Freddie Mac		2,829		101		─			2,930
Ginnie Mae	─		─			─		─
Total	$	4,932	$	131	$	─		$	5,063

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
Ginnie Mae	─		─			─		─
Total	$	5,528	$	112	$	(15	)	$	5,625

There were no sales of securities during the three months ended September 30, 2009 and 2008.

Securities with unrealized losses at September 30, 2009 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)
September 30, 2009
Description of Securities
Mortgage-backed	$	─	$	─		$	─	$	─	$	─	$	─
Collateralized mortgage obligations		─		─			─		─		─		─
Total temporarily impaired	$	─	$	─		$	─	$	─	$	─	$	─

June 30, 2009
Description of Securities
Mortgage-backed	$	─	$	─		$	─	$	─	$	─	$	─
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 likely that it will not 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 illiquidity, 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 likely that it will not be required to sell the securities before their anticipated recovery, no declines are deemed to be other-than-temporary.

Note 5 – Loans

The composition of loans consists of the following:

	September 30, 2009			June 30, 2009
	(In thousands)
Real Estate:
One-to-four family residential, fixed rate	$	298,485		$	303,287
One-to-four family residential, variable rate		69,522			73,943
Multi-family residential, variable rate		227,801			196,575
Commercial real estate, variable rate		116,093			121,143
		711,901			694,948
Consumer:
Automobile		39,723			41,798
Home equity		1,217			1,299
Other consumer loans, primarily unsecured		11,573			13,119
		52,513			56,216
Total loans
Deferred net loan origination costs		367			376
Net discounts on purchased loans		(78	)		(79	)
Allowance for loan losses		(5,297	)		(4,586	)
	$	759,406		$	746,875

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

	Three months ended September 30,
	2009				2008
	(In thousands)
Balance, beginning of period		$	4,586			$	3,229
Provision for loan losses			865				363
Recoveries			36				62
Loans charged off			(190	)			(377	)
Balance, end of year		$	5,297			$	3,277

At September 30, 2009, non-accrual loans totaled $13.3 million, compared to $8.9 million at June 30, 2009. At September 30, 2009 and June 30, 2009, there were no loans past due more than 90 days and still accruing interest.

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.

At September 30, 2009 and June 30, 2009, the Company had a gross investment in impaired loans of $13.3 million and $8.9 million, respectively. Impaired loans at September 30, 2009 included $8.6 million of loans for which valuation allowances of $1.8 million had been established and $4.7 million of loans for which no valuation allowances were established. At June 30, 2009, the Company had $5.1 million of impaired loans for which valuation allowances of $1.2 million had been established and $3.8 million of loans for which no valuation allowances were established. All valuation allowances are recorded as part of the total allowance for loan losses. For the three months ended September 30, 2009, the Company’s average investment in impaired loans was $11.1 million. For the three months ended September 30, 2008, the Company’s average investment in impaired loans was $4.7 million.

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 months ended September 30, 2009, income recorded on impaired loans totaled $28,000. For the three months ended September 30, 2008, income recorded on impaired loans totaled $18,000. 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

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.

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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.

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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.

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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 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.

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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.

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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 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.

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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 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.

The following underwriting guidelines 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 are 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. In this regard, 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 September 30, 2009
Real estate loans:
One-to-four family	8	$	3,853	22	$	9,929	30	$	13,782
Multi-family	—		—	—		—	—		—
Commercial	—		—	—		—	—		—
Other loans:
Automobile	—		—	3		30	3		30
Home equity	—		—	—		—	—		—
Other	6		8	5		6	11		14
Total loans	14	$	3,861	30	$	9,965	44	$	13,826

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 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. Delinquent loans 60 days or more increased to $13.8 million or 1.81% of total loans at September 30, 2009 from $8.5 million or 1.13% of total loans at June 30, 2009.

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. At September 30, 2009, we had $3.4 million of troubled debt restructurings (loans for which a concession has been granted due to the debtor’s financial difficulties) that are included in non-accrual loans in the following table.

Other 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.

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	At September 30,			At June 30,			At June 30,
	2009			2009			2008
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One-to-four family	$	9,929		$	6,766		$	1,583
Multi-family		—			—			—
Commercial		—			—			—
Other loans:
Automobile		30			—			132
Home equity		—			—			—
Other		6			11			15
Troubled debt restructuring:
One-to-four family		3,138			1,859			—
Multi-family		234			235			—
Commercial		—			—			—
Total non-accrual loans		13,337			8,871			1,730

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

Total non-performing assets	$	13,337		$	9,370		$	2,936
Ratios:
Non-performing loans to total loans (1)		1.74	%		1.18	%		0.23	%

Non-performing assets to total assets		1.54	%		1.05	%		0.35	%

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

The increase in non-performing loans was a result of the increased delinquency 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 our determination 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.

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 and concentrations in (1) geographic regions, (2) interest only loans, (3) stated income loans and (4) loans with credit scores less than a specified amount. The Company also reviewed the debt service coverage ratios 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.

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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 at levels above the minimum requirements previously imposed by OTS regulations and above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. See “Consolidated Statements of Cash Flows” contained in the 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 September 30, 2009, total approved loan commitments amounted to $7.4 million, which included the unfunded portion of loans of $2.2 million.

Certificates of deposit, State of California time deposits, and advances from the FHLB of San Francisco scheduled to mature in one year or less at September 30, 2009, totaled $144.6 million, $25.0 million and $10.0 million, respectively. Based on historical experience, management believes that a significant portion of maturing deposits will remain with Kaiser Federal Bank and we anticipate that we will continue to have sufficient funds, through deposits and borrowings, to meet our current commitments.

At September 30, 2009, we had available additional advances from the FHLB of San Francisco in the amount of $160.7 million. In fiscal 2009 we established a line of credit with the Federal Reserve Bank. At September 30, 2009 the available line of credit was $103.8 million.

Capital

The table below sets forth Kaiser Federal Bank’s capital position relative to its OTS capital requirements at September 30, 2009 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
September 30, 2009	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
Total risk-based capital (to risk-weighted assets)	$	81,864		13.46	%	$	48,668		8.00	%	$	60,835		10.00	%
Tier 1 risk-based capital (to risk-weighted assets)		78,440		12.89			24,334		4.00			36,501		6.00
Tier 1 (core) capital (to adjusted tangible assets)		78,440		9.11			34,442		4.00			43,052		5.00

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	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 September 30, 2009, 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. We are unable to determine the extent, if any, to which properties securing our loans have appreciated in dollar value due to inflation.

Item 3 . Quantitative and Qualitative Disclosures about Market Risk

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our 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.

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

The asset/liability management committee generally meets on a weekly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis and income simulations. The asset/liability management committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution’s existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the board of directors of Kaiser Federal Bank. The asset/liability management committee recommends appropriate strategy changes based on this review. The chairman or his designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors at least 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- 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- 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 September 30, 2009 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.

	September 30, 2009
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		$	87,271		$	(16,670	)		(16	)%		10.05	%		(143	)bp
+200 bp			95,959			(7,982	)		(8	)		10.86			(62	)
+100 bp			102,322			(1,619	)		(2	)		11.41			(7	)
0 bp			103,941			—			—			11.48			—
-100 bp			98,040			(5,901	)		(6	)		10.82			(66	)

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 market values of certain assets under differing interest rate scenarios.

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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 September 30, 2009 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
07/1/08 – 07/31/08		41,469	$	10.87		508,788		—
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

* 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 . Submission of Matters to a Vote of Security Holders

None.

Item 5 . Other Information

None.

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

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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: November 9, 2009
	BY: /s/ K. M. Hoveland
	K. M. Hoveland
	President, Chief Executive Officer

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

Page 28 of 28

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