K Fed Bancorp (KFED) 10-K 2006 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) of

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: June 30, 2006

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-50592

K-FED BANCORP

(Exact name of registrant as specified in its charter)

Federal	20-0411486
(State or other jurisdiction of incorporation)	(I.R.S. Employer Identification No.)
1359 N. Grand Avenue, Covina, CA	91724
(Address of principal executive offices)	(Zip Code)

(800) 524-2274

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of exchange on which registered
Common Stock, $.01 par value per share	The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None.

Indicated by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K x

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

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

YesoNox

The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average bid and asked price of such common equity as of December 31, 2005 was $61.3 million. There were 14,191,941 shares of the registrant’s common stock, $.01 par value per share, outstanding at August 31, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2006 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

K-FED BANCORP

Annual Report on Form 10-K

For the Fiscal Year Ended June 30, 2006

Table of Contents

		Page
Part I.
Item 1.	Business.	2
Item 1A.	Risk Factors.	38
Item 1B.	Unresolved Staff Comments.	40
Item 2.	Properties.	40
Item 3.	Legal Proceedings.	41
Item 4.	Submission of Matters to a Vote of Security Holders.	41
Part II.
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	42
Item 6.	Selected Financial Data.	45
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	47
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	60
Item 8.	Financial Statements and Supplementary Data.	63
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	63
Item 9A.	Controls and Procedures.	63
Item 9B.	Other Information.	63
Part III.
Item 10.	Directors and Executive Officers of the Registrant.	64
Item 11.	Executive Compensation.	64
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	64
Item 13.	Certain Relationships and Related Transactions.	64
Item 14.	Principal Accountant Fees and Services.	64
Part IV.
Item 15.	Exhibits and Financial Statement Schedules.	64
	Signatures.	66

1

Part I.

Item 1. Business.

General

K-Fed Bancorp (or the “Company”) is a federally-chartered stock corporation that was formed in July 2003 as a wholly-owned subsidiary of K-Fed Mutual Holding Company, a federally-chartered mutual holding company, in connection with the mutual holding company reorganization of Kaiser Federal Bank (or the “Bank”), a federally chartered stock savings association. Upon completion of the mutual holding company reorganization in July 2003, the Company acquired all of the capital stock of the Bank. On March 30, 2004, the Company completed a minority stock offering in which it sold 5,686,750 shares, or 39.09%, of its outstanding common stock to eligible depositors of the Bank in a subscription offering. The remaining 8,861,750 outstanding shares of the Company’s common stock are owned by K-Fed Mutual Holding Company.

K-Fed Mutual Holding Company is subject to regulation by the Office of Thrift Supervision. K-Fed Mutual Holding Company’s principal assets are its investment in K-Fed Bancorp and approximately $30,000 in cash. So long as K-Fed Mutual Holding Company is in existence, it will at all times own at least a majority of the outstanding common stock of K-Fed Bancorp.

At June 30, 2006, K-Fed Bancorp had total consolidated assets of $738.9 million, net loans of 634.1 million, deposits of $463.5 million and shareholders’ equity of $92.7 million. The Company’s business activities generally are limited to passive investment activities and oversight of its investment in the Bank. Unless the context otherwise requires, all references to the Company include the Bank and the Company on a consolidated basis.

The Bank is a community oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. We are headquartered in Covina, California, with a branch in Pasadena and Panorama City to serve Los Angeles County, a branch in Fontana to serve San Bernardino and Riverside Counties, and a branch in Santa Clara to serve Santa Clara County. New financial service centers were recently opened during April 2006 in Bellflower and Harbor City, with additional financial service centers located in Los Angeles and Riverside currently under construction.

The Bank began operations as a credit union in 1953 when we were formed as Kaiser Foundation Hospital Employees Federal Credit Union. The credit union initially served the employees of the Kaiser Foundation Hospital in Los Angeles, California. As the Kaiser Permanente Medical Care Program evolved so did the credit union, and in 1972, it changed its name to Kaiser Permanente Federal Credit Union. The credit union grew to primarily serve Kaiser employees and physicians who worked or lived in California between the Mexican border in the south and San Francisco County to the north. The credit union serviced members with two branches, Pasadena and Santa Clara, and a network of ATMs primarily located in Kaiser medical centers. However, as a credit union, the credit union was legally restricted to serve only individuals who shared a “common bond” such as a common employer.

After receiving the necessary regulatory and membership approvals, on November 1, 1999, Kaiser Permanente Federal Credit Union converted to a federal mutual savings association known as Kaiser Federal Bank which serves the general public as well as Kaiser Permanente employees.

2

On July 1, 2003, we completed our conversion from a federal mutual savings association to a federal stock savings association in conjunction with the mutual holding company reorganization. Om March 30, 2004, the Company completed its initial stock offering.

Our principal business consists of attracting retail deposits from the general public and investing those funds primarily in permanent loans secured by first mortgages on owner-occupied, one- to four-family residences and to a lesser extent, multi-family residential loans and commercial real estate loans. We also originate automobile and other consumer loans. Historically, we have not made commercial business loans or construction loans.

Our revenues are derived principally from interest on loans and mortgage-backed and related securities. We also generate revenue from service charges and other income.

We offer a variety of deposit accounts having a wide range of interest rates and terms, which generally include savings accounts, money market accounts, demand deposit accounts and time deposit accounts with varied terms ranging from 90 days to five years. We solicit deposits in our primary market area of San Diego, Los Angeles, San Bernardino, Riverside, and Santa Clara Counties, California.

Available Information

Our Internet address is www.kfed.com. We make available free of charge, through our web site, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. All SEC filings of the Company are also available at the SEC’s website, www.sec.gov.

Market Area

Our expansive market area provides a large, increasing base of potential customers with per capita income levels favorable to the national average. Los Angeles County’s economy has improved dramatically since the mid 1990’s as a result of extensive overhauling and restructuring of the region’s basic economic sectors. This base consists of a diversified mix of high-technology commercial endeavors, by-products of the defense related industries, which capitalized on the highly educated and skilled labor force. Emerging growth areas include telecommunications, electronics, computers, software and biomedical technologies as well as international trade. The western portion of San Bernardino and Riverside Counties are adjacent to higher housing cost areas of Los Angeles, Orange and San Diego Counties and are a magnet for new residents seeking affordable housing as well as many local business operations. Manufacturing, transportation and distribution companies provide thousands of jobs in this area. Santa Clara County is in the “Silicon Valley” where high technology industries have down sized. However, the per capita income well exceeds the state and national average.

3

Competition

We face strong competition in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions and mortgage bankers. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. We also face competition from other lenders and investors with respect to loans that we purchase.

We attract all of our deposits through our branch and ATM network. Competition for those deposits is principally from other savings institutions, commercial banks and credit unions, as well as mutual funds and other alternative investments. We compete for these deposits by offering superior service and a variety of deposit accounts at competitive rates.

Lending Activities

General. We originate and purchase one- to four-family and multi-family residential loans and to a lesser extent we originate and purchase commercial real estate loans. We also originate consumer loans, primarily automobile loans. Our loans carry either a fixed or an adjustable rate of interest. Consumer loans are generally short term and amortize monthly or have interest payable monthly. Mortgage loans generally have a longer term amortization, with maturities up to 30 years, depending upon the type of property with principal and interest due each month. We also have loans in our portfolio that require only interest payments on a monthly basis. At June 30, 2006, our net loan portfolio totaled $634.1 million, which constituted 85.8% of our total assets. We underwrite each purchased loan in accordance with our underwriting standards. The majority of the loans that we purchase are acquired with servicing released to allow for greater investments in real-estate lending without having to significantly increase our servicing and operations costs.

At June 30, 2006, the maximum amount which we could have loaned to any one borrower and the borrower’s related entities under applicable regulations was $10.3 million, or 15% of our unimpaired capital. At June 30, 2006, we had no loans or group of loans to related borrowers with outstanding balances in excess of this amount. Our five largest lending relationships at June 30, 2006 were as follows: (1) one loan to a limited partnership totaling $5.2 million, secured by an industrial facility located in Riverside County; (2) one loan to a limited partnership totaling $4.5 million, secured by 6 industrial buildings located in Los Angeles County; (3) three loans to an individual totaling $4.4 million, secured by 2 office buildings and a restaurant, all located in Orange County; (4) one loan to a corporation totaling $4.0 million, secured by an office building located in Orange County.; and (5) one loan to a limited partnership totaling $3.8 million, secured by a medical office building located in Los Angeles County.

4

The following table presents information concerning the composition of Kaiser Federal Bank’s loan portfolio in dollar amounts and in percentages as of the dates indicated.

	At June 30,
	2006					2005					2004					2003					2002
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in thousands)
Real estate
One- to four-family	$	437,024		68.63	%	$	372,134		69.04	%	$	341,776		68.82	%	$	259,563		66.64	%	$	145,383		61.03	%
Commercial		58,845		9.24			32,383		6.01			26,879		5.41			21,266		5.46			7,585		3.18
Multi-family		89,220		14.01			87,650		16.26			72,519		14.60			42,275		10.85			20,345		8.55
Total real estate loans		585,089		91.88			492,167		91.31			441,174		88.83			323,104		82.95			173,313		72.76
Other loans
Consumer:
Automobile		41,572		6.53			38,613		7.16			47,359		9.54			56,872		14.60			51,947		21.81
Home equity		1,787		0.28			601		0.11			437		0.08			664		0.17			1,735		0.73
Other		8,374		1.31			7,644		1.42			7,675		1.55			8,878		2.28			11,202		4.70
Total other loans		51,733		8.12			46,858		8.69			55,471		11.17			66,414		17.05			64,884		27.24
Total loans		636,822		100.00	%		539,025		100.00	%		496,645		100.00	%		389,518		100.00	%		238,197		100.00	%
Less:
Net deferred loan originations fees		(202	)				(32	)				(332	)				(354	)				(219	)
Net premiums on purchased loans		195					982					2,221					2,757					680
Allowance for loan losses		(2,722	)				(2,408	)				(2,328	)				(2,281	)				(1,744	)
Total loans receivable, net	$	634,093				$	537,567				$	496,206				$	389,640				$	236,914

5

The following table shows the composition of Kaiser Federal Bank’s loan portfolio by fixed- and adjustable-rate at the dates indicated.

	At June 30,
	2006					2005					2004					2003					2002
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
FIXED RATE	(Dollars in thousands)
Real Estate
One- to four-family	$	258,918		40.66	%	$	133,854		24.83	%	$	82,104		16.53	%	$	72,798		18.69	%	$	71,734		30.12	%
Total real estate loans		258,918		40.66			133,854		24.83			82,104		16.53			72,798		18.69			71,734		30.12
Other loans
Consumer:
Automobile		41,572		6.53			38,613		7.16			47,359		9.54			56,872		14.60			51,941		21.80
Other		7,424		1.17			6,666		1.24			6,459		1.30			7,530		1.93			9,607		4.03
Total other loans		48,996		7.70			45,279		8.40			53,818		10.84			64,402		16.53			61,548		25.83
Total fixed-rate loans		307,914		48.36			179,133		33.23			135,922		27.37			137,200		35.22			133,282		55.95
ADJUSTABLE RATE
Real Estate
One- to four-family		178,106		27.96			238,280		44.21			259,672		52.29			186,765		47.95			73,649		30.93
Commercial		58,845		9.24			32,383		6.01			26,879		5.41			21,266		5.46			7,585		3.18
Multi-family		89,220		14.01			87,650		16.26			72,519		14.60			42,275		10.85			20,345		8.54
Total real estate loans		326,171		51.21			358,313		66.48			359,070		72.30			250,306		64.26			101,579		42.65
Other loans
Consumer:
Automobile		—		—			—		—			—		—			—		—			6		—
Home equity		1,787		0.28			601		0.11			437		0.09			664		0.17			1,735		0.73
Other		950		0.15			978		0.18			1,216		0.24			1,348		0.35			1,595		0.67
Total other loans		2,737		0.43			1,579		0.29			1,653		0.33			2,012		0.52			3,336		1.40
Total adjustable-rate loans		328,908		51.64			359,892		66.77			360,723		72.63			252,318		64.78			104,915		44.05
Total loans		636,822		100.00	%		539,025		100.00	%		496,645		100.00	%		389,518		100.00	%		238,197		100.00	%
Less:
Net deferred loan originations fees		(202	)				(32	)				(332	)				(354	)				(219	)
Net premiums on purchased loans		195					982					2,221					2,757					680
Allowance for loan losses		(2,722	)				(2,408	)				(2,328	)				(2,281	)				(1,744	)
Total loans receivable, net	$	634,093				$	537,567				$	496,206				$	389,640				$	236,914

6

Loan Maturity and Repricing. The following schedule illustrates certain information at June 30, 2006 regarding the dollar amount of loans maturing in Kaiser Federal Bank’s portfolio based on their contractual terms-to-maturity, but does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.

	Real Estate
	One- to Four-Family		Multi-family		Commercial		Consumer –Autos		Consumer – Other (1)		Total
	(In thousands)
At June 30, 2006
Within (1) year (2)	$	—	$	40	$	—	$	782	$	5,553	$	6,375
After 1 year:
After 1 year through 3 years		64		—		—		10,762		335		11,161
After 3 years through 5 years		518		—		—		29,195		393		30,106
After 5 years through 10 years		3,432		965		58,183		833		3,880		67,293
After 10 years through 15 years		77,424		59,978		662		—		—		138,064
Over 15 years		355,586		28,237		—		—		—		383,823
Total due after 1 year		437,024		89,180		58,845		40,790		4,608		630,447
Total	$	437,024	$	89,220	$	58,845	$	41,572	$	10,161	$	636,822
(1) Includes home equity loans.
(2) Includes demand loans and loans that have no stated maturity.

7

The following table illustrates certain information at June 30, 2006 regarding the dollar amount of loans maturing in Kaiser Federal Bank’s portfolio based on their contractual terms to maturity, but does not include scheduled payments or potential prepayments. Loans that have adjustable or renegotiable interest rates are shown as maturing in the period during which the loan reprices. Demand loans, loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. Loan balances do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.

	Real Estate
	One- to Four-Family		Multi-family		Commercial		Consumer –Autos		Consumer – Other (1)		Total
	(In thousands)
At June 30, 2006
Within (1) year (2)	$	51,914	$	32,238	$	5,688	$	782	$	5,553	$	96,175
After 1 year:
After 1 year through 3 years		78,316		37,542		20,592		10,762		335		147,547
After 3 years through 5 years		36,019		15,476		25,513		29,195		393		106,596
After 5 years through 10 years		15,963		3,964		7,052		833		3,880		31,692
After 10 years through 15 years		254,812		—		—		—		—		254,812
Over 15 years		—		—		—		—		—		—
Total due after 1 year		385,110		56,982		53,157		40,790		4,608		540,647
Total	$	437,024	$	89,220	$	58,845	$	41,572	$	10,161	$	636,822
(1) Includes home equity loans.
(2) Includes demand loans and loans that have no stated maturity.

8

The following tables set forth the dollar amount of all loans due after June 30, 2007, which have fixed interest rates and adjustable interest rates.

	Due after June 30, 2007
	Fixed		Adjustable		Total
	(In thousands)
Real estate loans
One- to four-family	$	258,918	$	178,106	$	437,024
Commercial		─		58,845		58,845
Multi-family		─		89,180		89,180
Total real estate loans		258,918		326,131		585,049
Other Loans
Consumer
Automobile		40,790		─		40,790
Home equity		─		─		─
Other loans		4,608		─		4,608
Total other loans		45,398		─		45,398
Total loans	$	304,316	$	326,131	$	630,447

Of the $636.8 million in gross loans at June 30, 2006, approximately $307.9 million have fixed rates of interest and approximately $328.9 million have adjustable rates of interest.

One- to Four-Family Residential Lending. At June 30, 2006, one- to four-family residential mortgage loans totaled $437.0 million, or 68.6%, of our gross loan portfolio. We generally underwrite our one- to four-family loans based on the applicant’s employment and credit history and the appraised value of the subject property. Presently, we lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family residential loans. Should we grant a loan with a loan-to-value ratio in excess of 80%, we require private mortgage insurance in order to reduce our exposure below 80%. Properties securing our one- to four-family loans are generally appraised by independent state licensed fee appraisers approved by our board of directors. We require our borrowers to obtain title and hazard insurance, and flood insurance, if necessary, in an amount not less than the value of the property improvements. We currently retain in our portfolios all single-family loans we originate. We purchased $158.8 million in one- to four-family residential mortgage loans within the past fiscal year.

We currently originate one- to four-family mortgage loans on a fixed-rate and adjustable-rate basis. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with other local financial institutions and consistent with our internal needs. Adjustable-rate loans are tied to a variety of indices including a rate based on U.S. Treasury securities adjusted to a constant maturity of one year and the average of U.S. Treasury securities adjusted to a constant maturity of one year over the previous 12 month period. A majority of our adjustable rate loans carry an initial fixed rate of interest for either three or five years which then converts to an interest rate that is adjusted annually based upon the applicable index. Our home mortgages are structured with a five to thirty year maturity, with amortizations up to a 30-year period. All of our one- to four-family loans originated or purchased are secured by properties located in California.

All our real estate loans contain a “due on sale” clause allowing us to declare the unpaid principal balance due and payable upon the sale of the security property. The loans originated or purchased by us are underwritten and documented pursuant to Freddie Mac or Fannie Mae guidelines.

9

See “- Loan Originations, Purchases, Sales and Repayments.” See “- Asset Quality - Non-Performing Assets” and “Asset Quality - Classified Assets.”

Adjustable rate mortgage loans generally pose different credit risks than fixed-rate loan mortgages, primarily because as interest rates rise, the borrower’s payment rises, increasing the potential for default. The Company has not experienced significant delinquencies for these loans. However, the majority of these loans have been purchased or originated within the past three years. See “ - Asset Quality – Non-Performing Assets” and “ - Classified Assets.” At June 30, 2006, our one- to four-family adjustable rate mortgage loan portfolio totaled $178.1 million, or 28.0% of our gross loan portfolio. At that date, the fixed-rate one- to four-family mortgage loan portfolio totaled $258.9 million, or 40.7% of the Company’s gross loan portfolio.

In addition, the Company has purchased adjustable-rate interest-only mortgage loans. As of June 30, 2006, the Company’s one- to four-family interest-only adjustable rate mortgages loans totaled $90.3 million, or 14.2% of our gross loan portfolio. We have no plans to significantly increase the number of interest-only loans held in our loan portfolio at this time.

Multi-Family Residential Lending. We also offer multi-family residential loans. These loans are secured by real estate located in our primary market area. At June 30, 2006, multi-family residential loans totaled $89.2 million, or 14.0%, of our gross loan portfolio.

Our multi-family residential loans are originated primarily with adjustable interest rates. We use a number of indices to set the interest rate, including a rate based on the constant maturity of one year U.S. Treasury securities. A majority of our adjustable rate loans carry an initial fixed rate of interest for either three or five years which then converts to an interest rate that is adjusted annually based upon the applicable index. Loan-to-value ratios on our multi-family residential loans do not exceed 75% of the appraised value of the property securing the loan. These loans require monthly payments, amortize over a period of up to 30 years and have maximum maturity of 30 years. These loans are secured by properties located in California. We use mortgage bankers and brokers to originate these loans as well as through our staff. We retain some of the multi-family loans we originate, while selling participations in others to manage our exposure to any one borrower.

Loans secured by multi-family residential real estate are underwritten based on the income producing potential of the property and the financial strength of the borrower. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. We may require an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing multi-family residential loans are performed by independent state licensed fee appraisers approved by our board of directors. See “- Loan Originations, Purchases, Sales and Repayments.”

Loans secured by multi-family residential properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by multi-family residential properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. In order to monitor the adequacy of cash flows on income-producing properties, the borrower may be requested to or required to provide periodic financial information. See “- Asset Quality - Non-Performing Assets.”

10

Commercial Real Estate Lending. We offer commercial real estate loans. These loans are secured primarily by small retail establishments, rental properties and small office buildings located in our primary market area. At June 30, 2006, commercial real estate loans totaled $58.8 million, or 9.2%, of our gross loan portfolio. Our largest commercial real estate loan at June 30, 2006, was a $5.2 million loan secured by an industrial facility located in Riverside County.

We originate only adjustable-rate commercial real estate loans. The interest rate on these loans is tied to a variety of indices, including a rate based on the constant maturity of one year U.S. Treasury securities. A majority of our adjustable-rate loans carry an initial fixed rate of interest for either three or five years which then converts to an interest rate that is adjusted annually based upon the index. Loan-to-value ratios on our commercial real estate loans do not exceed 75% of the appraised value of the property securing the loan. These loans require monthly payments, amortize up to 30 years, have maturities of up to 15 years and carry pre-payment penalties.

Loans secured by commercial real estate are underwritten based on the income producing potential of the property, the financial strength of the borrower and any guarantors. The net operating income, which is the income derived from the operation of the property less all operating expenses, must be sufficient to cover the payments related to the outstanding debt. We may require an assignment of rents or leases in order to be assured that the cash flow from the project will be used to repay the debt. Appraisals on properties securing commercial real estate loans are performed by independent state licensed fee appraisers approved by the board of directors. All the properties securing our commercial real estate loans are located in California. See “- Loan Originations, Purchases, Sales and Repayments.”

Loans secured by commercial real estate properties are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “- Asset Quality - Non-Performing Loans.”

Consumer Loans. We offer a variety of secured consumer loans, including home equity lines of credit, new and used auto loans, and loans secured by savings deposits. We also offer a limited amount of unsecured loans. Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates, and carry higher rates of interest than do one- to four-family residential mortgage loans. At June 30, 2006, our consumer loan portfolio, exclusive of automobile loans, totaled $10.2 million, or 1.6%, of our gross loan portfolio. In recent years, our consumer loans, as a percentage of our loan portfolio, has continued to decrease as we have emphasized our real estate loan products.

The most significant component of our consumer lending is automobile loans. We originate automobile loans only on a direct basis with the borrower. Loans secured by automobiles totaled $41.6 million, or 6.5%, of our gross loan portfolio at June 30, 2006. Automobile loans may be written for up to seven years for new automobiles and a maximum of five years for used automobiles and have fixed rates of interest. Loan-to-value ratios for automobile loans are up to 100% of the sales price for new automobiles and up to 100% of value on used cars, based on valuation from official used car guides.

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Consumer loans may entail greater risk than do one- to four-family residential mortgage loans, particularly in the case of consumer loans which are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

Loan Originations, Purchases, Sales and Repayments

We originate loans through employees located at our offices. Walk-in customers and referrals from our current customer base, advertisements, real estate brokers, mortgage loan brokers and builders are also important sources of loan originations. In 2005, we contracted with AnyHour Lending, Inc. to give us the ability to take and process residential mortgage loans 24 hours a day as well as over the Internet.

While we originate adjustable-rate and fixed-rate loans, our ability to originate loans is dependent upon customer demand for loans in our market area. Demand is affected by local competition and the interest rate environment. We also purchase real estate whole loans as well as participation interests in real estate loans. In addition, we sell participation interests in some of our larger real estate loans. We began purchasing one- to four-family real estate loans in January 2001 and commercial real estate loans in October 2001. We have used 10 different loan brokers in these purchase transactions. As of June 30, 2006, we had participation interests in three commercial real estate loans. At June 30, 2006, our real estate loan portfolio totaled $585.1 million or 91.9% of the gross loan portfolio. Purchased real estate loans at June 30, 2006 totaled $386.9 million, or 66.1% of the real estate loan portfolio. At June 30, 2005, our real estate loan portfolio totaled $492.2 million or 91.3% of the gross loan portfolio. Purchased real estate loans at June 30, 2005 totaled $328.1 million or 66.7% of the real estate loan portfolio.

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The following table shows the loan origination, purchase, sale and repayment activities of Kaiser Federal Bank for the periods indicated, and includes loans originated for both our own portfolio and for sale of participating interests.

	Years ended June 30,
	2006		2005			2004
		(In thousands)
Originations by type:
Adjustable rate:
Real estate-one to four-family	$	─	$	3,942		$	1,288
-commercial		32,154		6,200			12,820
-multi-family		14,771		17,750			24,100
Non-real estate – other consumer		5,694		4,445			4,516
Total adjustable rate		52,619		32,337			42,724
Fixed rate:
Real estate-one to four-family		14,238		10,446			16,595
Non-real estate - consumer automobile		26,318		18,453			21,070
- other consumer		8,591		8,617			9,447
Total fixed-rate		49,147		37,516			47,112
Total loans originated		101,766		69,853			89,836
Purchases:
Adjustable rate:
Real estate- one to four-family		13,074		73,740			247,160
-commercial		2,430		3,993			─
-multi-family		─		10,152			18,394
Total adjustable rate		15,504		87,885			265,554
Fixed rate:
Real estate- one to four-family		145,771		62,825			18,281
Total fixed rate		145,771		62,825			18,281
Total loans purchased (1)		161,275		150,710			283,835
Sales and repayments:
Sales and loan participations sold		─		─			1,585
Principal repayments		165,244		178,183			264,959
Total reductions		165,244		178,183			266,544
Increase (decrease) in other items, net		(1,271)		(1,019	)		(561	)
Net increase	$	96,526	$	41,361		$	106,566
(1) Loan principal purchase amount only. Premiums and discounts on loans purchased included as increase (decrease) in other items, net. Net loans purchased amounted to $161.1 million, $151.2 million, and $286.2 million for the years ended June 30, 2006, 2005, and 2004, respectively.

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Asset Quality

The Kaiser Permanente Medical Care Program employs a large percentage of Kaiser Federal Bank’s account holders. Further, a significant concentration of our borrowers reside in California. Although Kaiser Federal Bank has a diversified loan portfolio, borrowers’ ability to repay loans may be affected by the economic climate of either the health care industry or the overall geographic region in which the borrowers reside. Because we have a significant amount of real estate loans, decreases in California’s real estate values could adversely affect the value of property used as collateral. In this regard, at June 30, 2006, the rate of unemployment (seasonally adjusted) in the State of California was 5.6% as compared with the unemployment rate for the United States at 4.7%. These same rates of unemployment at June 30, 2005 were 5.4% and 5.0%, respectively. The June 2006 California Forecast, authored by Senior Economist Christopher Thornberg of UCLA, continues to warn of a slowdown in the housing market and says, “The only debate now is how hard a landing there will be and what will it mean for the general economy.” One impact, Thornberg forecasts is that 200,000 jobs will be lost in the construction sector as residential construction and remodeling slow markedly. Thornberg forecasts the unemployment rate will rise from 5.6% in the fourth quarter of 2006 to 6.3% and 6.2% in the fourth quarter of 2007 and 2008. These factors may negatively affect the California economy and Kaiser Federal Bank.

For one- to four-family residential, multi-family and commercial real estate loans serviced by us, a delinquency notice is sent to the borrower when the loan is 8 days past due. When the loan is 20 days past due, we mail a subsequent delinquency notice to the borrower. Typically, before the loan becomes 45 days past due, contact with the borrower is made requesting payment of the delinquent amount in full, or the establishment of an acceptable repayment plan to bring the loan current. If an acceptable repayment plan has not been agreed upon, loan personnel will generally prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 10 days to bring the account current. Once the loan becomes 60 days delinquent, and an acceptable repayment plan has not been agreed upon, the servicing officer will turn over the account to the deed of trust trustee with instructions to initiate foreclosure.

Real estate loans serviced by a third party are subject to the servicing institution’s collection policies. However, we track each purchased loan individually to ensure full payments are received as scheduled. Each month, third party servicers are required to provide delinquent loan status reports to our servicing officer, which are included in the month-end delinquent real estate report to management. Contractually, third party servicers are required to adhere to collection policies no less stringent than our policies.

When a borrower fails to make a timely payment on a consumer loan, a delinquency notice is sent when the loan is 10 days past due. When the loan is 20 days past due, we mail a subsequent delinquency notice to the borrower. Once a loan is 30 days past due, our staff contacts the borrower by telephone to determine the reason for delinquency and to request payment of the delinquent amount in full or the establishment of an acceptable repayment plan to bring the loan current. If the borrower is unable to make or keep payment arrangements, additional collection action is taken in the form of repossession of collateral for secured loans and small claims or legal action for unsecured loans.

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Delinquent Loans. The following table sets forth our loans delinquent 60 to 89 days and 90 days or more past due by type, number, amount and percentage of type at June 30, 2006.

	Loans Delinquent For:
	60-89 Days					90 Days or More					Total Delinquent Loans
	Number of Loans		Principal Balance of Loans			Number of Loans		Principal Balance of Loans			Number of Loans		Principal Balance of Loans
	(Dollars in thousands)
One- to four-family		2	$	383			—	$	—			2	$	383
Commercial		—		—			—		—			—		—
Multi-family		—		—			—		—			—		—
Home equity		—		—			—		—			—		—
Consumer – automobile		8		108			7		57			15		165
Other consumer		3		3			6		10			9		13
Total		13	$	494			13	$	67			26	$	561
Delinquent loans to total gross loans				0.08	%				0.01	%				0.09	%

Non-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, accruing loans past due 90 days or more 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. Generally, 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.

Foreclosed 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. At all dates presented, we had no troubled debt restructurings which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates.

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	At June 30,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Nonaccrual loans:
One- to four-family	$	—		$	757		$	—		$	—		$	—
Commercial		—			—			—			—			—
Multi-family		—			—			—			—			—
Consumer – Automobile		57			28			79			13			138
Consumer – Other		10			2			3			13			—
Total		67			787			82			26			138
Accruing delinquent more than 90 days:
One- to four-family		—			—			—			—			—
Commercial		—			—			—			—			—
Multi-family		—			—			—			—			—
Consumer – Automobile		—			—			—			—			—
Consumer – Other		—			—			—			—			—
Total		—			—			—			—			—
Non-performing loans		67			787			82			26			138
Repossessed assets		69			35			62			26			78
Total non-performing assets	$	136		$	822		$	144		$	52		$	216
Non-performing loans to total loans (1)		0.01	%		0.15	%		0.02	%		0.01	%		0.06	%
Non-performing assets to total assets		0.02	%		0.13	%		0.02	%		0.01	%		0.07	%
Non-accrued interest (2)	$	1		$	25		$	4		$	1		$	4
(1) Total loans are net of deferred fees and costs
(2) If interest on the loans classified as nonaccrual had been accrued, interest income in these amounts would have been accrued on nonaccrual loans

Classified Assets. Regulations provide for the classification of loans and other assets, such as debt and equity securities considered by regulators to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.

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When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management and approved by the board of directors. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Office of Thrift Supervision and the FDIC, which may order the establishment of additional general or specific loss allowances.

In connection with the filing of our periodic reports with the Office of Thrift Supervision and in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. The total amount of classified assets represented 5.4% of our equity capital and 0.7% of our total assets at June 30, 2006.

The aggregate amount of our classified and special mention assets at the dates indicated were as follows:

	At June 30,
	2006		2005		2004
	(In thousands)
Classified Assets:
Loss	$	90	$	45	$	85
Doubtful		1,321		1,375		968
Substandard		1,134		1,094		858
Special Mention		2,497		880		422
Total	$	5,042	$	3,394	$	2,333

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

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

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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 collectibility of the loan. Senior management reviews these conditions quarterly in discussions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

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

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

At June 30, 2006, our allowance for loan losses was $2.7 million or 0.4% of the total loan portfolio and 4,062.7% of total non-performing loans. Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans, which may be susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, is at an amount that will absorb probable incurred loan losses inherent in our loan portfolios.

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The following sets forth an analysis of our allowance for loan losses.

	Year Ended June 30,
	2006			2005			2004			2003			2002
	(Dollars in thousands)
Balance at beginning of period	$	2,408		$	2,328		$	2,281		$	1,744		$	1,175
Charge-offs:
One- to four-family		—			—			—			—			—
Commercial		—			—			—			—			—
Multi-family		—			—			—			—			—
Consumer – automobile		547			500			675			842			990
Consumer – other		33			48			62			58			110
		580			548			737			900			1,100
Recoveries:
One- to four-family		—			—			—			—			—
Commercial		—			—			—			—			—
Multi-family		—			—			—			—			—
Consumer – automobile		234			203			279			296			503
Consumer – other		8			19			22			17			19
		242			222			301			313			522
Net charge-offs		338			326			436			587			578
Provision for losses		652			406			483			1,124			1,147
Balance at end of period	$	2,722		$	2,408		$	2,328		$	2,281		$	1,744
Net charge-offs to average loans during this period (1)		0.06	%		0.06	%		0.11	%		0.19	%		0.33	%
Net charge-offs to average non-performing loans during this period		79.16	%		75.03	%		807.41	%		715.85	%		504.80	%
Allowance for loan losses to non-performing loans		4,062.69	%		305.97	%		2,839.02	%		8,773.08	%		1,263.77	%
Allowance as a percent of total loans (end of period) (1)		0.43	%		0.45	%		0.47	%		0.58	%		0.73	%
(1) Total loans are net of deferred fees and costs.

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

	At June 30,
	2006						2005						2004						2003						2002
	Amount		Percent of Allowance to Total Allowance		Percent of Gross Loans in Each Category to Total Gross Loans		Amount		Percent of Allowance to Total Allowance		Percent of Gross Loans in Each Category to Total Gross Loans		Amount		Percent of Allowance to Total Allowance		Percent of Gross Loans in Each Category to Total Gross Loans		Amount		Percent of Allowance to Total Allowance		Percent of Gross Loans in Each Category to Total Gross Loans		Amount		Percent of Allowance to Total Allowance		Percent of Gross Loans in Each Category to Total Gross Loans
		(Dollars in thousands)
Secured by residential real estate	$	1,322	48.57	%	68.63	%	$	1,037	43.06	%	69.04	%	$	932	40.03	%	68.82	%	$	703	30.82	%	66.64	%	$	582	33.33	%	61.04	%
Secured by commercial real estate		54	1.98		9.24			40	1.66		6.01			99	4.25		5.41			82	3.59		5.46			30	1.73		3.18
Secured by multi-family real estate		123	4.52		14.01			155	6.44		16.26			232	9.97		14.60			132	5.79		10.85			81	4.66		8.54
Consumer - automobile		1,184	43.50		6.53			1,143	47.47		7.16			1,008	43.30		9.54			1,289	56.51		14.60			970	55.63		21.81
Consumer – other		39	1.43		1.59			33	1.37		1.53			57	2.45		1.63			75	3.29		2.45			81	4.65		5.43
Total allowance for loan losses	$	2,722	100.00	%	100.00	%	$	2,408	100.00	%	100.00	%	$	2,328	100.00	%	100.00	%	$	2,281	100.00	%	100.00	%	$	1,744	100.00	%	100.00	%

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Investment Activities

General. We are required by federal regulations to maintain an amount of liquid assets in order to meet our liquidity needs. These assets consist of certain specified securities. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Commitments.” Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is provided. As of June 30, 2006, our liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 14.6%.

We are authorized to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. Subject to various restrictions, federal savings associations may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings association is otherwise authorized to make directly. See “How We Are Regulated - Kaiser Federal Bank” for a discussion of additional restrictions on our investment activities.

Under the direction and guidance of the Investment/Asset and Liability Management Committee and board policy, our president has the basic responsibility for the management of our investment portfolio. Various factors are considered when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated short and long term interest rates, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.

The current structure of our investment portfolio provides liquidity when loan demand is high, assists in maintaining earnings when loan demand is low and maximizes earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. See “Quantitative and Qualitative Disclosures about Market Risk – Asset and Liability Management and Market Risk.”

At June 30, 2006, our investment portfolio totaled $36.0 million and consisted principally of collateralized mortgage obligations, mortgage-backed securities, and U.S. government agency and government sponsored entity bonds. From time to time, investment levels may increase or decrease depending upon yields available on investment alternatives and management’s projected demand for funds for loan originations, deposits, and other activities.

Mortgage-Backed Securities. Our mortgage-backed securities had a fair value of $6.7 million and a $7.1 million amortized cost at June 30, 2006. The mortgage-backed securities were comprised of Fannie Mae, Freddie Mac, and Ginnie Mae mortgage-backed securities. At June 30, 2006, the portfolio had a weighted-average coupon rate of 4.2% and an estimated weighted-average-yield of 3.6%. These securities had an estimated average maturity of 6.1 years and an estimated average life of 2.3 years at June 30, 2006.

U.S. Government Agency and Government Sponsored Entity Bonds. Our portfolio of U.S. government agency and government sponsored entity bonds had a fair value of $17.1 million and a $17.5 million amortized cost at June 30, 2006. This portfolio was comprised of Freddie Mac, Federal Home Loan Bank, and Federal Farm Credit Bank bonds. At June 30, 2006, the portfolio had a

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weighted-average-coupon and a weighted-average-yield of 3.6%. Most U.S. agency obligations have call provisions. The longest term call provision was on a bond with an amortized cost of $2.0 million, a one-time call of 0.4 years, and a final maturity of 1.9 years. The longest term agency without a call provision was on a bond with an amortized cost of $5.0 million and a final maturity of 1.4 years.

Collateralized Mortgage Obligations. Our portfolio of collateralized mortgage obligations had a fair value of $11.4 million and a $11.9 million amortized cost at June 30, 2006. At June 30, 2006 the portfolio had a weighted-average-coupon of 4.6% and a weighted-average-yield of 4.5%. These securities had an estimated average maturity of 17.8 years and an estimated average life of 4.9 years at June 30, 2006.

We invest in collateralized mortgage obligations as an alternative to mortgage loans and conventional mortgage-backed securities as part of our asset liability management strategy. Management believes that collateralized mortgage obligations represent attractive investment alternatives relative to other investments due to the wide variety of maturity and repayment options available through such investments. In particular, we have, from time to time, concluded that short and intermediate and long duration collateralized mortgage obligations (with an expected average life of five to ten years or less) represent a better combination of rate and duration than adjustable rate mortgage-backed securities. Because our collateralized mortgage obligations are purchased as an alternative to mortgage loans and because we have the ability and intent to hold such securities to maturity, all such securities are classified as held-to-maturity. All of our collateralized mortgage obligations and mortgage-backed securities are guaranteed by either Fannie Mae, Freddie Mac or Ginnie Mae.

In contrast to mortgage-backed pass-through securities in which cash flow is received (and, hence, prepayment risk is shared) pro rata by all securities holders, the cash flows from the mortgages or mortgage-backed securities underlying collateralized mortgage obligations are segmented and paid in accordance with a predetermined priority to investors holding various tranches of such securities or obligations. A particular tranche of collateralized mortgage obligations may therefore carry prepayment risk that differs from that of both the underlying collateral and other tranches. It is our strategy to purchase tranches of collateralized mortgage obligations with expected shorter term duration and are intended to produce stable cash flows in different interest rate environments. However, interest rate changes may affect the duration of these securities.

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The following table sets forth the composition of our investment portfolio at the dates indicated.

	At June 30,
	2006				2005				2004
	Carrying Value		Percent of Total		Carrying Value		Percent of Total		Carrying Value		Percent of Total
Securities available-for-sale:		(Dollars in thousands)
Securities
U.S. government and government sponsored entity bonds	$	5,392	14.96	%	$	10,864	21.87	%	$	10,890	17.46	%
Mortgage-backed securities:
Freddie Mac		5,897	16.37			7,984	16.07			10,113	16.22
Total securities available-for-sale	$	11,289	31.33	%	$	18,848	37.94	%	$	21,003	33.68	%
Securities held-to-maturity:
Securities
U.S. government and government sponsored entity bonds	$	12,000	33.31	%	$	10,000	20.13	%	$	10,000	16.03	%
Mortgage-backed securities:
Fannie Mae		408	1.13			541	1.09			732	1.17
Freddie Mac		269	0.75			335	0.67			454	0.73
Ginnie Mae		168	0.47			250	0.50			310	0.50
Collateralized mortgage obligations:
Fannie Mae		3,372	9.36			4,617	9.29			7,342	11.77
Freddie Mac		7,197	19.98			12,570	25.30			18,049	28.95
Ginnie Mae		1,324	3.67			2,521	5.08			4,474	7.17
Total securities held-to-maturity	$	24,738	68.67	%	$	30,834	62.06	%	$	41,361	66.32	%
Total securities	$	36,027	100.00	%	$	49,682	100.00	%	$	62,364	100.00	%
Other earning assets:
Interest-bearing deposits in other financial institutions	$	9,010	24.97	%	$	9,010	38.57	%	$	2,970	24.40	%
Fed Funds		18,335	50.80			10,325	44.20			5,235	43.00
FHLB stock		8,746	24.23			4,027	17.23			3,290	27.02
Other investments		—	—			—	—			679	5.58
Total other earning assets	$	36,091	100.00	%	$	23,362	100.00	%	$	12,174	100.00	%
Total securities and other earning assets	$	72,118			$	73,044			$	74,538

While our collateralized mortgage-backed securities and mortgage-backed securities carry a reduced credit risk as compared to whole loans due to their issuance under government agency sponsored programs, they remain subject to the risk that a fluctuating interest rate environment, along with other factors like the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of the mortgage loans and so affect both the prepayment speed, and value, of the investment securities. As a result of these factors, the estimated average lives of these securities will be shorter than the contractual maturities as shown on the following table.

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The composition and maturities of the investment securities portfolio as of June 30, 2006, are as follows:

		At June 30, 2006
		One year or less	Weighted Average Yield			After one year through five years	Weighted Average Yield			After five years through ten years	Weighted Average Yield			After ten years	Weighted Average Yield			Total		Weighted Average Yield
		(Dollars in thousands)
U.S. government and government sponsored entity bonds	$	5,392	3.09	%	$	12,000	3.83	%	$	—	—	%	$	—	—	%	$	17,392	$	3.60	%
Mortgage-backed securities		—	—			4,628	3.31			1,269	3.79			845	5.15			6,742		3.63
Collateralized mortgage obligations		—	—			—	—			—	—			11,893	4.51			11,893		4.51
Total investment securities	$	5,392	3.09	%	$	16,628	3.69	%	$	1,269	3.79	%	$	12,738	4.56	%	$	36,027	$	3.91	%

Interest Earning Deposits in Other Financial Institutions. Interest earning deposits in other financial institutions consists of certificates of deposits placed with multiple federally insured financial institutions in amounts that do not exceed the insurable limit of $100,000. These deposits are used as short-term investments as part of our overall asset/liability management. These certificates of deposit had a weighted-average yield of 3.6% and an average life of 9 months at June 30, 2006.

Federal Home Loan Bank Stock. As a member of the Federal Home Loan Bank of San Francisco, we are required to own capital stock in the Federal Home Loan Bank of San Francisco. The amount of stock we hold is based on percentages specified by the Federal Home Loan Bank of San Francisco on our outstanding advances and the requirements of their Mortgage Purchase Program. The redemption of any excess stock we hold is at the discretion of the Federal Home Loan Bank of San Francisco. The carrying value of Federal Home Loan Bank of San Francisco stock totaled $8.7 million and had a weighted-average-yield of 3.9% for the year ended June 30, 2006. The yield on the Federal Home Loan Bank of San Francisco stock is produced by stock dividends that are subject to the discretion of the board of directors of the Federal Home Loan Bank of San Francisco.

Equity Investment. At June 30, 2006, we also had an approximate 14% investment in an affordable housing fund totaling $2.2 million, with a commitment to fund an additional $322,000, for the purposes of obtaining tax credits and for Community Reinvestment Act purposes. The investment is being accounted for using the equity method of accounting. The investment is evaluated periodically for impairment based on the remaining allocable tax credits.

Bank-Owned Life Insurance. In April 2005, we purchased $10.0 million in bank-owned life insurance, which covers certain key employees, to provide tax-exempt income to assist in offsetting costs associated with employee benefit plans offered by the Kaiser Federal Bank. The bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

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Sources of Funds

General. Our sources of funds are deposits, payment of principal and interest on loans, interest earned on or maturation of other investment securities, borrowings, and funds provided from operations.

Deposits. We offer a variety of deposit accounts to consumers with a wide range of interest rates and terms. Our deposits consist of time deposit accounts, savings, money market and demand deposit accounts. We have historically paid competitive rates on our deposit accounts. We primarily rely on competitive pricing policies, marketing and customer service to attract and retain these deposits. At June 30, 2006, approximately 34.4% of our deposits were from customers who are employed by the Kaiser Permanente Medical Care Program.

The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates and bi-weekly direct deposits from Kaiser Permanente Medical Care Program payrolls. The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. We have become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. We try to manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe that our deposits are a relatively stable sources of funds. Despite this stability, our ability to attract and maintain these deposits and the rates paid on them has been and will continue to be significantly affected by market conditions.

The following table sets forth our deposit flows during the periods indicated.

	Year Ended June 30,
	2006			2005			2004
	(Dollars in thousands)
Opening balance	$	475,792		$	422,953		$	346,239
Acquired deposits		—			61,177			—
Deposits, net of withdrawals		(23,721	)		(17,204	)		68,590
Interest credited		11,383			8,866			8,124
Ending balance	$	463,454		$	475,792		$	422,953
Net (decrease) increase	$	(12,338	)	$	52,839		$	76,714
Percent (decrease) increase		(2.6	) %		12.5	%		22.2	%

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The following table sets forth the dollar amount of savings deposits in the various types of deposit programs we offered at the dates indicated.

	At June 30,
	2006				2005				2004
	Amount		Percent of Total		Amount		Percent of Total		Amount		Percent of Total
		(Dollars in thousands)
Noninterest-bearing demand	$	43,137	9.31	%	$	43,744	9.19	%	$	38,020	8.99	%
Savings		91,199	19.68			99,730	20.96			95,115	22.49
Money Market		110,987	23.95			107,080	22.51			105,532	24.95
Certificates of deposit:
1.00% - 1.99%		55	.01			7,139	1.50			26,092	6.17
2.00% - 2.99%		4,911	1.06			49,332	10.37			69,569	16.45
3.00% - 3.99%		54,679	11.80			93,291	19.61			37,652	8.90
4.00% - 4.99%		150,843	32.54			55,168	11.59			26,808	6.34
5.00% - 5.99%		7,643	1.65			9,148	1.92			9,770	2.31
6.00% - 6.99%		—	—			5,021	1.06			8,400	1.99
7.00% - 7.99%		—	—			6,139	1.29			5,995	1.41
Total Certificates of Deposit		218,131	47.06			225,238	47.34			184,286	43.57
Total	$	463,454	100.00	%	$	475,792	100.00	%	$	422,953	100.00	%

The following table indicates the amount of Kaiser Federal Bank’s certificates of deposit by time remaining until maturity as of June 30, 2006.

	June 30, 2007		June 30, 2008		June 30, 2009		June 30, 2010		June 30, 2011		Total
	(Dollars in thousands)
1.00% - 1.99%	$	46	$	9	$	—	$	—	$	—	$	55
2.00% - 2.99%		4,618		267		26		—		—		4,911
3.00% - 3.99%		33,696		6,962		10,766		2,688		567		54,679
4.00% - 4.99%		76,763		24,931		8,069		20,564		20,516		150,843
5.00% - 5.99%		7,643		—		—		—		—		7,643
6.00% - 6.99%		—		—		—		—		—		—
7.00% - 7.99%		—		—		—		—		—		—
	$	122,766	$	32,169	$	18,861	$	23,252	$	21,083	$	218,131

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The following table provides the remaining maturities of large denomination ($100,000 or more) time deposits at June 30, 2006.

Maturity Period	Certificates of Deposit
	(In thousands)
Three months or less	$	6,237
Over three through six months		10,123
Over six through twelve months		20,490
Over twelve months		37,847
Total	$	74,697

Borrowings. Although deposits are our primary source of funds, we may utilize borrowings when they are a less costly source of funds, and can be invested at a positive interest rate spread, when we desire additional capacity to purchase loans or to fund loan demand or when they meet our asset/liability management goals. Our borrowings historically have consisted of advances from the Federal Home Loan Bank of San Francisco. See Note 8 of the Notes to Consolidated Financial Statements.

We may obtain advances from the Federal Home Loan Bank of San Francisco upon the security of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At June 30, 2006, we had $180.0 million in Federal Home Loan Bank advances outstanding.

The following table sets forth information as to our Federal Home Loan Bank advances for the periods indicated.

	Year Ended June 30,
	2006			2005			2004
	(Dollars in thousands)
Average balance outstanding	$	148,408		$	60,354		$	51,538
Maximum month-end balance		179,948			90,444			70,000
Balance at end of period		179,948			70,777			70,000
Weighted average interest rate during the period		4.14	%		3.35	%		2.92	%
Weighted average interest rate at end of period		4.20	%		4.20	%		2.50	%

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Employees

At June 30, 2006, we had a total of 104 employees, including 10 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relations with our employees.

How We Are Regulated

Set forth below is a brief description of certain laws and regulations which are applicable to K-Fed Bancorp and Kaiser Federal Bank. The description of these laws and regulations, as well as descriptions of laws and regulations contained elsewhere herein, does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

Legislation is introduced from time to time in the United States Congress that may affect the operations of K-Fed Bancorp and Kaiser Federal Bank. In addition, the regulations governing K-Fed Bancorp and Kaiser Federal Bank may be amended from time to time by the Office of Thrift Supervision. Any such legislation or regulatory changes in the future could adversely affect K-Fed Bancorp or Kaiser Federal Bank. No assurance can be given as to whether or in what form any such changes may occur.

General

Kaiser Federal Bank, as a federally-chartered savings institution, is subject to federal regulation and oversight by the Office of Thrift Supervision extending to all aspects of its operations. Kaiser Federal Bank also is subject to regulation by the FDIC, which insures the deposits of Kaiser Federal Bank to the maximum extent permitted by law, and reserve requirements established by the Federal Reserve Board. Federally chartered savings institutions are required to file periodic reports with the Office of Thrift Supervision and are subject to periodic examinations by the Office of Thrift Supervision and the FDIC. The investment and lending authority of savings institutions are prescribed by federal laws and regulations, and such institutions are prohibited from engaging in any activities not permitted by such laws and regulations. Such regulation and supervision primarily is intended for the protection of depositors and not for the purpose of protecting stockholders.

The Office of Thrift Supervision regularly examines Kaiser Federal Bank and prepares reports for the consideration of Kaiser Federal Bank’s board of directors on any deficiencies that it may find in Kaiser Federal Bank’s operations. Kaiser Federal Bank’s relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in such matters as the ownership of savings accounts and the form and content of Kaiser Federal Bank’s mortgage requirements. Any change in such regulations, whether by the FDIC, the Office of Thrift Supervision or Congress, could have a material adverse impact on K-Fed Bancorp and Kaiser Federal Bank and their operations.

K-Fed Bancorp

General. K-Fed Bancorp is a federal mutual holding company subsidiary within the meaning of Section 10(o) of the Home Owners’ Loan Act. It is required to file reports with the Office of Thrift Supervision and is subject to regulation and examination by the Office of Thrift Supervision. In addition, the Office of Thrift Supervision has enforcement authority over K-Fed Bancorp and any non-savings institution subsidiaries. This permits the Office of Thrift Supervision to restrict or prohibit

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activities that it determines to be a serious risk to Kaiser Federal Bank. This regulation is intended primarily for the protection of the depositors and not for the benefit of stockholders of K-Fed Bancorp.

Activities Restrictions. K-Fed Bancorp and its non-savings institution subsidiaries are subject to statutory and regulatory restrictions on their business activities specified by federal regulations, which include performing services and holding properties used by a savings institution subsidiary, activities authorized for savings and loan holding companies as of March 5, 1987, and non-banking activities permissible for bank holding companies pursuant to the Bank Holding Company Act of 1956 or authorized for financial holding companies pursuant to the Gramm-Leach-Bliley Act.

If Kaiser Federal Bank fails the qualified thrift lender test, K-Fed Bancorp must, within one year of that failure, register as, and will become subject to, the restrictions applicable to bank holding companies. See “- Qualified Thrift Lender Test.”

Waivers of Dividends by K-Fed Bancorp. Office of Thrift Supervision regulations require K-Fed Mutual Holding Company to notify the Office of Thrift Supervision of any proposed waiver of its receipt of dividends from K-Fed Bancorp. The Office of Thrift Supervision reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if the mutual holding company provides the OTS with written notice of its intent to waive its right to receive dividends 30 days prior to the proposed date of payment of the dividend, and the OTS does not object. The OTS shall not object to a notice of intent to waive dividends if: (i) the waiver would not be detrimental to the safe and sound operation of the savings association; and (ii) the board of directors of the mutual holding company expressly determines that waiver of the dividend by the mutual holding company is consistent with the directors’ fiduciary duties to the mutual members of such company. A dividend waiver notice shall include a copy of the resolution of the board of directors of the mutual holding company, in form and substance satisfactory to the OTS, together with any supporting materials relied upon by the board, concluding that the proposed dividend waiver is consistent with the board’s fiduciary duties to the mutual members of the mutual holding company. The OTS will not consider waived dividends in determining an appropriate exchange ratio in the event of a full conversion to stock form.

K-Fed Mutual Holding Company waived its right to receive dividends paid by K-Fed Bancorp during the year ended June 30, 2006 and we anticipate that K-Fed Mutual Holding Company will waive future dividends paid by K-Fed Bancorp, if any. Under Office of Thrift Supervision regulations, our public stockholders would not be diluted because of any dividends waived by K-Fed Mutual Holding Company (and waived dividends would not be considered in determining an appropriate exchange ratio) in the event K-Fed Mutual Holding Company converts to stock form.

Conversion of K-Fed Mutual Holding Company to Stock Form. The Office of Thrift Supervision regulations permit K-Fed Mutual Holding Company to convert from the mutual form of organization to the capital stock form of organization (a “Conversion Transaction”). There can be no assurance when, if ever, a Conversion Transaction will occur, and the board of directors has no current intention or plan to undertake a Conversion Transaction. In a Conversion Transaction a new holding company would be formed as the successor to K-Fed Bancorp (the “New Holding Company”), K-Fed Mutual Holding Company’s corporate existence would end, and certain depositors of Kaiser Federal Bank would receive the right to subscribe for additional shares of the New Holding Company. In a Conversion Transaction, each share of common stock held by stockholders other than K-Fed Mutual Holding Company (“Minority Stockholders”) would be automatically converted into a number of shares of common stock in the New Holding Company determined pursuant to an exchange ratio that

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ensures that the Minority Stockholders own the same percentage of common stock in the New Holding Company as they owned in K-Fed Bancorp immediately prior to the Conversation Transaction. Under Office of Thrift Supervision regulations, Minority Stockholders would not be diluted because of any dividends waived by K-Fed Mutual Holding Company (and waived dividends would not be considered in determining an appropriate exchange ratio), if K-Fed Mutual Holding Company converts to stock form. The total number of shares held by Minority Stockholders after a Conversion Transaction also would be increased by any purchases by Minority Stockholders in the stock offering conducted as part of the Conversion Transaction.

A Conversion Transaction requires the approval of the Office of Thrift Supervision as well as a majority of the votes eligible to be cast by the members of K-Fed Mutual Holding Company and a majority of the votes eligible to be cast by the stockholders of K-Fed Bancorp other than K-Fed Mutual Holding Company.

Kaiser Federal Bank

The Office of Thrift Supervision has extensive authority over the operations of savings institutions. As part of this authority, Kaiser Federal Bank is required to file periodic reports with the Office of Thrift Supervision and is subject to periodic examinations by the Office of Thrift Supervision and the FDIC. When these examinations are conducted by the Office of Thrift Supervision and the FDIC, the examiners may require Kaiser Federal Bank to provide for higher general or specific loan loss reserves. All savings institutions are subject to a semi-annual assessment, based upon the savings institution’s total assets, to fund the operations of the Office of Thrift Supervision.

The Office of Thrift Supervision also has extensive enforcement authority over all savings institutions and their holding companies, including Kaiser Federal Bank and K-Fed Bancorp. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with the Office of Thrift Supervision. Except under certain circumstances, public disclosure of final enforcement actions by the Office of Thrift Supervision is required.

In addition, the investment, lending and branching authority of Kaiser Federal Bank is prescribed by federal laws and it is prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal institutions in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the Office of Thrift Supervision. Federal savings institutions are also generally authorized to branch nationwide. Kaiser Federal Bank is in compliance with the noted restrictions.

Kaiser Federal Bank’s general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At June 30, 2006 Kaiser Federal Bank’s lending limit under this restriction was $10.3 million. Kaiser Federal Bank is in compliance with the loans-to-one-borrower limitation.

The Office of Thrift Supervision, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and

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documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan.

Insurance of Accounts and Regulation by the FDIC

Kaiser Federal Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposits are insured up to the applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the Deposit Insurance Fund. The FDIC also has the authority to initiate enforcement actions against savings institutions, after giving the Office of Thrift Supervision an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. On July 11, 2006, the Federal Deposit Insurance Corporation proposed rules that would change how it imposes deposit insurance assessments. Under the proposed rule, a depository institution would be subject to a minimum assessment rate of between 2 and 4 basis points based on the total deposits held by the institution. If enacted, this increased assessment will increase our non-interest expense.

Regulatory Capital Requirements

Federally insured savings institutions, such as Kaiser Federal Bank, are required to maintain a minimum level of regulatory capital. The Office of Thrift Supervision has established capital standards, including a tangible capital requirement, a leverage ratio or core capital requirement and a risk-based capital requirement applicable to such savings institutions. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The Office of Thrift Supervision is also authorized to impose capital requirements in excess of these standards on individual institutions on a case-by-case basis.

The capital regulations require tangible capital of at least 1.50% of adjusted total assets, as defined by regulation. Tangible capital generally includes common stockholders’ equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital for calculating compliance with the requirement. At June 30, 2006, Kaiser Federal Bank had intangible assets totaling $4.4 million, consisting of a core deposit premium of $437,000 and $4.0 million of goodwill, which were deducted from its tangible capital.

At June 30, 2006, Kaiser Federal Bank had tangible capital of $68.9 million, or 9.58% of adjusted total assets, which is approximately $58.1 million above the minimum requirement of 1.50% of adjusted total assets in effect on that date.

The capital standards also require core capital equal to at least 4.00% of adjusted total assets unless its supervisory condition is such to allow it to maintain a 3.00% ratio. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships.

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At June 30, 2006, Kaiser Federal Bank had core capital equal to $68.9 million, or 9.58% of adjusted total assets, which is $40.1 million above the minimum requirement of 4.00% in effect on that date.

The Office of Thrift Supervision also requires savings institutions to have core capital equal to 4.00% of risk-weighted assets (“Tier 1 Risk-Based”). At June 30, 2006, Kaiser Federal Bank had Tier 1 risk-based capital of $68.9 million or 15.42% of risk-weighted assets, which is approximately $51.0 million above the minimum on such date. The Office of Thrift Supervision also requires savings institutions to have total capital of at least 8.00% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The Office of Thrift Supervision is also authorized to require a savings institution to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities.

In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the Office of Thrift Supervision has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by Fannie Mae or Freddie Mac.

On June 30, 2006, Kaiser Federal Bank had total risk-based capital of $71.6 million and risk-weighted assets of $446.8million; or total capital of 16.03% of risk-weighted assets. This amount was $35.9 million above the 8.00% requirement in effect on that date.

The Office of Thrift Supervision and the FDIC are authorized and, under certain circumstances, required to take certain actions against savings institutions that fail to meet their capital requirements. The Office of Thrift Supervision is generally required to take action to restrict the activities of an “undercapitalized institution,” which is an institution with less than either a 4.00% core capital ratio, a 4.00% Tier 1 risked-based capital ratio or an 8.00% risk-based capital ratio. Any such institution must submit a capital restoration plan and until the plan is approved by the Office of Thrift Supervision, may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The Office of Thrift Supervision is authorized to impose the additional restrictions that are applicable to significantly undercapitalized institutions.

As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized institution must agree that it will enter into a limited capital maintenance guarantee with respect to the institution’s achievement of its capital requirements.

Any savings institution that fails to comply with its capital plan or has Tier 1 risk-based or core capital ratios of less than 3.00% or a risk-based capital ratio of less than 6.00% and is considered “significantly undercapitalized” will be made subject to one or more additional specified actions and operating restrictions which may cover all aspects of its operations and may include a forced merger or acquisition of the institution. An institution that becomes “critically undercapitalized” because it has a tangible capital ratio of 2.00% or less is subject to further mandatory restrictions on its activities in

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addition to those applicable to significantly undercapitalized institutions. In addition, the Office of Thrift Supervision must appoint a receiver, or conservator with the concurrence of the FDIC, for a savings institution, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized institution is also subject to the general enforcement authority of the Office of Thrift Supervision and the FDIC, including the appointment of a conservator or a receiver.

The Office of Thrift Supervision is also generally authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

Limitations on Dividends and Other Capital Distributions

Office of Thrift Supervision regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.

Generally, savings institutions, such as Kaiser Federal Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year equal to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the Office of Thrift Supervision may have its dividend authority restricted by the Office of Thrift Supervision. Kaiser Federal Bank may pay dividends to K-Fed Bancorp in accordance with this general authority.

Savings institutions proposing to make any capital distribution need not submit written notice to the Office of Thrift Supervision prior to such distribution unless they are a subsidiary of a holding company or would not remain well-capitalized following the distribution. Savings institutions that do not, or would not meet their current minimum capital requirements following a proposed capital distribution or propose to exceed these net income limitations, must obtain Office of Thrift Supervision approval prior to making such distribution. The Office of Thrift Supervision may object to the distribution during that 30-day period based on safety and soundness concerns. See “- Regulatory Capital Requirements.”

Liquidity

All savings institutions, including Kaiser Federal Bank, are required to maintain sufficient liquidity to ensure a safe and sound operation.

Qualified Thrift Lender Test

All savings institutions, including Kaiser Federal Bank, are required to meet a qualified thrift lender test to avoid certain restrictions on their operations. This test requires a savings institution to have at least 65% of its portfolio assets, as defined by regulation, in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings institution may maintain 60% of its assets in those assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans and investments. At June 30, 2006 Kaiser Federal Bank met the test with a 95.1%, ratio and has always met the test since it became subject to the Office of Thrift Supervision regulation.

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Any savings institution that fails to meet the qualified thrift lender test must convert to a national bank charter, unless it requalifies as a qualified thrift lender within one year of failure and thereafter remains a qualified thrift lender. If such an institution has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings institution and a national bank, and it is limited to national bank branching rights in its home state. In addition, the institution is immediately ineligible to receive any new Federal Home Loan Bank borrowings and is subject to national bank limits for payment of dividends. If such an institution has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. If any institution that fails the qualified thrift lender test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies.

Community Reinvestment Act

Under the Community Reinvestment Act, every FDIC-insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift Supervision, in connection with the examination of Kaiser Federal Bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by Kaiser Federal Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the Office of Thrift Supervision. Due to the heightened attention being given to the Community Reinvestment Act in the past few years, Kaiser Federal Bank may be required to devote additional funds for investment and lending in its local community. Kaiser Federal Bank received a rating of satisfactory in May 2006.

Transactions with Affiliates

Generally, transactions between a savings institution or its subsidiaries and its affiliates are required to be on terms as favorable to the institution as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the institution’s capital. Affiliates of Kaiser Federal Bank include K-Fed Bancorp and any company which is under common control with Kaiser Federal Bank. In addition, a savings institution may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The Office of Thrift Supervision has the discretion to treat subsidiaries of savings institutions as affiliates on a case by case basis. In addition, the Office of Thrift Supervision regulations prohibit a savings institution from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary.

Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the Office of Thrift Supervision. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must generally be made on terms substantially the same as for loans to unaffiliated individuals.

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Federal Securities Law

The stock of K-Fed Bancorp is registered with the SEC under the Securities Exchange Act of 1934, as amended. K-Fed Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Securities Exchange Act of 1934.

K-Fed Bancorp stock held by persons who are affiliates of K-Fed Bancorp may not be resold without registration unless sold in accordance with certain resale restrictions. Affiliates are generally considered to be officers, directors and principal stockholders. If K-Fed Bancorp meets specified current public information requirements, each affiliate of K-Fed Bancorp will be able to sell in the public market, without registration, a limited number of shares in any three-month period.

USA PATRIOT Act

In response to the terrorist events of September 11, 2001, the President of the United States signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act, which augmented existing anti-money laundering laws, gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions.

Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements:

• Financial institutions must establish anti-money laundering programs that include: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.

• Financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives must establish appropriate, specific, and, where necessary, enhance due diligence policies, procedures, and controls designed to detect and report money laundering.

• Financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign banks that do not have a physical presence in any country and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.

• Bank regulators must consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

Our policies and procedures have been updated to reflect the requirements of the USA PATRIOT Act. No significant changes in our business or customer practices were required as a result of the implementation of these requirements.

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Privacy

Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide:

• initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated third parties and affiliates;

• annual notices of their privacy policies to current customers; and

• a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties.

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. The Company has implemented our privacy policies in accordance with the law.

In recent years, a number of states have implemented their own versions of privacy laws. For example, in 2003, California adopted standards that are more stringent than federal law, allowing bank customers the opportunity to bar financial companies from sharing information with their affiliates.

Sarbanes-Oxley Act of 2002.

The Sarbanes-Oxley Act of 2002 was signed into law by President Bush on July 30, 2002 in response to public concerns regarding corporate accountability in connection with recent accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the Securities Exchange Act of 1934, including K-Fed Bancorp.

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

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Federal Reserve System

The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, primarily checking, NOW and Super NOW checking accounts. At June 30, 2006, Kaiser Federal Bank was in compliance with these reserve requirements. Savings institutions are authorized to borrow from the Federal Reserve Bank “discount window,” but Federal Reserve Board regulations require institutions to exhaust other reasonable alternative sources of funds, including Federal Home Loan Bank borrowings, before borrowing from the Federal Reserve Bank.

Federal Home Loan Bank System

Kaiser Federal Bank is a member of the Federal Home Loan Bank of San Francisco, which is one of 12 regional Federal Home Loan Banks that administers the home financing credit function of savings institutions. Each Federal Home Loan Bank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the Federal Home Loan Bank System. It makes loans or advances to members in accordance with policies and procedures, established by the board of directors of the Federal Home Loan Bank, which are subject to the oversight of the Federal Housing Finance Board. All advances from the Federal Home Loan Bank are required to be fully secured by sufficient collateral as determined by the Federal Home Loan Bank. In addition, all long-term advances are required to provide funds for residential home financing.

As a member, Kaiser Federal Bank is required to purchase and maintain stock in the Federal Home Loan Bank of San Francisco. At June 30, 2006, Kaiser Federal Bank had $8.7 million in Federal Home Loan Bank stock, which was in compliance with this requirement. In past years, Kaiser Federal Bank has received dividends on its Federal Home Loan Bank stock. Over the past two fiscal years such dividends have averaged 3.9% and were 3.9% for the year ended June 30, 2006.

Under federal law, the Federal Home Loan Banks are required to provide funds for the resolution of troubled savings institutions and to contribute to low- and moderately-priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of Federal Home Loan Bank dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of Federal Home Loan Bank stock in the future. A reduction in value of Kaiser Federal Bank’s Federal Home Loan Bank stock may result in a corresponding reduction in Kaiser Federal Bank’s capital.

Taxation

Federal

General. K-Fed Bancorp and Kaiser Federal Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to K-Fed Bancorp or Kaiser Federal Bank. Kaiser Federal Bank’s federal income tax returns have never been audited by the IRS.

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Method of Accounting. For federal income tax purposes, K-Fed Bancorp and Kaiser Federal Bank currently reports their income and expenses on the accrual method of accounting and use a fiscal year ending on June 30th, for filing their federal income tax returns.

Minimum Tax. The Internal Revenue Code imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, called alternative minimum taxable income. The alternative minimum tax is payable to the extent such alternative minimum taxable income is in excess of an exemption amount. Net Operating losses can offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Kaiser Federal Bank has not been subject to the alternative minimum tax, nor do we have any such amounts available as credits for carryover.

Net Operating Loss Carryovers. A financial institution may carryback net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 6, 1997. At June 30, 2006, Kaiser Federal Bank had no net operating loss carryforwards for federal income tax purposes.

Corporate Dividends-Received Deduction. K-Fed Bancorp may eliminate from its income dividends received from Kaiser Federal Bank as a wholly owned subsidiary of K-Fed Bancorp if it elects to file a consolidated return with Kaiser Federal Bank. The corporate dividends-received deduction is 100% or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payor of the dividend. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.

State

K-Fed Bancorp and Kaiser Federal Bank are subject to the California corporate (franchise) tax which is assessed at the rate of 10.84%. For this purpose, California taxable income generally means federal taxable income subject to certain modifications provided for in the California law.

Item1A. Risk Factors

The following are certain risk factors that could impact our business, financial results and results of operations. Investing in our common stock involves risks, including those described below. These risk factors should be considered by prospective and current investors in our common stock when evaluating the disclosures in this Annual Report on Form 10-K (particularly the forward-looking statements.) These risk factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. If the risks we face, including those listed below, actually occur, our business, financial condition or results of operations could be negatively impacted, and the trading price of our common stock could decline, which may cause you to lose all or part of your investment.

Rising interest rates may hurt our profits.

Interest rates are at historically low levels, despite increases over the past two years. If interest rates continue to rise, our net interest income and the value of our assets could be reduced if interest paid on interest-bearing liabilities, such as deposits and borrowings, increases more quickly than interest received on interest-earning assets, such as loans, mortgage-related and investment securities. For example, if we experienced an immediate 100 basis point rise in interest rates as of June 30, 2006,

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the market value of our portfolio equity could decrease by $10.1 million. See Item 7A—“Quantitative and Qualitative Disclosures About Market Risk.” In addition, rising interest rates may hurt our income because they may reduce the demand for loans and the value of our securities.

Our loan portfolio possesses increased risk due to our substantial number of multi-family, commercial real estate and consumer loans.

Our multi-family, commercial real estate and consumer loans accounted for approximately 31.4% of our total loan portfolio as of June 30, 2006. Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner-occupied residential properties. In addition, we plan to increase our emphasis on multi-family and commercial real estate lending. Because of our planned increased emphasis on and increased investment in multi-family and commercial real estate lending, it may become necessary to increase the level of our provision for loan losses, which could hurt our profits.

Our loan portfolio possesses increased risk due to its rapid expansion, unseasoned nature and amount of nonconforming loans.

Since June 30, 2003, our loan portfolio has grown by $244.5 million or 162.7%. As a result of this rapid expansion, a significant portion of our portfolio is unseasoned, with the risk that these loans may not have had sufficient time to perform to properly indicate the potential magnitude of losses. Our unseasoned adjustable rate loans have not, therefore, been subject to an interest rate environment which causes them to adjust to the maximum level and may involve risks resulting from potentially increasing payment obligations by the borrower as a result of repricing. Most of our adjustable rate mortgage loans are also non-conforming, due mainly to the generally large loan size and are, therefore, not readily saleable to Freddie Mac or Fannie Mae. They are, however, saleable to other private investors.

Strong Competition Within Our Market Area May Limit Our Growth and Profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we do and may offer certain services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our market.

If economic conditions deteriorate, our results of operations and financial condition could be adversely impacted as borrowers’ ability to repay loans declines and the value of the collateral securing our loans decreases.

Our financial results may be adversely affected by changes in prevailing economic conditions, including decreases in real estate values, changes in interest rates which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events. Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. In this regard, approximately 100% of our loans are to individuals and businesses in California.

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Item1B. Unresolved Staff Comments.

None.

Item 2. Properties.

At June 30, 2006, we had three full service offices and four financial service centers. Our financial service centers provide all the same services as a full service office except they do not dispense cash, but cash is available from an ATM located on site. We lease the space in which our home office, executive offices and branch offices are located. The net book value of our investment in premises, equipment and fixtures, excluding computer equipment, was approximately $2.7 million at June 30, 2006.

The following table provides a list of our main and branch offices, all of which are leased.

Location	Owned or Leased	Lease Expiration Date	Deposits at June 30, 2006 (In thousands)
HOME AND EXECUTIVE OFFICE
1359 North Grand Avenue Covina, CA 91724	Leased	April 2010	$ 84,367
BRANCH OFFICES:
252 South Lake Avenue Pasadena, CA 91101	Leased	May 2015	$122,784
3375 Scott Boulevard, Suite 312 Santa Clara, CA 95054	Leased	May 2009	$ 57,802
9844 Sierra Avenue, Suite A Fontana, CA 92335	Leased	September 2006	$ 47,242
8501 Van Nuys Boulevard Panorama City, CA 91402	Leased	March 2011	$ 98,995
10105 Rosecrans Avenue Bellflower, CA 90706	Leased	March 2011	$ 36,019
26640 Western Avenue, Suite N Harbor City, CA 90170	Leased	February 2011	$ 16,245

During the third and fourth quarter of 2006, we expanded our properties and entered into a lease agreement for office space located in Los Angeles, California and purchased an office building in Riverside, California at a cost of $998,000. The Los Angeles and Riverside locations are currently under construction and will be opened as financial service centers during the first quarter of Fiscal 2007.

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We believe that our current facilities are adequate to meet the present and immediately foreseeable needs of Kaiser Federal Bank and K-Fed Bancorp.

We use an in-house system with support provided by a third-party vendor to maintain our data base of depositor and borrower customer information. The net book value of our data processing and computer equipment at June 30, 2006 was approximately $676,000.

Item 3. 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 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2006.

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Part II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the Nasdaq Global Market under the symbol “KFED”. K-Fed Mutual Holding Company owns 8,861,750 shares, or 62.4% of our outstanding common stock. The approximate number of holders of record of the Company’s common stock as of September 1, 2006 was 2,504. Certain shares of the Company are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number. The following table presents quarterly market information for the Company’s common stock for the two fiscal years ended June 30, 2006 and June 30, 2005. The Company began trading on the Nasdaq Stock Market on March 31, 2004. The following information was provided by the Nasdaq Stock Market.

	Market Price Range
	High		Low		Dividends
Fiscal Year ended June 30, 2006
Quarter ended September 30, 2005	$	13.04	$	12.13	$	0.06
Quarter ended December 31, 2005	$	12.54	$	11.88	$	0.07
Quarter ended March 31, 2006	$	12.74	$	12.05	$	0.07
Quarter ended June 30, 2006	$	14.49	$	12.61	$	0.08

	Market Price Range
	High		Low		Dividends
Fiscal Year ended June 30, 2005
Quarter ended September 30, 2004	$	15.62	$	12.70	$	0.00
Quarter ended December 31, 2004	$	15.25	$	13.95	$	0.05
Quarter ended March 31, 2005	$	15.25	$	12.31	$	0.05
Quarter ended June 30, 2005	$	12.99	$	10.95	$	0.06

Dividend Policy

Dividend payments by K-Fed Bancorp are dependent primarily on dividends it receives from Kaiser Federal Bank, because K-Fed Bancorp has no source of income other than dividends from Kaiser Federal Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by K-Fed Bancorp, and interest payments with respect to K-Fed Bancorp’s loan to the Employee Stock Ownership Plan. A regulation of the Office of Thrift Supervision imposes limitations on “capital distributions” by savings institutions. See “How We Are Regulated – Limitations on Dividends and Other Capital Distributions.”

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Equity Compensation Plans

Set forth below is information, as of June 30, 2006, regarding equity compensation plans categorized by those plans that have been approved by stockholders and those plans that have not been approved by stockholders.

Plan	Number of Securities to be Issued Upon Exercise of Outstanding Options and Rights(1)		Weighted Average Exercise Price(2)		Number of Securities Remaining Available For Issuance Under Plan
Equity compensation plans approved by stockholders		565,675	$	14.50		195,075
Equity compensation plans not approved by stockholders		—		—		—
Total		565,675	$	14.50		195,075

______________________

⁽¹⁾ Consists of options to purchase 568,675 shares of common stock under the 2004 K-Fed Bancorp Stock Option Plan.

 

⁽²⁾ The weighted average exercise price reflects the exercise price of 14.50 per share. Does not take into effect the grant of shares of restricted stock.

 

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Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased	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
4/1/06 – 4/30/06	—		—	—	165,129
5/1/06 – 5/31/06	27,500		13.48	27,500	137,629
6/1/06 – 6/30/06	125,000		14.03	125,000	12,629

______________________

^* On April 27, 2005, the Company announced its intention to repurchase 5% of its outstanding publicly held common stock, or 281,129 shares of stock. On July 5, 2006, the board of directors authorized an additional stock repurchase program for up to 5% or 267,216 shares, of K-Fed’s outstanding common stock.

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Item 6. Selected Financial Data

The following table sets forth certain consolidated financial and other data of the Company at the dates and for the periods indicated. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein at Item 7 and the consolidated financial statements and related notes contained in Item 8 and beginning on page F-1

	At June 30,
	2006			2005			2004			2003		2002
	(Dollars in thousands)
Selected Financial Condition Data:
Total assets	$	738,899		$	639,882		$	584,422		$	433,753	$	289,194
Cash and cash equivalents		25,579			17,315			12,158			16,190		4,330
Loans receivable, net		634,093			537,567			496,206			389,640		236,914
Securities available-for-sale		11,289			18,848			21,003			—		—
Securities held-to-maturity		24,738			30,834			41,361			14,247		19,787
Other investments (interest-bearing term deposits)		9,010			9,010			2,970			6,437		23,378
FHLB stock		8,746			4,027			3,290			2,602		1,008
Deposits		463,454			475,792			422,953			346,239		252,038
Total borrowings		179,948			70,777			70,000			50,000		2,000
Total stockholders’ equity		92,657			90,760			89,116			35,395		32,956
Selected Operations Data:
Total interest income	$	35,821		$	28,168		$	22,037		$	20,444	$	16,597
Total interest expense		17,464			10,800			9,622			8,365		6,622
Net interest income		18,357			17,368			12,415			12,079		9,975
Provision for loan losses		652			406			483			1,124		1,147
Net interest income after provision for loan losses		17,705			16,962			11,932			10,955		8,828
Customer service charges		3,308			3,200			3,121			2,879		2,260
Loss on equity investment		(588	)		(505	)		(173	)		—		—
Bank-owned life insurance		426			89			—			—		—
Other noninterest income		280			272			281			307		582
Total noninterest income		3,426			3,056			3,229			3,186		2,842
Total noninterest expense		13,476			12,041			10,000			9,992		8,618
Income before income taxes		7,655			7,977			5,161			4,149		3,052
Income tax provision		2,726			2,980			1,993			1,710		1,145
Net income	$	4,929		$	4,997		$	3,168		$	2,439	$	1,907
Basic and diluted earnings per share	$	0.36		$	0.36		$	0.06		$	n/m	$	n/a
Dividends per share	$	0.28		$	0.16		$	—		$	—	$	n/a

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	At or for the Year Ended June 30,
	2006			2005			2004			2003			2002
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets)		0.68	%		0.82	%		0.58	%		0.68	%		0.76	%
Return on equity (ratio of net income to average total equity)		5.33	%		5.49	%		6.05	%		7.13	%		6.01	%
Dividend payout ratio (5)		77.78	%		44.44	%		n/a			n/a			n/a
Interest Rate Spread Information:
Average during period		2.17	%		2.48	%		2.03	%		2.98	%		3.37	%
End of period		2.18	%		2.33	%		2.31	%		2.84	%		3.30	%
Net interest margin (1)		2.66	%		2.93	%		2.34	%		3.42	%		4.06	%
Ratio of noninterest expense to average total assets		1.87	%		1.97	%		1.82	%		2.77	%		3.42	%
Efficiency ratio (2)		61.86	%		58.96	%		63.92	%		65.46	%		67.24	%
Ratio of average interest-earning assets to average interest-bearing liabilities		119.38	%		124.49	%		117.32	%		118.57	%		125.42	%
Quality Ratios:
Non-performing assets to total assets		0.02	%		0.13	%		0.02	%		0.01	%		0.07	%
Allowance for loan losses to non-performing loans(3)		4062.69	%		305.97	%		2839.02	%		8773.08	%		1263.77	%
Allowance for loan losses to total loans (3) (4)		0.43	%		0.45	%		0.47	%		0.58	%		0.73	%
Net charge-offs to average outstanding loans		0.06	%		0.06	%		0.11	%		0.19	%		0.33	%
Non-performing loans to total loans		0.01	%		0.15	%		0.02	%		0.01	%		0.06	%
Capital Ratios:
Equity to total assets at end of period		12.54	%		14.18	%		15.25	%		8.16	%		11.40	%
Average equity to average assets		12.84	%		14.85	%		9.56	%		9.47	%		12.58	%
Tier 1 leverage		9.58	%		10.17	%		11.05	%		8.16	%		11.40	%
Tier 1 risk-based		15.42	%		16.12	%		17.95	%		14.20	%		19.87	%
Total risk-based		16.03	%		16.74	%		18.63	%		15.11	%		20.92	%
Other Data:
Number of full-service centers		3			3			2			2			2
Number of loans		8,942			8,847			9,936			11,020			11,394
Number of deposit accounts		64,995			65,724			65,264			64,495			63,663
(1) Net interest income divided by average interest-earning assets.
(2) Efficiency ratio represents noninterest expense as a percentage of net interest income plus noninterest income, exclusive of securities gains and losses.
(3) The allowance for loan losses at June 30, 2006, 2005, 2004, 2003, and 2002 was $2.7 million, $2.4 million, $2.3 million, $2.3 million, and $1.7 million, respectively.
(4) Total loans are net of deferred fees and costs
(5) The dividend payout ratio is calculated using dividends declared and not waived by the Company’s mutual holding company parent, K-Fed Mutual Holding Company, divided by net income.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Form 10-K contains forward-looking statements, which are based on assumptions and describe future plans, strategies and expectations of K-Fed Bancorp and Kaiser Federal Bank. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similar words. Our ability to predict results or the actual effect of future plans or strategies is uncertain. Factors which could have a material adverse effect on our operations include, but are not limited to, changes in interest rates, general economic conditions, economic conditions in the state of California, legislative and regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, fiscal policies of the California State Government, the quality or composition of our loan or investment portfolios, demand for loan products, competition for and the availability of, loans that we purchase for our portfolio, deposit flows, competition, demand for financial services in our market areas and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements.

Overview and Management Strategy

Our results of operations depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, which principally consist of loans and investment securities, and interest expense on interest-bearing liabilities, which principally consist of deposits and borrowings. Our results of operations also are affected by the level of our provisions for loan losses, noninterest income and noninterest expenses. Noninterest income consists primarily of service charges on deposit accounts and ATM fees and charges. Noninterest expense consists primarily of salaries and employee benefits, occupancy, equipment, data processing, and ATM costs. Our results of operations may also be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Our strategy continues to focus on operating as an independent financial institution dedicated to serving the needs of customers in our market area, which extends from Southern California to the San Francisco Bay area as a result of our history as a credit union serving the employees of the Kaiser Permanente Medical Care Program. We intend to continue to attract retail deposits, with the goal of expanding the deposit base by building upon the existing market locations. New financial service centers were recently opened during April 2006 in Bellflower and Harbor City, with additional financial service centers located in Los Angeles and Riverside currently under construction.

Remote access methods, such as our ATM network, audio response unit, call center, and internet banking / bill payer continue to process over 90% of our customer transactions. Branches and Financial Service Centers strategically located for our markets provide touchstones to attract new account holders and facilitate transactions that cannot be completed electronically.

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We project that the majority of the deposits will be used to originate or purchase one- to four-family residential real estate, multi-family or commercial real estate loans. A majority of our loan portfolio consists of loans that we have purchased, using our own underwriting standards. We will continue to rely on purchased and broker sourced loans as a method of reducing costs related to internally generated loans. We will also continue to analyze the utilization of borrowed funds from the Federal Home Loan Bank of San Francisco to purchase attractive loan pools in an effort to leverage our current financial structure to further reduce marginal operating costs.

We have a commitment to our customers, existing and new, to provide high quality service. Our goal is to grow Kaiser Federal Bank while providing cost effective services to our market area.

Critical Accounting Policies and Estimates

In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements.

These policies are described in Note 1 to the consolidated financial statements included in Item 8 of this report and are essential in understanding Management’s Discussion and Analysis of Financial Condition and Results of Operation. The accounting and financial reporting policies of the Company conform to U.S. generally accepted accounting principles and to general practices within the banking industry. Accordingly, the consolidated financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented. The following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results.

Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will absorb probable incurred losses relating to specifically identified loans, as well as probable incurred credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses, and may require adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience for consumer loans and peer group loss experience for real estate loans adjusted for qualitative factors.

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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. Commercial loans are evaluated for impairment based on their past due status and are measured on an individual basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Loans. Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and deferred net loan origination fees, and increased by net premiums on purchased loans. Interest on loans is recognized over the terms of the loans and is accrued as earned, using the effective interest rate. Net premiums on purchased loans are recognized in interest income as a yield adjustment over the estimated lives of the loan pools using the effective interest method. The estimated lives of these loan pools are re-evaluated periodically based on actual prepayments. The current estimated lives of these loan pools range from two to eight years. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the effective interest method over the estimated lives of the related loans.

Fair Value of Financial Instruments.Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 16 of the Company’s consolidated financial statements contained in Item 8 and set forth at F-1. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Comparison of Financial Condition at June 30, 2006 and June 30, 2005.

General. Our total assets increased by $99.0 million, or 15.5%, to $738.9 million at June 30, 2006 compared to $639.9 million at June 30, 2005. The increase primarily reflects growth in our net loan portfolio of $96.5 million to $634.1 million at June 30, 2006 from $537.6 million at June 30, 2005. To fund the increase in assets, borrowings from the Federal Home Loan Bank increased $109.1 to $179.9 million at June 30, 2006 from $70.8 million at June 30, 2005 and equity increased $1.9 million to $92.7 million at June 30, 2006 from $90.8 million at June 30, 2005.

Loans. Our net loan portfolio increased $96.5 million, or 18.0%, to $634.1 million at June 30, 2006 from $537.6 million at June 30, 2005. This increase was primarily attributable to increases in one- to four-family real estate loans, which increased $64.9 million, or 17.4% to $437.0 million at June 30, 2006 from $372.1 million at June 30, 2005. Additional increases were experienced in multi-family and commercial real estate loans, which increased $28.0 million, or 23.4% to $148.1 million at June 30, 2006 from $120.0 million at June 30, 2005. Consumer loans increased $4.8 million, or 10.4% to $51.7 million at June 30, 2006 from $46.9 million at June 30, 2005. The overall loan mix remained relatively constant, with real estate loans comprising 91.9% of the total loan portfolio at June 30, 2006, compared with 91.3% at June 30, 2005. This growth in loans is consistent with our business strategy of utilizing deposits and other funding sources to expand our real estate loan portfolio.

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Investments. Our investment portfolio (including mortgage-backed securities) decreased $13.7 million, or 27.5% to $36.0 million at June 30, 2006 from $49.7 million at June 30, 2005. The decrease in the investment portfolio resulted from the continuing maturity of the mortgage-backed securities and the reinvestment of these funds into the loan portfolio in order to increase the yield on our interest-earning assets.

Interest earning deposits in other financial institutions was $9.0 million at June 30, 2006 and at June 30, 2005, respectively.

Premises and Equipment. In March 2006, we purchased an office building located in Riverside, California at a cost of $998,000. The building is currently under construction and will open as a Financial Service Center during the first quarter of fiscal 2007.

Bank-Owned Life Insurance. In April 2005, we purchased $10.0 million in bank-owned life insurance, which covers certain key employees, to provide tax-exempt income to assist in offsetting costs associated with employee benefit plans offered by the Bank.

Deposits. Our total deposits decreased $12.3 million, or 2.6%, to $463.5 million at June 30, 2006 from $475.8 million at June 30, 2005. This decrease was primarily due to the maturation and withdrawal of high-rate certificates of deposit and the withdrawal of savings account funds by customers seeking higher yielding opportunities elsewhere.

Equity. Total shareholders’ equity increased $1.9 million, or 2.1%, to $92.7 million at June 30, 2006 from $90.8 million at June 30, 2005. Our equity to assets ratio under generally accepted accounting principles (“GAAP”) was 12.54% at June 30, 2006 compared to 14.18% at June 30, 2005. The increase in equity was primarily a result of $4.9 million in income earned for the year ended June 30, 2006, stock options earned during the year totaling $370,000 and the allocation of employee stock ownership plan shares and stock awards earned during the year totaling $1.0 million offset by the repurchase of 217,500 of our outstanding common shares at an average cost of $13.53 and a total cost of $2.9 million and the payment of $1.4 million in cash dividends to shareholders of record, excluding shares held by K-Fed Mutual Holding Company, or $0.28 per share for the year ended June 30, 2006.

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

The following table sets forth certain information at June 30, 2006 and for the fiscal years ended June 30, 2006, 2005 and 2004, respectively. The average yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived primarily from month-end balances. Management does not believe that the use of month-end balances rather than daily average balances has caused any material differences in the information presented.

			For the year ended June 30,
	At June 30, 2006		2006							2005							2004
	Average Yield/Cost		Average Balance			Interest		Average Yield/Cost		Average Balance			Interest		Average Yield/Cost		Average Balance			Interest		Average Yield/Cost
Interest-Earning Assets			(Dollars in thousands)
Loans receivable (1) (4)	5.56	%	$	610,410		$	32,918	5.39	%	$	510,842		$	25,519	5.00	%	$	397,799		$	19,423	4.88	%
Securities(2)	3.93			44,188			1,611	3.65			55,432			1,935	3.49			46,554			1,716	3.68
Fed funds	5.09			16,696			637	3.82			15,472			362	2.34			78,838			700	0.89
Federal Home Loan Bank stock	0.00			7,121			280	3.93			3,863			151	3.92			2,837			111	3.90
Interest-earning deposits in other financial institutions	3.60			9,010			301	3.34			6,672			190	2.85			3,122			58	1.85
Other interest-earning assets	1.92			1,512			74	4.89			261			11	4.14			1,930			29	1.52
Total interest-earning assets	5.36			688,937			35,821	5.20			592,542			28,168	4.75			531,080			22,037	4.15
Noninterest earning assets				30,756							19,951							16,940
Total assets			$	719,693						$	612,493						$	548,020
Interest-Bearing Liabilities
Deposits:
Money market	2.00	%	$	111,487		$	2,343	2.10	%	$	107,274		$	1,396	1.30	%	$	123,734		$	1,722	1.39	%
Savings	0.40			94,809			395	0.42			96,740			405	0.42			105,983			518	0.49
Certificates of deposit	4.09			222,416			8,586	3.86			211,611			6,977	3.30			171,410			5,879	3.43
FHLB Advances	4.23			148,408			6,140	4.14			60,354			2,022	3.35			51,538			1,503	2.92
Total interest-bearing liabilities	3.18			577,120			17,464	3.03			475,979			10,800	2.27			452,665			9,622	2.12
Noninterest bearing liabilities				50,171							45,553							42,963
Total liabilities				627,291							521,532							495,628
Equity				92,402							90,961							52,392
Total liabilities and equity			$	719,693						$	612,493						$	548,020
Net interest/spread	2.18	%				$	18,357	2.17	%				$	17,368	2.48	%				$	12,415	2.03	%
Margin(3)	2.67	%						2.66	%						2.93	%						2.34	%
Ratio of interest-earning assets to interest-bearing liabilities				119.38	%						124.49	%						117.32	%
(1) Calculated net of deferred fees, loan loss reserves and includes non-accrual loans.
(2) Calculated based on amortized cost.
(3) Net interest income divided by interest-earning assets
(4) Interest income includes loan fees of $276,000, $299,000, and $494,000 for the fiscal years ended June 30, 2006, 2005, and 2004, respectively.

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Rate/Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in volume multiplied by the old rate; (2) changes in rate, which are changes in rate multiplied by the old volume; and (3) changes in rate/volume, which are the changes in rate times the changes in volume.

	For the Year Ended June 30,												For the Year Ended June 30,
	2006 vs. 2005 Increase (Decrease) Due to												2005 vs. 2004 Increase (Decrease) Due to
	Volume			Rate			Rate/ Volume			Net			Volume			Rate			Rate/ Volume			Net
	(Dollars in thousands)
Interest-Earning Assets
Loans Receivable (1)	$	4,973		$	2,029		$	396		$	7,398		$	5,519		$	450		$	127		$	6,096
Securities		(392	)		86			(17	)		(323	)		327			(91	)		(17	)		219
Fed Funds		29			228			18			275			(564	)		1,143			(917	)		(338	)
Federal home Loan Bank stock		128			1			1			130			40			1			(1	)		40
Interest-earning deposits in other financial institutions		67			32			11			110			66			31			35			132
Other interest-earning assets		52			2			9			63			(25	)		51			(44	)		(18	)
Total interest-earning assets	$	4,857		$	2,378		$	418		$	7,653		$	5,363		$	1,585		$	(817	)	$	6,131
Interest-Bearing Liabilities
Deposits:
Money market	$	55		$	858		$	34		$	947		$	(229	)	$	(111	)	$	14		$	(326	)
Savings		(8	)		(2	)		—			(10	)		(45	)		(74	)		6			(113	)
Certificates of deposit		356			1,192			61			1,609			1,378			(226	)		(54	)		1,098
FHLB advances		2,950			475			693			4,118			257			222			40			519
Total interest-bearing liabilities		3,353			2,523			788			6,664			1,361			(189	)		6			1,178
Change in net interest income/spread	$	1,504		$	(145	)	$	(370	)	$	989		$	4,002		$	1,774		$	(823	)	$	4,953
(1) Total loans are net of deferred fees and costs.

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Comparison of Results of Operations for the Fiscal Years Ended June 30, 2006 and 2005.

General. Net income for the year ended June 30, 2006 was $4.9 million, a decrease of $68,000 thousand, or 1.36%, from net income of $5.0 million for the year ended June 30, 2005.

Interest Income. Interest income increased $7.7 million, or 27.2%, to $35.8 million for the year ended June 30, 2006 from $28.2 million for the year ended June 30, 2005. The primary factor for the increase in the interest income was an increase in the average loans receivable balance of $99.6 million, or 19.5%, to $610.4 million for the year ended June 30, 2006 from $510.8 million for the year ended June 30, 2005. The increase was primarily due to purchases of one- to four-family and multi-family real estate loans. The average yield on loans receivable increased 39 basis points to 5.39% for the year ended June 30, 2006 from 5.00% for the year ended June 30, 2005.

Interest Expense. Interest expense increased $6.7 million, or 61.7%, to $17.5 million for the year ended June 30, 2006 from $10.8 million for the year ended June 30, 2005. The average interest rates on interest-bearing liabilities increased 76 basis points to 3.03% for the year ended June 30, 2006 from 2.27% for the year ended June 30, 2005. This increase was primarily attributable to the increased volume of average deposits, specifically certificates of deposit, and an increase in the average balance and interest rate on advances from the Federal Home Loan Bank of San Francisco.

Average money market accounts increased by $4.2 million, or 3.9% to $111.5 million for the year ended June 30, 2006 from $107.3 million for the year ended June 30, 2005. Average savings accounts decreased by $1.9 million, or 2.0% to $94.8 million for the year ended June 30, 2006 from $96.7 million for the year ended June 30, 2005. Average time deposits increased by $10.8 million, or 5.1%, to $222.4 million for the year ended June 30, 2006 from $211.6 million for the year ended June 30, 2005.

Average advances from the Federal Home Loan Bank of San Francisco increased $88.0 million, or 145.9%, to $148.4 million for the year ended June 30, 2006 from $60.4 million for the year ended June 30, 2005. The average cost of advances increased 79 basis points to 4.14% for the year ended June 30, 2006 from 3.35% for the year ended June 30, 2005. The primary factor for the increase in the balance and average interest rates on advances was due to new borrowings used to fund real estate loan purchases in order to better match the Company’s debt maturity schedule with the maturities and repricing terms of our interest-earning assets and other interest-bearing liabilities.

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

The loss ratio analysis component of the allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of the loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the formula allowance.

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Loss factors are based both on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

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

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

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

Our provision for loan losses increased $246,000 to $652,000 for the year ended June 30, 2006 as compared to $406,000 for the year ended June 30, 2005. The allowance for loan losses as a percent of total loans was 0.43% at June 30, 2006 as compared to 0.45% at June 30, 2005. The increase in the provision was primarily attributable to a general increase in non-seasoned real estate loans, which have an unknown rate loss. We used the same methodology and generally similar

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assumptions in assessing the adequacy of the allowance for consumer and real estate loans for both years.

Noninterest Income. Noninterest income increased $370,000, or 12.1%, to $3.4 million for the year ended June 30, 2006 from $3.1 million for the year ended June 30, 2005. The increase was primarily the result an increase of $337,000 from bank-owned life insurance purchased in April 2005 and a $126,000 increase in ATM fees and charges due to increased usage and deployment of additional ATM’s partially offset by an increase in the loss of $83,000 recognized from our investment in an affordable housing tax credit limited liability partnership.

Noninterest Expenses. Our noninterest expenses increased $1.5 million, or 11.9% to $13.5 million for the year ended June 30, 2006 from $12.0 million for the year ended June 30, 2005. The increase was primarily due to a $736,000 increase in salaries and benefits, a $316,000 increase in occupancy and equipment, and a $235,000 increase in other operating expenses.

Salaries and benefits represented 54.2% and 54.5% of total noninterest expense for the years ended June 30, 2006 and 2005, respectively. Total salaries and benefits increased $736,000, or 11.2%, to $7.3 million for the year ended June 30, 2006 from $6.6 million for the year ended June 30, 2005. The increase was primarily due to an increase of $257,000 in compensation expense arising from general salary increases and additional full-time employees, an increase of $151,000 in stock award expense and the addition of $370,000 in stock option expense related to the to the adoption of FAS-123R partially offset by a reduction in fair market value costs related to our employee stock ownership plan.

Occupancy and equipment expenses increased $316,000, or 21.7% to $1.8 million for the year ended June 30, 2006 from $1.5 million for the year ended June 30, 2005. The increase was primarily due to costs associated with the relocation of our Pasadena Branch and increased costs related to build-outs of financial service centers in Bellflower and Harbor City in addition to increased equipment maintenance expense.

Other operating expenses increased $235,000, or 19.3% to $1.5 million for the year ended June 30, 2006 from $1.2 million for the year ended June 30, 2005. The increase in other expense was primarily due to increased operational costs to support continued growth of the Bank.

Income Tax Expense. Income tax expense for the year ended June 30, 2006 was $2.7 million as compared to $3.0 million for the year ended June 30, 2005. This decrease was primarily the result of a decline in pre-tax income of $322,000, combined with increase an in tax credits received from our bank-owned life insurance and affordable housing tax credit investment for the year ended June 30, 2006. The effective tax rate was 35.6% and 37.4% for the years ended June 30, 2006 and 2005, respectively.

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Comparison of Results of Operations for the Fiscal Years Ended June 30, 2005 and 2004.

General. Net income for the year ended June 30, 2005 was $5.0 million, an increase of $1.8 million, or 56.3%, from the net income of $3.2 million for the year ended June 30, 2004. The increase in net income was primarily due to an increase in interest income of $6.2 million, offset by increases in interest expense of $1.2 million, noninterest expenses of $2.0 million, income taxes of $1.0 million and a decrease in noninterest income of $173,000.

Interest Income. Interest income increased $6.2 million, or 28.2%, to $28.2 million for the year ended June 30, 2005 from $22.0 million for the year ended June 30, 2004. The primary factor for the increase in the interest income was an increase in the average loans receivable balance of $113.0 million, or 28.4%, to $510.8 million for the year ended June 30, 2005 from $397.8 million for the year ended June 30, 2004. The increase was primarily due to the investment of proceeds received from the Company’s stock offering, which occurred at the end of March 2004, in purchases of one- to four-family and multi-family real estate loans. The average yield on loans receivable increased 12 basis points to 5.00% for the year ended June 30, 2005 from 4.88% for the year ended June 30, 2004.

Interest Expense. Interest expense increased $1.2 million, or 12.5%, to $10.8 million for the year ended June 30, 2005 from $9.6 million for the year ended June 30, 2004. The average interest rates on interest-bearing liabilities increased 15 basis points to 2.27% for the year ended June 30, 2005 from 2.12% for the year ended June 30, 2004. This increase was primarily attributable to the increased volume of average deposits, specifically certificates of deposit, and an increase in the average interest rate on advances from the Federal Home Loan Bank of San Francisco.

Average time deposits increased by $40.2 million, or 23.5%, to $211.6 million for the year ended June 30, 2005 from $171.4 million for the year ended June 30, 2004. Although the average cost of interest-bearing deposits declined for each category for the year ended June 30, 2005 as compared to the year ended June 30, 2004, the shift in the deposit mix to a larger percentage of longer-term deposits primarily as a result of the acquisition of the Panorama City branch, caused the overall average cost of interest-bearing deposits to increase 9 basis points to 2.11% for the year ended June 30, 2005 from 2.02% for the year ended June 30, 2004.

Average advances from the Federal Home Loan Bank of San Francisco increased $8.9 million, or 17.3%, to $60.4 million for the year ended June 30, 2005 from $51.5 million for the year ended June 30, 2004. The average cost of advances increased 43 basis points to 3.35% for the year ended June 30, 2005 from 2.92% for the year ended June 30, 2004. The primary factor for the increase in the average interest rates on advances was due to the amortization of deferred costs incurred in connection with our debt restructuring in order to better match the Company’s debt maturity schedule with the maturities and repricing terms of our interest-earning assets and other interest-bearing liabilities.

Provision for Loan Losses. Our provision for loan losses decreased $77,000 to $406,000 for the year ended June 30, 2005 as compared to $483,000 for the year ended June 30, 2004. The allowance for loan losses as a percent of total loans was 0.45% at June 30, 2005 as compared to 0.47% at June 30, 2004. The decrease in the provision was primarily attributable to the continued shift in the loan portfolio mix from consumer loans, which have experienced a higher rate of loss for Kaiser Federal Bank, to real estate loans, which have experienced a lower rate of loss. We used the

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same methodology and generally similar assumptions in assessing the adequacy of the allowance for consumer and real estate loans for both years.

Noninterest Income. Noninterest income decreased $173,000, or 5.4%, to $3.1 million for the year ended June 30, 2005 from $3.2 million for the year ended June 30, 2004. The primary factor in the decline was attributable to the increase in the loss recognized from our investment in an affordable housing tax credit limited liability partnership. The loss recognized for the year ended June 30, 2005 was $505,000, an increase of $332,000 over the $173,000 loss recognized for the year ended June 30, 2004. This loss was partially offset by the recognition of $89,000 from the increase in the surrender value of our bank-owned life insurance policies and a $79,000 increase in service and ATM charges and fees.

Noninterest Expenses. Our noninterest expenses increased $2.0 million, or 20.0% to $12.0 million for the year ended June 30, 2005 from $10.0 million for the year ended June 30, 2004. The increase was primarily due to a $1.2 million increase in salaries and benefits, a $179,000 increase in occupancy and equipment, a $356,000 increase in professional services, and a $275,000 increase in other operating expenses.

Salaries and benefits represented 54.5% and 54.3% of total noninterest expense for the years ended June 30, 2005 and 2004, respectively. Total salaries and benefits increased $1.2 million, or 22.2%, to $6.6 million for the year ended June 30, 2005 from $5.4 million for the year ended June 30, 2004. The increase was primarily due to the $611,000 in employee stock ownership plan compensation expense related to the establishment of the plan in March 2004, $288,000 in compensation expense related to the allocation of stock awards as part of the implementation of the Recognition and Retention Plan and $194,000 related to additional salaries and benefits at the Panorama City branch that was acquired in September 2004. The remaining increase was primarily due to normal salary increases and the hiring of additional employees.

Occupancy and equipment expenses increased $179,000, or 14.0% to $1.5 million for the year ended June 30, 2005 from $1.3 million for the year ended June 30, 2004. The increase was primarily due to the addition of the Panorama City branch along with increases in information technology systems repair and maintenance services.

Professional services increased $356,000, or 89.5% to $754,000 for the year ended June 30, 2005 from $398,000 for the year ended June 30, 2004. The increase was primarily due to increased audit and filing fees as a result of increased SEC and OTS compliance and reporting requirements as well as the implementation of the Recognition and Retention and Stock Option Plans. Outside consulting fees related to the acquisition of the Panorama City branch also contributed to the increase.

Other operating expenses increased $275,000, or 29.2% to $1.2 million for the year ended June 30, 2005 from $942,000 for the year ended June 30, 2004. The increase in miscellaneous accounts resulted from the continued growth of the Bank and the amortization of the core deposit intangible related to the acquisition of the Panorama City branch in September 2004, which amounted to $108,000 for the year ended June 30, 2005.

57

Income Tax Expense. Income tax expense for the year ended June 30, 2005 was $3.0 million as compared to $2.0 million for the year ended June 30, 2004. This increase was primarily a result of an increase in pre-tax income of $2.8 million, offset by an increase in tax credits received from our affordable housing tax credit investment for the year ended June 30, 2005. The effective tax rate was 37.4% and 38.6% for the years ended June 30, 2005 and 2004, respectively.

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 Office of Thrift Supervision regulations and above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained.

Our liquidity, represented by cash and cash equivalents 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 Federal Home Loan Bank advances to leverage our capital base and provide funds for our lending and investment activities, and enhance our interest rate risk management.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits. On a longer-term basis, we maintain a strategy of investing in various lending products as described in greater detail under “Business - Lending Activities.” We use our sources of funds primarily to meet ongoing commitments, to pay maturing time deposits and savings withdrawals, to fund loan commitments and to maintain our portfolio of mortgage-backed and related securities. At June 30, 2006, the total approved loan commitments unfunded amounted to $8.3 million, which includes the unadvanced portion of loans of $7.1 million. Time deposits and advances from the Federal Home Loan Bank of San Francisco scheduled to mature in one year or less at June 30, 2006, totaled $122.8 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 June 30, 2006 we had available additional advances from the Federal Home Loan Bank of San Francisco in the amount of $109.5 million.

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Contractual Obligations

In the normal course of business, the Company enters into contractual obligations that meet various business needs. These contractual obligations include time deposits to customers, borrowings from the Federal Home Loan Bank, lease obligations for facilities, and commitments to purchase and/or originate loans. The following table summarizes the Company’s long-term contractual obligations at June 30, 2006.

Contractual obligations	Total		Less than 1 year		1 – 3 Years		3 – 5 Years		More than 5 years
	(Dollars in thousands)
FHLB advances	$	180,000	$	10,000	$	48,000	$	122,000	$	—
Operating lease obligations		4,027		792		1,613		1,066		556
Loan commitments to purchase residential mortgage loans		—		—		—		—		—
Loan commitments to originate residential mortgage loans		1,257		1,257		—		—		—
Available home equity and unadvanced lines of credit		7,065		7,065		—		—		—
Time Deposits		218,131		122,766		51,030		44,335		—
Commitments to fund equity investment in tax credit fund		322		322		—		—		—
Total commitments and contractual obligations	$	410,802	$	142,202	$	100,643	$	167,401	$	556

Capital

Consistent with our goal to operate a sound and profitable financial organization, we actively seek to maintain a “well capitalized” institution in accordance with regulatory standards. Total stockholders’ equity was $92.7 million at June 30, 2006 or 12.54%, of total assets on that date. As of June 30, 2006, we exceeded all regulatory capital requirements. The Bank’s regulatory capital ratios at June 30, 2006 were as follows: core capital 9.58%; Tier I risk-based capital 15.42%; and total risk-based capital 16.03%. The regulatory capital requirements to be considered well capitalized are 5%, 6% and 10%, respectively. See “How We Are Regulated - Regulatory Capital Requirements.”

For the year ended June 30, 2006, we repurchased 217,500 shares of our common stock at an average cost of $13.53. On July 5, 2006, we announced completion of the repurchase program of 5% of our outstanding publicly held common stock, or 281,129 shares. The repurchase program was announced on April 27, 2005. The shares were repurchased at prices between $11.30 and $14.25 per share with an average price per share of $13.18. Upon completion of the aforementioned stock repurchase, on July 5, 2006, the board of directors authorized an additional stock repurchase program for up to 5% or 267,216 shares, of the Company’s outstanding common stock.

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.

59

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 non-interest 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.

Newly Issued but not yet Effective Accounting Rules

Please refer to Note 1 of the financial statements contained in Item 8 and set forth at F-1.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Asset and Liability Management and Market Risk

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

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

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

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

60

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 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:

• Originating and purchasing adjustable rate loans;

• Originating a reasonable volume of short- and intermediate-term consumer loans;

• Managing our deposits to establish stable deposit relationships; and

• Using Federal Home Loan Bank advances and pricing on fixed-term non-core deposits to align maturities and repricing terms.

At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the asset/liability management committee may determine to increase our interest rate risk position somewhat in order to maintain our net interest margin.

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.

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The Office of Thrift Supervision provides Kaiser Federal Bank with the information presented in the following tables, which is based on information provided to the Office of Thrift Supervision by Kaiser Federal Bank. It presents the change in Kaiser Federal Bank’s net portfolio value at June 30, 2006 and June 30, 2005 that would occur upon an immediate change in interest rates based on Office of Thrift Supervision assumptions but without giving effect to any steps that management might take to counteract that change.

	June 30, 2006
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	$	52,074	$	(31,435	)	(38	)%	7.79	%	(377	)bp
+200 bp		62,793		(20,716	)	(25	)	9.15		(241	)
+100 bp		73,459		(10,050	)	(12	)	10.43		(113	)
0 bp		83,509		—		—		11.56		—
-100 bp		90,540		7,031		8		12.27		71
-200 bp		89,698		6,189		7		12.03		47

	June 30, 2005
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	$	54,641	$	(24,671	)	(31	)%	9.20	%	(334	)bp
+200 bp		64,059		(15,253	)	(19	)	10.54		(200	)
+100 bp		72,638		(6,674	)	(8	)	11.70		(84	)
0 bp		79,312		—		—		12.54		—
-100 bp		81,069		1,757		2		12.68		14
-200 bp		78,872		(440	)	(1	)	12.27		(27	)

The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under differing interest rate scenarios, among others.

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.

62

Item 8. Financial Statements and Supplementary Data.

Please see pages F-1 through F-35 following the signature page of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. 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 fiscal year ended June 30, 2006 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

63

Part III.

Item 10. Directors and Executive Officers of the Registrant.

Directors and Executive Officers. The information required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders.

Section 16(a) Beneficial Ownership Reporting Compliance. The information concerning compliance with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 by directors, officers, and ten percent stockholders of the Company required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders.

Code of Ethics. The Company has adopted a written Code of Ethics. The Code of Ethics applies to the Company’s and the Bank’s Principal Executive Officer and Principal Financial and Accounting Officer. A copy of the Company’s Code of Ethics is available on our website at www.kfed.com.

Item 11. Executive Compensation.

The information concerning executive compensation required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information concerning security ownership of certain beneficial owners and management required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions.

The information concerning certain relationships and related transactions required by this item is incorporated herein by reference from the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders.

Item 14. Principal Accountant Fees and Services.

The information concerning principal accountant fees and services is incorporated herein by reference from the Company’s definitive proxy statement for its 2006 Annual Meeting of Stockholders.

64

Part IV.

Item 15. Exhibits and Financial Statement Schedules.

(a)	Financial Statements:
	See Part II – Item 8. Financial Statements and Supplementary Data.
(b)	Exhibits:
	3.1	Charter of K-Fed Bancorp (1)
	3.2	Bylaws of K-Fed Bancorp (2)
	4.0	Form of Stock Certificate of K-Fed Bancorp (1)
	10.1	Registrant’s Employee Stock Ownership Plan (1)
	10.2	Registrant’s Executive Non-Qualified Retirement Plan (1)
	10.3	Registrant’s 2004 Stock Option Plan (3)
	10.4	Registrant’s 2004 Recognition and Retention Plan (3)
	21.0	Subsidiaries of the Registrant (1)

23.1 Consent of Crowe Chizek and Company LLP

23.2 Consent of McGladrey and Pullen LLP

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

(1) Filed as an exhibit to Registrant’s Registration Statement on Form S-1, as amended (Registration No.333-111029), and incorporated herein by reference.

(2) Filed as an exhibit to Registrant’s Current Report on Form 8-K (Commission File No. 000-50592) and incorporated herein by reference.

(3) Incorporated by reference to the Registrant’s Proxy Statement for the 2004 Annual

Meeting of Stockholders filed with the Securities and Exchange Commission

on September 23, 2004.

65

SIGNATURES

Pursuant to the requirements of section 13 or 15(d) 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

Date: September 8, 2006	/s/ Kay M. Hoveland
	Kay M. Hoveland President, Chief Executive Officer, and Chief Financial Officer Duly authorized representative

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Date: September 8, 2006	/s/ James L. Breeden
	James L. Breeden
	Director and Chairman of the Board
Date: September 8, 2006	/s/ Kay M. Hoveland
	Kay M. Hoveland Director, President, Chief Executive Officer, and Chief Financial Officer Principal Executive Officer
Date: September 8, 2006	/s/ Rita H. Zwern
	Rita H. Zwern Director and Secretary
Date: September 8, 2006	/s/ Gerald A. Murbach
	Gerald A. Murbach Director
Date: September 8, 2006	/s/ Robert C. Steinbach
	Robert C. Steinbach Director
Date: September 8, 2006	/s/ Frank G. Nicewicz
	Frank G. Nicewicz Director

66

EXHIBIT 23.1

Consent of Crowe Chizek and Company LLP

We consent to the incorporation by reference in Registration Statements for Form S-8 for the K-Fed Bancorp 2004 Stock Option Plan and the K-Fed Bancorp 2004 Recognition and Retention Plan (333-120768) and the Form S-8 for the Kaiser Federal Bank Savings and Profit Sharing Plan and Trust (333-113078) filed under the Securities Act of 1933 of our report dated August 18, 2006 appearing in this Annual Report on Form 10-K of K-Fed Bancorp for the year ended June 30, 2006.

Crowe Chizek and Company LLP

Oak Brook, Illinois

September 5, 2006

67

EXHIBIT 23.2

Consent of McGladrey and Pullen LLP

We consent to the incorporation by reference in Registration Statements No’s. 333-120768 and 333-113078 of K-Fed Bancorp on Forms S-8 of our report, dated August 10, 2004, appearing in this Annual Report on Form 10-K of K-Fed Bancorp for the year ended June 30, 2004.

McGladrey and Pullen LLP

Irvine, California

September 7, 2006

68

EXHIBIT 31.1

Certification of the Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act

I, Kay M. Hoveland, certify that:

1. I have reviewed this Annual Report on Form 10-K of K-Fed Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 8, 2006	/s/ Kay M. Hoveland
		Kay M. Hoveland

President and Chief Executive Officer

69

EXHIBIT 31.2

Certification of the Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act

I, Kay M. Hoveland, certify that:

1. I have reviewed this Annual Report on Form 10-K of K-Fed Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 8, 2006 /s/ Kay M. Hoveland

Kay M. Hoveland

Chief Financial Officer

70

EXHIBIT 32.1

Certification of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of K-Fed Bancorp (the “Company”) on Form 10-K for the fiscal year ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kay M. Hoveland, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this annual report on Form 10-K that:

1. The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

2. The information contained in the report fairly presents, in all material respects, the company’s financial condition and results of operations.

Date: September 8, 2006 /s/ Kay M. Hoveland

Kay M. Hoveland

Chief Executive Officer

71

EXHIBIT 32.2

Certification of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of K-Fed Bancorp (the “Company”) on Form 10-K for the fiscal year ended June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kay M. Hoveland, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this annual report on Form 10-K that:

3. The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

4. The information contained in the report fairly presents, in all material respects, the company’s financial condition and results of operations.

Date: September 8, 2006	/s/ Kay M. Hoveland
	Kay M. Hoveland
	Chief Financial Officer

72

K-Fed Bancorp

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Reports of Independent Registered Public Accounting Firm F-2

Consolidated Statements of Financial Condition at

June 30, 2006 and 2005 F-4

Consolidated Statements of Income for the Years Ended

June 30, 2006, 2005, and 2004 F-5

Consolidated Statements of Stockholders’ Equity and

Comprehensive Income for the Years Ended
June 30, 2006, 2005, and 2004	F-6

Consolidated Statements of Cash Flows for the Years Ended

	June 30, 2006, 2005, and 2004	F-7
Notes to Consolidated Financial Statements		F-8

The consolidated financial statements of K-Fed Mutual Holding Company have been omitted because K-Fed Mutual Holding Company has not conducted any business other than that of an organizational nature.

REPORT OF INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

K-Fed Bancorp

Covina, California

We have audited the accompanying consolidated statements of financial condition of K-Fed Bancorp and Subsidiary as of June 30, 2006 and 2005 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of K-Fed Bancorp and Subsidiary as of June 30, 2006 and 2005 and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Crowe Chizek and Company LLP

Crowe Chizek and Company LLP

Oak Brook, Illinois

August 17, 2006

F - 2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

K-Fed Bancorp

Covina, California

We have audited the accompanying consolidated statements of income and comprehensive income, stockholders’ equity and cash flows of K-Fed Bancorp (the Company) for the year ended June 30, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and the significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of K-Fed Bancorp and Subsidiary for the year ended June 30, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ McGladrey & Pullen LLP

McGladrey & Pullen LLP

Irvine, California

August 10, 2004

F - 3

K-FED BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Dollars in thousands, except per share data)

	June 30 2006			June 30 2005
ASSETS
Cash and due from banks	$	7,244		$	6,990
Federal funds sold		18,335			10,325
Total cash and cash equivalents		25,579			17,315
Interest bearing deposits in other financial institutions		9,010			9,010
Securities available-for-sale		11,289			18,848
Securities held-to-maturity, fair value of $23,939 and $30,688 at June 30, 2006 and June 30, 2005, respectively		24,738			30,834
Federal Home Loan Bank stock, at cost		8,746			4,027
Loans receivable		636,822			539,025
Deferred net loan origination fees		(202	)		(32	)
Net premium on purchased loans		195			982
Allowance for loan losses		(2,722	)		(2,408	)
Loans receivable, net		634,093			537,567
Accrued interest receivable		2,767			2,310
Premises and equipment, net		3,416			1,491
Core deposit intangible		437			568
Goodwill		3,950			3,950
Bank-owned life insurance		10,514			10,089
Other assets		4,360			3,873
Total assets	$	738,899		$	639,882
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest bearing	$	43,137		$	43,744
Interest bearing		420,317			432,048
Total deposits		463,454			475,792
Federal Home Loan Bank advances, short-term		10,000			11,000
Federal Home Loan Bank advances, long-term		169,948			59,777
Accrued expenses and other liabilities		2,840			2,553
Total liabilities		646,242			549,122
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; June 30, 2006 — 14,702,040 shares issued and outstanding. June 30, 2005 — 14,711,800 shares issued and outstanding.		147			147
Additional paid-in capital		56,456			57,541
Retained earnings		46,224			42,689
Accumulated other comprehensive loss, net of tax		(247	)		(168	)
Unearned employee stock ownership plan shares		(3,526	)		(3,981	)
Unearned employee stock awards		—			(2,015	)
Treasury stock, at cost (June 30, 2006 — 495,970 shares; June 30, 2005 — 278,470 shares)		(6,397	)		(3,453	)
Total stockholders’ equity		92,657			90,760
Total liabilities and stockholders’ equity	$	738,899		$	639,882

The accompanying notes are an integral part of these financial statements

F - 4

K-FED BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share data)

	Years Ended June 30
	2006			2005			2004
Interest income
Interest and fees on loans	$	32,918		$	25,519		$	19,423
Interest on securities, taxable		1,611			1,935			1,716
Federal Home Loan Bank dividends		280			151			111
Other interest		1,012			563			787
Total interest income		35,821			28,168			22,037
Interest expense
Interest on Federal Home Loan Bank advances		6,140			2,022			1,503
Interest on deposits		11,324			8,778			8,119
Total interest expense		17,464			10,800			9,622
Net interest income		18,357			17,368			12,415
Provision for loan losses		652			406			483
Net interest income after provision for loan losses		17,705			16,962			11,932
Noninterest income
Service charges and fees		1,827			1,845			1,911
ATM fees and charges		1,481			1,355			1,210
Referral commissions		238			207			221
Loss on equity investments		(588	)		(505	)		(173	)
Bank-owned life insurance		426			89			—
Other noninterest income		42			65			60
Total noninterest income		3,426			3,056			3,229
Noninterest expense
Salaries and benefits		7,298			6,562			5,433
Occupancy and equipment		1,775			1,459			1,280
ATM expense		1,135			1,049			976
Advertising and promotional		407			401			411
Professional services		751			754			398
Postage		295			268			266
Telephone		363			331			294
Other operating expense		1,452			1,217			942
Total noninterest expense		13,476			12,041			10,000
Income before income tax expense		7,655			7,977			5,161
Income tax expense		2,726			2,980			1,993
Net income	$	4,929		$	4,997		$	3,168
Earnings per common share:
Basic	$	0.36		$	0.36		$	0.06
Diluted	$	0.36		$	0.36		$	0.06

The accompanying notes are an integral part of these financial statements

F - 5

K-FED BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share data)

				Common Stock																			Treasury Stock
	Comprehensive Income			Shares		Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Loss, net			Unearned ESOP Shares			Unearned Stock Awards			Shares		Amount			Total
Balance, June 30, 2003				—		$	—	$	—		$	35,395		$	—		$	—		$	—		—		$	—		$	35,395
Comprehensive income
Net income for the year ended June 30, 2004	$	3,168		—			—		—			3,168			—			—			—		—			—			3,168
Other comprehensive income – unrealized loss on securities, net of tax		(190	)	—			—		—			—			(190	)		—			—		—			—			(190	)
Total comprehensive income	$	2,978
Distribution to capitalize K-Fed Mutual Holding Company				1,000			—		—			(50	)		—			—			—		—			—			(50	)
Common stock issued to K-Fed Mutual Holding Company				8,860,750			—		—			—			—			—			—		—			—			—
Common stock issued				5,231,810			146		50,507			—			—			—			—		—			—			50,653
Shares acquired by ESOP				454,940			—		4,549			—			—			(4,549	)		—		—			—			—
Allocation of ESOP common stock				—			—		27			—			—			113			—		—			—			140
Balance, June 30, 2004				14,548,500			146		55,083			38,513			(190	)		(4,436	)		—		—			—			89,116
Comprehensive income
Net income for the year ended June 30, 2005	$	4,997		—			—		—			4,997			—			—			—		—			—			4,997
Other comprehensive income – unrealized gain on securities, net of tax		22		—			—		—			—			22			—			—		—			—			22
Total comprehensive income	$	5,019
Dividends declared ($0.16 per share) *				—			—		—			(821	)		—			—			—		—			—			(821	)
Issuance of stock awards				166,300			1		2,344			—			—			—			(2,345	)	—			—			—
Purchase of treasury stock				—			—		—			—			—			—			—		(278,470	)		(3,453	)		(3,453	)
Allocation of stock awards				—			—		—			—			—			—			288		—			—			288
Forfeiture of stock awards				(3,000	)		—		(42	)		—			—			—			42		—			—			—
Allocation of ESOP common stock				—			—		156			—			—			455			—		—			—			611
Balance, June 30, 2005				14,711,800			147		57,541			42,689			(168	)		(3,981	)		(2,015	)	(278,470	)		(3,453	)	$	90,760
Comprehensive income
Net income for the year ended June 30, 2006	$	4,929		—			—		—			4,929			—			—			—		—			—			4,929
Other comprehensive income – unrealized loss on securities, net of tax		(79	)	—			—		—			—			(79	)		—			—		—			—			(79	)
Total comprehensive income	$	4,850
Dividends declared ($0.28 per share) *				—			—		—			(1,394	)		—			—			—		—			—			(1,394	)
Purchase of treasury stock				—			—		—			—			—			—			—		(217,500	)		(2,944	)		(2,944	)
Stock options earned				—			—		370			—			—			—			—		—			—			370
Allocation of stock awards				—			—		439			—			—			—			—		—			—			439
Forfeiture of stock awards				(9,760	)		—		—			—			—			—			—		—			—			—
Transfer due to adoption of SFAS 123R				—			—		(2,015	)		—			—			—			2,015		—			—			—
Allocation of ESOP common stock				—			—		121			—			—			455			—		—			—			576
Balance, June 30, 2006				14,702,040		$	147	$	56,456		$	46,224		$	(247	)	$	(3,526	)	$	—		(495,970	)	$	(6,397	)	$	92,657
* K-Fed Mutual Holding Company waived its receipt of dividends on the 8,861,750 shares it owns.

The accompanying notes are an integral part of these financial statements

F - 6

K-FED BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands, except per share data)

	Years Ended June 30
	2006			2005			2004
OPERATING ACTIVITIES
Net income	$	4,929		$	4,997		$	3,168
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net premium on securities		94			164			189
Amortization of net premiums on loan purchases		547			1,357			2,863
Accretion of net loan origination fees		(29	)		(53	)		(94	)
Accretion of net premiums on purchased certificates of deposit		(63	)		(99	)		—
Provision for loan losses		652			406			483
Federal Home Loan Bank stock dividend		(279	)		(151	)		(111	)
Depreciation and amortization		507			459			383
Amortization of core deposit intangible		131			108			—
Loss on equity investment		588			505			173
Increase in cash surrender value of bank-owned life insurance		(425	)		(89	)		—
Amortization of debt exchange costs		171			250			—
Allocation of ESOP common stock		576			611			140
Allocation of stock awards		439			288			—
Stock options earned		370			—			—
Net change in deferred income taxes		54			(258	)		(20	)
Net change in accrued interest receivable		(457	)		(267	)		(374	)
Net change in other assets		(519	)		(19	)		462
Net change in accrued expenses and other liabilities		(35	)		198			234
Net cash provided by operating activities		7,251			8,407			7,496
INVESTING ACTIVITIES
Purchases of held-to-maturity securities		(2,000	)		(5,000	)		(47,813	)
Proceeds from maturities of held-to-maturity securities		8,051			15,428			20,522
Purchases of available-for-sale securities		—			—			(21,837	)
Proceeds from maturities of available-for-sale securities		7,375			2,127			499
Net change in interest bearing deposits with other financial institutions		—			(6,040	)		3,467
Purchases of loans		(161,071	)		(151,145	)		(286,162	)
Net change in loans, excluding loan purchases		63,375			108,098			176,344
Purchase of FHLB stock		(4,440	)		(1,547	)		(577	)
Redemption of FHLB stock		—			961			—
Purchase of equity investment		(232	)		(229	)		(2,670	)
Purchase of bank-owned life insurance		—			(10,000	)		—
Net cash received from branch acquisition		—			56,491			—
Purchases of premises and equipment		(2,432	)		(408	)		(618	)
Net cash provided by (used in) investing activities		(91,374	)		8,736			(158,845	)
FINANCING ACTIVITIES
Proceeds from FHLB advances		128,000			208,416			32,000
Repayment of FHLB advances		(19,000	)		(207,416	)		(12,000	)
Debt exchange costs		—			(473	)		—
Net change in deposits		(12,275	)		(8,239	)		76,714
Net proceeds from stock issuance		—			—			50,653
Dividends paid on common stock		(1,394	)		(821	)		—
Purchase of treasury stock		(2,944	)		(3,453	)		—
Distribution to capitalize K-Fed Mutual Holding Company		—			—			(50	)
Net cash provided by (used in) financing activities		92,387			(11,986	)		147,317
NET CHANGE IN CASH AND CASH EQUIVALENTS		8,264			5,157			(4,032	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		17,315			12,158			16,190
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	25,579		$	17,315		$	12,158
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid on deposits and FHLB advances	$	17,352		$	10,638		$	9,627
Income taxes paid		3,271			2,942			2,106

The accompanying notes are an integral part of these financial statements

F - 7

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business: K-Fed Bancorp (the Company) is a majority-owned subsidiary of K-Fed Mutual Holding Company (the Parent). The Company and its Parent are holding companies. The Company’s sole subsidiary, Kaiser Federal Bank (the Bank), is a federally chartered stock savings association, which provides retail and commercial banking services to individual and business customers from its 7 branches throughout California. While the Bank originates all types of retail, and commercial real estate loans, the majority of its residential real estate loans have been purchased from other financial institutions. The accounting and reporting policies of the Company and the Bank conform to U.S. generally accepted accounting principles (GAAP) and general industry practices.

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

Change in Reporting Entity: On July 1, 2003, the Bank consummated its reorganization into a federally chartered mutual holding company form of organization, whereby the Bank became the wholly owned subsidiary of the newly formed Company with the Company becoming a wholly owned subsidiary of the newly formed Parent. In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations,” when accounting for a transfer of assets or exchange of shares between entities under common control, the entity that receives the net assets or the equity interests shall initially recognize the assets and liabilities transferred at their carrying amounts in the accounts of the transferring entity at the date of transfer. Therefore, K-Fed Bancorp, recorded the acquisition of the Bank at historical cost.

Execution of Plan of Stock Issuance: On November 22, 2003, and amended on February 9, 2004, the Board of Directors adopted a plan of stock issuance to sell a minority interest of its common stock to eligible depositors of the Bank in a subscription offering, with the majority of the common stock owned by K-Fed Mutual Holding Company. The plan was accomplished through the sale to eligible depositors on March 30, 2004 of 5,686,750 shares (including shares allocated to the Employee Stock Ownership Plan), representing 39.09% of the Company’s stock.

The issued shares resulted in gross proceeds of $56.9 million. In connection with the offering, the Company loaned $4.5 million to the Bank’s Employee Stock Ownership Plan to purchase stock and incurred $1.7 million of expenses associated with the offering resulting in net proceeds of $50.7 million to the Company. The aggregate purchase price was determined by an independent appraisal. Consistent with the Company’s stated intent for use of the stock offering proceeds, one-half of the total proceeds less offering expenses ($27.6 million) was invested in the Bank and placed in the Bank’s general funds for general corporate purposes. In addition to the 5,686,750 shares issued to eligible depositors, the Company issued 8,860,750 additional shares to K-Fed Mutual Holding Company. As a result of the offering, purchasers in the offering owned 39.09% of K-Fed Bancorp’s common stock, and K-Fed Mutual Holding Company owned 60.91%.

Principles of Consolidation and Basis of Presentation: The consolidated financial statements include the accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

F - 8

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

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

Cash and Cash Equivalents: Cash and cash equivalents consist of vault and ATM cash, daily federal funds sold, demand deposits due from other banks, and other time deposits that have an original maturity of less than 90 days. For purposes of the Statement of Cash Flows, the Company reports net cash flows for customer loan transactions (excluding loan purchases) and deposit transactions, as well as transactions involving interest bearing deposits in other financial institutions.

Interest Bearing Deposits in Other Financial Institutions: Interest bearing deposits in other financial institutions consist of interest-bearing time deposits in depository institutions with an original maturity equal to or greater than 90 days and are carried at cost and have a weighted average life of less than one year.

Securities: Securities available-for-sale represent securities that may be sold prior to maturity. These securities are stated at fair value, and any unrealized net gains and losses are reported as a separate component of equity until realized, net of any tax effect. 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. Premiums or discounts are recognized in interest income using the effective interest method over the estimated life of the investment. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Securities available-for-sale may be sold in response to changes in market interest rates, repayment rates, the need for liquidity, and changes in the availability and the yield on alternative investments. Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospectus of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Securities for which the Company has the positive intent and ability to hold until maturity are classified as securities held-to-maturity and are recorded at cost, adjusted for unamortized premiums or discounts.

Federal Home Loan Bank Stock: The Bank, as a member of the Federal Home Loan Bank of San Francisco (FHLB) system, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of its outstanding mortgage loans or 4.7% of advances from the FHLB. No ready market exists for the FHLB stock, and it has no quoted market value. The Bank carries FHLB stock at cost. Cash and stock dividends are reported as income.

F - 9

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

Loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and deferred net loan origination fees, and increased by net premiums on purchased loans. Interest on loans is recognized over the terms of the loans and is accrued as earned, using the effective interest method. Net premiums on purchased loans are recognized in interest income as a yield adjustment over the estimated lives of the loan pools using the effective interest method. The estimated lives of these loan pools are re-evaluated periodically based on actual prepayments. The current estimated lives of these loan pools range from two to eight years. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the effective interest method over the estimated lives of the related loans.

We underwrite purchased loans in accordance with our underwriting standards. The majority of the loans that we purchase are acquired with servicing released to allow for greater investments in real-estate lending without having to significantly increase our servicing and operations costs.

A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by non-payment of a monthly installment by the due date. Accrual of interest on loans is discontinued when management believes, after considering economics, business conditions, and collection efforts that the borrower’s financial condition is such that collection of interest is doubtful. Accrual of interest is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when the loan becomes past due 90 days as to either principal or interest. All interest accrued but not collected for loans that are placed on non-accrual status or subsequently charged off is reversed against interest income. Income is subsequently recognized on the cash basis until, in management’s judgment, the borrower’s ability to make periodic interest and principal payments is back to normal and future payments are reasonably assured, in which case the loan is returned to accrual status.

Allowance for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged off against the allowance for loan losses when management believes that collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance.

The allowance is an amount that management believes will absorb probable incurred losses relating to specifically identified loans, as well as probable incurred credit losses inherent in the balance of the loan portfolio, based on an evaluation of the collectibility of existing loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower’s ability to pay. This evaluation does not include the effects of expected losses on specific loans or groups of loans that are related to future events or expected changes in economic conditions. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses, and may require adjustments to the allowance based on their judgment about information available to them at the time of their examinations.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience for consumer loans and peer group loss experience for real estate loans adjusted for qualitative factors.

F - 10

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

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. Commercial real estate loans are evaluated for impairment based on their past due status and are measured on an individual basis based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment: Leasehold improvements and furniture and equipment are carried at cost, less accumulated depreciation and amortization. Buildings are depreciated using the straight-line method with a useful live of 25 years. Furniture and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which is usually 3 to 5 years. The cost of leasehold improvements is amortized using the straight-line method over the lesser of the terms of the related leases or their useful life, which is usually 5 to 10 years.

Bank-Owned Life Insurance: The Bank has purchased life insurance policies on certain key employees. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Investment in Limited Liability Partnership: The Company has a 14% investment in an affordable housing fund totaling $2,187,000 and $2,222,000 at June 30, 2006 and 2005, respectively, with a commitment to fund an additional $322,000 at June 30, 2006, for the purposes of obtaining tax credits and for Community Reinvestment Act purposes. The investment is recorded in other assets on the balance sheet and is accounted for using the equity method of accounting. Under the equity method of accounting, the Company recognizes its ownership share of the profits and losses of the fund. This investment is regularly evaluated for impairment by comparing the carrying value to the remaining tax credits expected to be received. Tax credits received from the fund are accounted for in the period earned (the flow-through method) and are included in income as a reduction of income tax expense.

Goodwill and Other Intangible Assets: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit intangible assets arising from a branch acquisition. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which was determined to be 8 years.

F - 11

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

Long-Term Assets: Premises and equipment, core deposit and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance-sheet credit instruments, such as commitments to make or purchase loans. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Adoption of New Accounting Standard: In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R (FAS-123R), Share-Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123 (FAS-123), Accounting for Stock-Based Compensation.

FAS-123R eliminates accounting for share-based compensation transactions using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB-25), Accounting for Stock Issued to Employees, and requires instead that such transactions be accounted for using a fair-value-based method. FAS-123R is effective as of the first interim or annual reporting period that begins after June 15, 2005. The Company adopted FAS-123R effective July 1, 2005 applying the modified prospective transition method. Under the modified prospective transition method, the financial statements will not reflect restated amounts. Existing options that will vest after June 30, 2005 result in scheduled expense of $370,000 for the years ending June 30, 2006, 2007, 2008, 2009, and $139,000 for the year ending June 30, 2010. The options become exercisable in equal installments over a five-year period beginning one year from the date of grant. The options expire ten years from the date of grant and are subject to certain restrictions and limitations. The Company assumes 3% in forfeitures as a component for determining expense related to the SOP. The effect of this pronouncement on future operations will depend on the fair value of future options issued and accordingly, cannot be determined at this time.

The following table illustrates the pro forma effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123 and SFAS 148 to stock-based employee compensation for the year ended June 30, 2005 prior to the Company’s adoption of SFAS 123(R) (Dollars in thousands):

Net income as reported	$	4,997
Add: Stock-based compensation recorded, net of tax		—
Less: Total stock-based compensation costs determined under the fair value based method, net of tax		(206	)
Net income, pro forma	$	4,791
Earnings per share – as reported
Basic	$	0.36
Diluted	$	0.36
Earnings per share – pro forma
Basic	$	0.34
Diluted	$	0.34

No activity is reported for the year ended June 30, 2004 as the SOP was not adopted until November 16, 2004.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

The fair value of options granted and pro forma effects are computed using the Black-Scholes option pricing valuation model with the following assumptions as of the date of grant.

		11/16/2004
Risk-free interest rate		3.54	%
Expected option life		5 years
Expected price volatility		39.18	%
Expected dividend yield		1.33	%
Estimated fair value of stock option granted	$	5.10

Income Taxes: Deferred taxes are provided on an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Employee Stock Ownership Plan (ESOP): The cost of shares issued to the ESOP but not yet allocated to participants is shown as a reduction of stockholders’ equity. Compensation expense is based on the market price of shares as they are committed to be released to participant accounts. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to service the debt.

Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and stock awards.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.

Newly Issued But Not Yet Effective Accounting Standards: In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which supplements SFAS No. 109, Accounting for Income Taxes , by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. The Interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not threshold represents a positive assertion by management that a company is entitled to economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit.  At adoption, companies must adjust their financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  It is not anticipated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

that adoption will have a material impact on the Company’s financial condition, results of operations, or cash flows.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Restrictions on Cash: The Company is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances is approximately $1,101,000 and $1,129,000 at June 30, 2006 and 2005, respectively.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

2. INVESTMENTS

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

	Fair Value		Gross Unrealized Gains		Gross Unrealized Losses
	(Dollars in thousands)
2006
U.S. government agency and government sponsored entity bonds	$	5,392	$	─	$	(108	)
Mortgage-backed:
Freddie Mac		5,897		─		(313	)
Total	$	11,289	$	─	$	(421	)
2005
U.S. government agency and government sponsored entity bonds	$	10,864	$	─	$	(136	)
Mortgage-backed:
Freddie Mac		7,984		─		(150	)
Total	$	18,848	$	─	$	(286	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

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
	(Dollars in thousands)
2006
U.S. government agency and government sponsored entity bonds	$	12,000	$	─	$	(267	)	$	11,733
Mortgage-backed
Fannie Mae		408		2		─			410
Freddie Mac		269		1		─			270
Ginnie Mae		168		1		─			169
Collateralized mortgage obligations
Fannie Mae		3,372		1		(162	)		3,211
Freddie Mac		7,197		─		(374	)		6,823
Ginnie Mae		1,324		─		(1	)		1,323
Total	$	24,738	$	5	$	(804	)	$	23,939
2005
U.S. government agency and government sponsored entity bonds	$	10,000	$	─	$	(70	)	$	9,930
Mortgage-backed
Fannie Mae		541		9		─			550
Freddie Mac		335		5		─			340
Ginnie Mae		250		2		(10	)		242
Collateralized mortgage obligations
Fannie Mae		4,617		1		(21	)		4,597
Freddie Mac		12,570		10		(104	)		12,476
Ginnie Mae		2,521		32		─			2,553
Total	$	30,834	$	59	$	(205	)	$	30,688

There were no sales of securities during the years ending June 30, 2006, 2005, and 2004.

The fair value of debt securities and carrying amount, if different, at June 30, 2006 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Held-to-Maturity				Available-for-Sale
	Carrying Amount		Fair Value		Fair Value
	(Dollars in thousands)
Due within one year	$	─	$	─	$	5,392
Due from one year to five years		12,000		11,733		─
Due from five years to ten years		─		─		─
Due after ten years		─		─		─
Mortgage-backed securities and Collateralized mortgage obligations		12,738		12,206		5,897
	$	24,738	$	23,939	$	11,289

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Securities with unrealized losses at June 30, 2006 and 2005, 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
	(Dollars in thousands)
2006
Description of Securities
U.S. government agency	$	1,982	$	(18	)	$	15,143	$	(357	)	$	17,125	$	(375	)
Mortgage-backed		─		─			5,898		(312	)		5,898		(312	)
Collateralized mortgage obligations		2,914		(114	)		8,402		(424	)		11,316		(538	)
Total temporarily impaired	$	4,896	$	(132	)	$	29,443	$	(1,093	)	$	34,339	$	(1,225	)
2005
Description of Securities
U.S. government agency	$	9,930	$	(70	)	$	10,864	$	(136	)	$	20,794	$	(206	)
Mortgage-backed		74		(9	)		8,040		(151	)		8,114		(160	)
Collateralized mortgage obligations		9,601		(48	)		5,134		(77	)		14,735		(125	)
Total temporarily impaired	$	19,605	$	(127	)	$	24,038	$	(364	)	$	43,643	$	(491	)

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 intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 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.

At June 30, 2006, thirteen debt securities have unrealized losses with aggregate depreciation of 3.4% for the Company’s amortized cost basis. The unrealized losses relate principally to the general change in interest rate levels 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 ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, and fully expects to recover their value, no declines are deemed to be other than temporary.

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K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

At June 30, 2005, fourteen debt securities have unrealized losses with aggregate depreciation of 1% for the Company’s amortized cost basis. The unrealized losses relate principally to the general change in interest rate levels 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 ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, and fully expects to recover their value, no declines are deemed to be other than temporary.

3. LOANS

The composition of loans consists of the following:

	June 30
	2006			2005
	(Dollars in thousands)
Real Estate:
One- to four-family residential, fixed rate	$	258,918		$	133,854
One- to four-family residential, variable rate		178,106			238,280
Multi-family residential, variable rate		89,220			87,650
Commercial real estate, variable rate		58,845			32,383
		585,089			492,167
Consumer:
Automobile		41,572			38,613
Home equity		1,787			601
Other consumer loans, primarily unsecured		8,374			7,644
		51,733			46,858
Total loans		636,822			539,025
Deferred net loan origination fees		(202	)		(32	)
Net premiums on purchased loans		195			982
Allowance for loan losses		(2,722	)		(2,408	)
	$	634,093		$	537,567

In addition to the above, the Company participates with other financial institutions in certain loans they have originated. The Company continues to service the participants’ balance, which at June 30, 2006 totaled approximately $2.7 million and represented 4 loans. The Company receives a servicing fee of 25 basis points on these participated loans.

The Company has purchased real-estate loan participations originated by other financial institutions. All of these loan participations were purchased without recourse and are secured by real property. The originating financial institution performs all servicing functions on these loans.

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K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

The following is an analysis of the changes in the allowance for loan losses:

	Years Ended June 30
	2006			2005			2004
	(Dollars in thousands)
Balance, beginning of year	$	2,408		$	2,328		$	2,281
Provision for loan losses		652			406			483
Recoveries		242			222			301
Loans charged off		(580	)		(548	)		(737	)
Balance, end of year	$	2,722		$	2,408		$	2,328

There were no loans individually classified as impaired during the periods or as of June 30, 2006 and 2005.

Loans on which accrual of interest has been discontinued or reduced amounted to $67,000, $787,000 and $82,000 at June 30, 2006, 2005, and 2004 respectively. If interest on those loans had been accrued, such income would have approximated $1,000, $25,000, and $4,000 for the years ended June 30, 2006, 2005, and 2004 respectively. The effects of troubled debt restructurings are not considered material to the Company’s financial position and results of operations.

4. CONCENTRATIONS OF CREDIT RISK

The Kaiser Permanente Medical Care Program employs a large percentage of the Bank’s account holders. Further, a significant concentration of the Bank’s borrowers resides in California. Although the Bank has a diversified loan portfolio, borrowers’ ability to repay loans may be affected by the economic climate of either the health care industry or the overall geographic region in which borrowers reside.

5. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	June 30,
	2006			2005
	(Dollars in thousands)
Building	$	998		$	─
Leasehold improvements		827			378
Furniture and equipment		4,034			3,283
		5,859			3,661
Accumulated depreciation and amortization		(2,443	)		(2,170	)
	$	3,416		$	1,491

Depreciation expense on premises and equipment totaled $507,000, $459,000, and $383,000 for the years ended June 30, 2006, 2005, and 2004, respectively.

The Company leases office space in seven buildings. The operating leases contain renewal options and provisions requiring the Company to pay property taxes and operating expenses over base period amounts. All rental payments are dependent only upon the lapse of time.

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K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

Minimum rental payments under operating leases with initial or remaining terms of one year or more at June 30, 2006 are as follows (dollars in thousands):

Years ended June 30,
2007	$	791
2008		799
2009		814
2010		735
2011		331
Thereafter		556
	$	4,026

Rental expense, including property taxes and common area maintenance for the years ended June 30, 2006, 2005, and 2004 for all facilities leased under operating leases totaled $874,000, $683,000, and $602,000, respectively.

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The activity in balance for goodwill during the year is as follows (dollars in thousands):

	Year ended June 30, 2006
Beginning of year	$	3,950
Acquired goodwill		─
Impairment		─
End of year	$	3,950

Acquired Intangible Assets

Acquired intangible assets were as follows as of year end (dollars in thousands):

	Year Ended June 30, 2006				Year Ended June 30, 2005
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Core deposit intangibles	$	676	$	239	$	676	$	108

Aggregate amortization expense was $131,000 and $108,000 for the years ended June 30, 2006 and June 30, 2005, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

Estimated amortization expense for each of the next five years is as follows (dollars in thousands):

Years ended June 30,
2007	$	114
2008		97
2009		80
2010		62
2011		45

7. DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more at June 30, 2006 and 2005 is approximately $74,697,000 and $72,749,000, respectively.

Scheduled maturities of time deposits for the next five years are as follows (dollars in thousands):

	June 30, 2006
Years ended June 30,
2007	$	122,766
2008		32,169
2009		18,861
2010		23,252
2011		21,083
	$	218,131

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K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

8. FEDERAL HOME LOAN BANK ADVANCES

At June 30, 2006, the stated interest rates on the Bank’s advances from the FHLB ranged from 2.74% to 4.77%, with a weighted average stated rate of 4.20%. At June 30, 2005, the interest rates on the Bank’s advances from the FHLB ranged from 2.18% to 4.30% with a weighted average rate of 3.40%. The contractual maturities by year of the Bank’s advances are as follows:

	June 30,
	2006			2005
	(Dollars in thousands)
Years ended June 30,
2006	$	─		$	10,000
2007		10,000			10,000
2008		20,000			20,000
2009		28,000			10,000
2010		70,000			20,000
2011		52,000			─
Overnight borrowings		─			1,000
Total advances		180,000			71,000
Deferred debt exchange costs		(52	)		(223	)
Total	$	179,948		$	70,777

The Bank’s advances from the FHLB were collateralized by certain real estate loans of an aggregate unpaid principal balance of $597,051,000 and $469,478,000 as of the most recent notification date for June 30, 2006 and 2005, respectively. At June 30, 2006 and June 30, 2005, the amount available to borrow under this agreement is approximately $109,455,000 and $115,171,000, respectively. 0020Each advance is payable at its maturity date. FHLB advances are subject to a prepayment penalty if repaid before the maturity date.

The average balance of FHLB advances for the years ended June 30, 2006 and June 30, 2005 were $148,408,000 and $60,354,000 with average costs of 4.23% and 4.14%, respectively.

In August 2004, the Bank paid-off and replaced a $50 million advance from the Federal Home Loan Bank of San Francisco with $5-$10 million advances. The prepayment penalty of $473,000 assessed by the Federal Home Loan Bank of San Francisco is being amortized over the life of the new advances using the interest method in accordance with EITF 96-19, issued by the Financial Accounting Standards Board in 1996.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

9. EMPLOYEE BENEFITS

401(k) Plan: The Company has a 401(k) pension plan that allows eligible employees to defer a portion of their salary into the 401(k) plan. The Company matches 50% of the first 10% of employees’ wage reductions. The Company contributed $145,000, $136,000, and $130,000 respectively, to the plan for the years ended June 30, 2006, 2005, and 2004.

Deferred Compensation Plan: The Company has an executive salary deferral program for the benefit of certain senior executives that have been designated to participate in the program. The program allows an additional opportunity for key executives to defer a portion of their compensation into a non-qualified deferral program to supplement their retirement earnings. At June 30, 2006 and 2005 the Company has accrued a liability for executive deferrals of $973,000 and $800,000, respectively.

Incentive Plan: Effective July 1, 2001 the Company began maintaining an Annual Incentive Plan and a Long-Term Incentive Plan (terminated July 1, 2004) for key employees. Participants are awarded a percentage of their base salary for attaining certain personal performance goals. The compensation expense related to these plans for the year ended June 2006, 2005, and 2004 totaled $227,000, $191,000 and $184,000 respectively.

10. EMPLOYEE STOCK COMPENSATION

Recognition and Retention Plan (“RRP”):The Company’s RRP provides for issue of shares to directors, officers, and employees. Compensation expense is recognized over the vesting period of the shares for the difference between the exercise price and the market value at issue date. Pursuant to its 2004 stock-based incentive plan, the Company awarded 166,300 shares of restricted stock during the year ended June 30, 2005 of which 3,000 shares were forfeited during the year ended June 30, 2005 and 9,760 shares were forfeited during the year ended June 30, 2006. These shares vest over a five year period. The unamortized cost of the shares not yet earned (vested) is reported as a reduction of stockholder’s equity. Compensation expense related to the RRP awards for the year ended June 30, 2006 and 2005 was $439,000 and $288,000, respectively. There were 120,880 restricted shares outstanding at June 30, 2006 and the Company had an aggregate of 73,930 restricted shares available for future issuance under the RRP.

Stock Option Plan (“SOP”): The Company’s SOP provides for issue of options to directors, officers and employees. Pursuant to the Company’s 2004 SOP, 568,675 shares of the Company’s common stock may be awarded. On November 16, 2004, the Company granted 275,600 incentive stock options to certain employees and 98,000 non-qualified stock options to directors, for a total of 373,600 stock options granted. The fair market value of the Company’s common stock for purposes of determining the exercise price of the option on the grant date was $14.50, based on the closing price of the Company’s stock as of the previous business day per the terms of the Plan. The Company implemented the SOP to promote the long-term interest of the Company and its shareholders by providing an incentive to those key employees who contribute to the operational success of the Company. The options become exercisable in equal installments over a five-year period beginning one year from the date of grant. The options expire ten years from the date of grant and are subject to certain restrictions and limitations. The Company assumes 3% in forfeitures as a component for determining expense related to the SOP. Compensation expense, net of tax effects related to the SOP was $329,000 for year ended June 30, 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

A summary of the status of the Company’s stock option plan and changes during the year ended June 30, 2006 is presented below:

	Shares			Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Intrinsic Value
Outstanding at beginning of year		373,600		$	14.50		373,600	$	14.50
Granted		─			─		─		─
Exercised		─			─		─		─
Forfeited		(22,880	)		14.50		─		14.50
Outstanding at end of year		350,720		$	14.50		373,600	$	14.50	$	─
Options exercisable at year end		71,920		$	14.50		─	$	14.50	$	─
Weighted-average fair value of options granted
				$	5.10			$	5.10
Weighted average remaining contractual life		8.4 years					9.4 years

A summary of the status of the Company’s nonvested shares as of June 30, 2006 and for the year ended, is presented below:

Nonvested Shares	Shares			Weighted-Average Grant-Date Fair Value
Nonvested at June 30, 2005		373,000		$	5.10
Granted		─			─
Vested		(71,920	)		5.10
Forfeited		(22,880	)		5.10
Nonvested at June 30, 2006	$	278,200		$	5.10

At June 30, 2006, the Company had an aggregate of 195,075 options available for future issuance under the SOP.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

11. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

During 2004, the Company implemented the Employee Stock Ownership Plan (ESOP), which covers substantially all of its employees. In connection with the stock offering, the Company issued 454,940 shares of common stock for allocation under the ESOP in exchange for a ten-year note in the amount of approximately $4.5 million. The $4.5 million for the ESOP purchase was borrowed from the Company. The ESOP shares initially were pledged as collateral for the loan.

The loan is secured by shares purchased with the loan proceeds and will be repaid by the ESOP with funds from the Company’s contributions to the ESOP and earnings on ESOP assets. Shares issued to the ESOP are allocated to ESOP participants based on the proportion of debt service paid in the year. Principal and interest payments are scheduled to occur over a ten-year period. Contributions to the ESOP were $442,000, $481,000, and $138,000 for the years ended June 30, 2006, 2005, and 2004, respectively.

During 2006, 45,494 shares of stock with an average fair value of $12.66 per share were committed to be released, resulting in ESOP compensation expense of $576,000. During 2005, 45,494 shares of stock with an average fair value of $13.43 per share were committed to be released, resulting in ESOP compensation expense of $611,000. During 2004, 11,374 shares of stock with an average fair value of $12.37 were committed to be released, resulting in ESOP compensation expense of $140,000.

Shares held by the ESOP at June 30, 2006 and 2005 are as follows:

	2006		2005
Allocated shares		102,362		56,868
Unearned shares		352,578		398,072
Total ESOP shares		454,940		454,940
Fair value of unearned shares (dollars in thousands)	$	5,109	$	4,852

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

12. INCOME TAXES

The components of income tax expense are as follows:

	June 30
	2006		2005			2004
	(Dollars in thousands)
Current
Federal	$	1,941	$	2,375		$	1,490
State		731		863			523
		2,672		3,238			2,013
Deferred
Federal		49		(210	)		(15	)
State		5		(48	)		(5	)
		54		(258	)		(20	)
Income tax expense	$	2,726	$	2,980		$	1,993

The income tax provision differs from the amount of income tax determined by applying the United States federal income tax rate to pretax income due to the following:

	June 30
	2006			2005			2004
	(Dollars in thousands)
Federal income tax at statutory rate	$	2,603		$	2,712		$	1,755
State taxes, net of federal tax benefit		487			532			369
Bank-owned life insurance		(145	)		(30	)		─
ESOP expenses		41			53			─
General business credit		(335	)		(295	)		(140	)
Stock options		93			─			─
RRP expenses		(26	)		─			─
Other, net		8			8			9
Total	$	2,726			2,980			1,993
Tax expense as a percentage of income before tax		35.6	%		37.4	%		38.6	%

F - 25

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

The Company’s total net deferred tax assets are as follows:

	June 30
	2006			2005
	(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses	$	913		$	706
Accrued expenses		429			413
Accrued state income tax		268			293
Unrealized loss on securities available-for-sale		173			118
RRP Plan		110			118
Other		─			46
Total deferred tax assets		1,893			1,694
Deferred tax liabilities:
Premises and equipment		(221	)		(263	)
Goodwill and other intangibles		(124	)		(50	)
Federal Home Loan Bank Stock dividends		(290	)		(175	)
Other		(51	)		─
Total deferred tax liabilities		(686	)		(488	)
Net deferred tax asset, included in other assets	$	1,207		$	1,206

13. RELATED PARTY TRANSACTIONS

Loans to certain executive officers, directors, and their associates totaled $1.1 million at June 30, 2006. Management believes that such loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal credit risk nor present other unfavorable features. The following is a summary of activity during the fiscal year ended June 30, 2006 with respect to such aggregate loans to these individual and their associates and affiliated companies (dollars in thousands):

Balance at June 30, 2005	$	986
New loans		81
Repayments		(14	)
Balance at June 30, 2006	$	1,053

F - 26

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

14. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS

The Bank is subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital to total assets (as defined). Management’s opinion, as of June 30, 2006, is that the Bank meets all capital adequacy requirements to which it is subject.

As of June 30, 2006 and 2005, the most recent notification from the Office of Thrift Supervision, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Bank’s actual capital amounts and ratios are presented in the following table.

	Actual			Minimum Capital Requirements			Minimum Required to be Well Capitalized Under Prompt Corrective Actions Provisions
	Amount	Ratio		Amount	Ratio		Amount	Ratio
	(Dollars in thousands)
June 30, 2006:
Total capital (to risk-weighted assets)	$71,632	16.03	%	$35,741	8.00	%	$44,676	10.00	%
Tier 1 capital (to risk-weighted assets)	68,910	15.42		17,870	4.00		26,806	6.00
Tier 1 (core) capital (to adjusted tangible assets)	68,910	9.58		28,771	4.00		35,964	5.00
June 30, 2005:
Total capital (to risk-weighted assets)	$65,081	16.74	%	$31,101	8.00	%	$38,877	10.00	%
Tier 1 capital (to risk-weighted assets)	62,673	16.12		15,551	4.00		23,326	6.00
Tier 1 (core) capital (to adjusted tangible assets)	62,673	10.17		24,642	4.00		30,813	5.00

Office of Thrift Supervision regulations impose various restrictions on savings institutions with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account.

F - 27

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

Generally, savings institutions, such as Kaiser Federal Bank, that before and after the proposed distribution are well-capitalized, may make capital distributions during any calendar year up to 100% of net income for the year-to-date plus retained net income for the two preceding years. However, an institution deemed to be in need of more than normal supervision by the Office of Thrift Supervision may have its dividend authority restricted by the Office of Thrift Supervision. Kaiser Federal Bank may pay dividends to K-Fed Bancorp in accordance with this general authority.

The Holding Company is not currently subject to prompt corrective action regulations.

15. LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

The Company is a party to various legal actions normally associated with collections of loans and other business activities of financial institutions, the aggregate effect of which, in management’s opinion, would not have a material adverse effect on the financial condition or results of operations of the Company.

At June 30, 2006 and 2005, there were approximately $15,466,000 and $10,481,000, respectively, in cash and cash equivalents with balances in excess of insured limits.

Outstanding mortgage loan commitments at June 30, 2006 and 2005 total approximately $1.3 million and $120,000, respectively. As of June 30, 2006, $417,000 of commitments were issued at a fixed rate of 6.75%. Commitments to purchase mortgage loans at June 30, 2006 and 2005 total approximately $0 and $10,000,000, respectively. There were no fixed rate commitments at June 30, 2005.

Available credit on home equity and unsecured lines of credit is summarized as follows:

	June 30
	2006		2005
	(Dollars in thousands)
Home equity	$	2,372	$	822
Other consumer		4,693		5,189
	$	7,065	$	6,011

Commitments for home equity and unsecured lines of credit may expire without being drawn upon. Therefore, the total commitment amount does not necessarily represent future cash requirements of the Company. These commitments are not reflected in the financial statements.

16. 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.

F - 28

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

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.

The impact of delinquent loans on the estimation of the fair values described above is not considered to have a material effect and, accordingly, delinquent loans have been disregarded in the valuation methodologies employed.

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, and accrued expenses and other liabilities. The carrying value of each of these financial instruments is a reasonable estimation of fair value.

Off-Balance-Sheet Financial Instruments

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

F - 29

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

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

	June 30, 2006				June 30, 2005
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	25,579	$	25,579	$	17,315	$	17,315
Interest bearing deposits in other financial institutions		9,010		8,865		9,010		8,861
Securities available-for-sale		11,289		11,289		18,848		18,848
Securities held-to-maturity		24,738		23,939		30,834		30,688
Federal Home Loan Bank Stock		8,746		8,746		4,027		4,027
Loans, net		634,093		613,105		537,567		535,148
Accrued interest receivable		2,767		2,767		2,310		2,310
Financial liabilities:
Deposits		463,454		459,917		475,792		476,352
FHLB advances		179,948		172,372		70,777		69,942

F - 30

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

17. BUSINESS COMBINATION

On September 24, 2004, the Bank acquired the Panorama City branch of Pan American Bank. The acquisition was accounted for as a purchase and accordingly was included in the results of operations from the date of acquisition. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (dollars in thousands).

Assets acquired:
Teller and vault cash	$	128
Loans		23
Other assets / prepayment credits		38
Core deposit intangible		676
Total assets acquired		865
Liabilities assumed:
Deposit accounts		60,971
Discount on certificates of deposit		206
Accrued interest payable		1
Total liabilities assumed (net of assets acquired)		60,313
Cash received from Pan American Bank		56,363
Goodwill	$	3,950

The core deposit intangible will be amortized over approximately 8 years on an accelerated basis and deducted for tax purposes over 15 years using the straight line method. In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, goodwill is not amortizable but will be subject to annual impairment testing and will be deducted for tax purposes over 15 years using the straight line method.

The Bank acquired the branch at this premium to further solidify its market share in the Los Angeles County market, expand its customer base to enhance deposit fee income, provide an opportunity to market additional products and services to new customers, and improve customer convenience by adding a new location.

F - 31

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

18. EARNINGS PER COMMON SHARE

The factors used in the earnings per share computation follow (dollars in thousands).

	June 30
	2006		2005		2004
	(Dollars in thousands)
Basic
Net income as reported	$	4,929	$	4,997	$	3,168
Less net income of Company prior to initial stock offering		─		─		2,280
Net income attributable to common stock holders	$	4,929	$	4,997	$	888
Weighted average common shares outstanding		13,867,645		14,071,992		14,093,682
Basic earnings per share	$	0.36	$	0.36	$	0.06
Diluted
Net income attributable to common stock holders	$	4,929	$	4,997	$	888
Weighted average common shares outstanding for basic earnings per common share		13,867,645		14,071,992		14,093,682
Add: Dilutive effects of stock awards		─		─		─
Add: Dilutive effects of stock options		─		─		─
Average shares and dilutive potential common shares		13,867,645		14,071,992		14,093,682
Diluted earnings per common share	$	0.36	$	0.36	$	0.06

The effect of stock awards and stock options was not included in the calculation of diluted earnings per share because to do so would have been anti-dilutive for all shares. Stock award and stock option plans were not in place at June 30, 2004.

19. OTHER COMPREHENSIVE LOSS (INCOME)

Other comprehensive (loss) income components and related taxes were as follows:

	June 30
	2006			2005			2004
	(Dollars in thousands)
Unrealized holding (loss) gain on securities available-for-sale	$	(135	)	$	37		$	(323	)
Tax effect		56			(15	)		133
Other comprehensive (loss) income	$	(79	)	$	22		$	(190	)

F - 32

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

20. CONDENSED CONSOLIDATED QUARTERLY RESULTS OF OPERATIONS (Unaudited)

	Three months ended
	September 30		December 31		March 31		June 30
	(Dollars in thousands, except share data)
Fiscal Year 2006
Interest income	$	7,686	$	9,013	$	9,474	$	9,648
Interest expense		3,316		4,429		4,772		4,947
Net interest income		4,370		4,584		4,702		4,701
Provision for loan losses		165		195		128		164
Noninterest income		745		951		873		857
Noninterest expense		3,307		3,251		3,369		3,549
Income before income tax		1,643		2,089		2,078		1,845
Income tax expense		589		767		723		647
Net income	$	1,054	$	1,322	$	1,355	$	1,198
Basic and Diluted earnings per share	$	0.08	$	0.10	$	0.10	$	0.09
Fiscal Year 2005
Interest income	$	6,823	$	6,917	$	7,116	$	7,312
Interest expense		2,439		2,591		2,710		3,060
Net interest income		4,384		4,326		4,406		4,252
Provision for loan losses		120		32		123		131
Noninterest income		770		595		782		909
Noninterest expense		2,926		3,098		3,092		2,925
Income before income tax		2,108		1,791		1,973		2,105
Income tax expense		803		678		746		753
Net income	$	1,305	$	1,113	$	1,227	$	1,352
Basic and Diluted earnings per share	$	0.09	$	0.08	$	0.09	$	0.10

F - 33

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

CONDENSED FINANCIAL STATEMENTS OF K-FED BANCORP (UNCONSOLIDATED)

CONDENSED BALANCE SHEET

(Dollars in thousands)

	June 30 2006		June 30 2005
Assets
Cash and cash equivalents	$	4,087	$	407
Securities available for sale		11,289		18,848
ESOP Loan		3,678		4,075
Investment in bank subsidiary		73,297		67,191
Accrued income receivable		50		76
Other assets		308		178
	$	92,709	$	90,775
Liabilities & Stockholders’ Equity
Accrued expenses and other liabilities	$	52	$	15
Stockholders’ equity		92,657		90,760
	$	92,709	$	90,775

F - 34

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

CONDENSED STATEMENT OF INCOME

(Dollars in thousands)

	June 30
	2006		2005			2004
	(Dollars in thousands)
Income
Interest on ESOP Loan	$	46	$	102		$	46
Interest on investment securities, taxable		513		604	)		114
Other income		44		39			63
Total income		603		745			223
Expenses
Other operating expenses		250		276			86
Income before income taxes and equity in undistributed earnings of bank subsidiary		353		469			137
Income taxes		145		182			68
Income before equity in undistributed earnings of bank subsidiary		208		287			69
Equity in undistributed earnings of bank subsidiary		4,721		4,710			3,099
Net income	$	4,929	$	4,997		$	3,168

F - 35

K-FED BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006, 2005 AND 2004

CONDENSED STATEMENT OF CASH FLOWS

(Dollars in thousands)

	June 30
	2006			2005			2004
	(Dollars in thousands)
OPERATING ACTIVITIES
Net income	$	4,929		$	4,997		$	3,168
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of bank subsidiary		(4,721	)		(4,710	)		(3,099	)
Amortization of net premiums on investments		49			65			12
Net change in accrued income receivable		26			7			(83	)
Net change in other assets		(74	)		(45	)		(15	)
Net change in accrued expenses and other liabilities		37			(90	)		105
Net cash provided by operating activities		246			224			88
INVESTING ACTIVITIES
Purchases of available-for-sale investments		─			─			(21,837	)
Proceeds from maturities of available-for-sale investments		7,375			2,127			499
Net change in ESOP loan receivable		397			382			(4,457	)
Dividends received on equity investment in bank subsidiary		─			─			100
Net cash provided by investing activities		7,772			2,509			(25,695	)
FINANCING ACTIVITIES
Capital contribution to bank subsidiary		─			─			(23,048	)
Dividends paid on common stock		(1,394	)		(821	)		─
Purchase of treasury stock		(2,944	)		(3,453	)		─
Net proceeds from stock issuance		─			─			50,653
Distribution to capitalize K-Fed Mutual Holding Company		─			─			(50	)
Net cash used in financing activities		(4,338	)		(4,274	)		27,555
NET CHANGE IN CASH AND CASH EQUIVALENTS		3,680			(1,541	)		1,948
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		407			1,948			─
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	4,087		$	407		$	1,948

F - 36