K Fed Bancorp (KFED) 10-Q/A 2007 Q2 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No 1.)

(Mark One)

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2006

OR

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-50592

K-FED BANCORP

(Exact name of registrant as specified in its charter)

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

(800) 524-2274

(Registrant’s telephone number, including area code)

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

Yes x No o

Indicate by check mark whether the registrant 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 in Rule 12b-2 of the Exchange Act).

Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $.01 par value – 14,028,201 shares outstanding as of February 1, 2007.

Form 10-Q/A

K-FED BANCORP

Table of Contents

		Page
Part I.	Financial Information
Item 1:	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition at December 31, 2006 and June 30, 2006	1
	Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended December 31, 2006 and 2005	2
	Consolidated Statement of Stockholders’ Equity and Other Comprehensive Income for the Six Months Ended December 31, 2006	3
	Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2006 and 2005	4
	Notes to Consolidated Financial Statements	5
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4:	Controls and Procedures	19
Part II.	Other Information
Item 1:	Legal Proceedings	20
Item 1A:	Risk Factors	20
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3:	Defaults upon Senior Securities	20
Item 4:	Submission of Matters to a Vote of Security Holders	20
Item 5:	Other Information	20
Item 6:	Exhibits	20
	SIGNATURES	21

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements

K-FED BANCORP AND SUBSIDIARY

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except share data)

	December 31 2006			June 30 2006
ASSETS
Cash and due from banks	$	11,685		$	7,244
Federal funds sold		22,830			18,335
Total cash and cash equivalents		34,515			25,579
Interest bearing deposits in other financial institutions		3,070			9,010
Securities available-for-sale		10,874			11,289
Securities held-to-maturity, fair value of $22,342 and $23,939 at December 31, 2006 and June 30, 2006, respectively		22,810			24,738
Federal Home Loan Bank stock, at cost		9,053			8,746
Loans receivable		673,366			636,822
Deferred net loan origination fees		(175	)		(202	)
Net premium on purchased loans		226			195
Allowance for loan losses		(2,862	)		(2,722	)
Loans receivable, net		670,555			634,093
Accrued interest receivable		3,065			2,767
Premises and equipment, net		3,704			3,416
Core deposit intangible		378			437
Goodwill		3,950			3,950
Bank-owned life insurance		10,726			10,514
Other assets		3,984			4,360
Total assets	$	776,684		$	738,899
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Noninterest bearing	$	47,912		$	43,137
Interest bearing		444,060			420,317
Total deposits		491,972			463,454
Federal Home Loan Bank advances, short-term		10,000			10,000
Federal Home Loan Bank advances, long-term		179,985			169,948
Accrued expenses and other liabilities		2,430			2,840
Total liabilities		684,387			646,242
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; December 31, 2006 — 14,723,300 shares issued. June 30, 2006 — 14,702,040 shares issued.		147			147
Additional paid-in capital		57,013			56,456
Retained earnings		47,773			46,224
Accumulated other comprehensive loss, net of tax		(123	)		(247	)
Unearned employee stock ownership plan shares		(3,298	)		(3,526	)
Treasury stock, at cost (December 31, 2006 — 665,099 shares; June 30, 2006 — 495,970 shares)		(9,215	)		(6,397	)
Total stockholders’ equity		92,297			92,657
Total liabilities and stockholders’ equity	$	776,684		$	738,899
The accompanying notes are an integral part of these financial statements

1

K-FED BANCORP AND SUBSIDIARY

Consolidated Statements of Income and Comprehensive Income

(Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended December 31						Six Months Ended December 31
	2006			2005			2006			2005
Interest Income
Interest and fees on loans	$	9,114		$	8,266		$	18,017		$	15,296
Interest on securities, taxable		336			401			684			827
Federal Home Loan Bank dividends		124			47			237			88
Other interest		671			299			1,032			488
Total interest income		10,245			9,013			19,970			16,699
Interest Expense
Interest on Federal Home Loan Bank advances		2,110			1,644			4,092			2,315
Interest on deposits		3,749			2,785			6,920			5,430
Total interest expense		5,859			4,429			11,012			7,745
Net interest income		4,386			4,584			8,958			8,954
Provision for loan losses		180			195			303			360
Net interest income after provision for loan losses		4,206			4,389			8,655			8,594
Noninterest income
Service charges and fees		490			481			1,001			954
ATM fees and charges		402			363			773			737
Referral commissions		80			61			142			115
Loss on equity investment		(75	)		(71	)		(56	)		(342	)
Bank-owned life insurance		105			107			212			214
Other noninterest income		7			10			14			17
Total noninterest income		1,009			951			2,086			1,695
Noninterest expense
Salaries and benefits		1,896			1,804			3,698			3,586
Occupancy and equipment		510			422			1,030			814
ATM expense		318			282			625			580
Advertising and promotional		65			101			131			204
Professional services		154			152			355			381
Postage		80			76			149			141
Telephone		127			90			218			176
Other operating expense		383			324			755			676
Total noninterest expense		3,533			3,251			6,961			6,558
Income before income tax expense		1,682			2,089			3,780			3,731
Income tax expense		537			767			1,320			1,355
Net income	$	1,145		$	1,322		$	2,460		$	2,376
Comprehensive Income	$	1,186		$	1,303		$	2,584		$	2,301
Earnings per common share:
Basic	$	0.08		$	0.10		$	0.18		$	0.17
Diluted	$	0.08		$	0.10		$	0.18		$	0.17
The accompanying notes are an integral part of these financial statements

2

K-FED BANCORP AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity

And Other Comprehensive Income

(Unaudited)

(Dollars in thousands, except share data)

			Common Stock															Treasury Stock
	Comprehensive Income		Shares		Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss, net			Unearned ESOP Shares			Shares		Amount			Total
Balance June 30, 2006			14,702,040		$	147	$	56,456	$	46,224		$	(247	)	$	(3,526	)	(495,970	)	$	(6,397	)	$	92,657
Comprehensive income
Net income for the six months ended December 31, 2006	$	2,460	—			—		—		2,460			—			—		—			—			2,460
Other comprehensive income – unrealized gain on securities, net of tax		124	—			—		—		—			124			—		—			—			124
Total comprehensive income	$	2,584
Dividends paid ($0.19 per share) *			—			—		—		(911	)		—			—		—			—			(911	)
Purchase of treasury stock			—			—		—		—			—			—		(169,129	)		(2,818	)		(2,818	)
Stock options earned			—			—		102		—			—			—		—			—			102
Stock options exercised			10,260			—		149		—			—			—		—			—			149
Allocation of stock awards			—			—		134		—			—			—		—			—			134
Tax benefit of RRP shares vesting			—			—		35		—			—			—		—			—			35
Issuance of stock awards			35,000			—		—		—			—			—		—			—			—
Forfeiture of stock awards			(24,000	)		—		—		—			—			—		—			—			—
Allocation of ESOP common stock			—			—		137		—			—			228		—			—			365
Balance December 31, 2006			14,723,300		$	147	$	57,013	$	47,773		$	(123	)	$	(3,298	)	(665,099	)	$	(9,215	)	$	92,297
* K-Fed Mutual Holding Company waived its receipt of dividends on the 8,861,750 shares it owns.

3

K-FED BANCORP AND SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

	Six Months Ended December 31
	2006			2005
Operating Activities
Net income	$	2,460		$	2,376
Adjustments to reconcile net income to cash provided by operating activities:
Amortization of net premiums on securities		21			68
Amortization of net premiums on loan purchases		120			313
Accretion of net loan origination fees		(46	)		(50	)
Provision for loan losses		303			360
Federal Home Loan Bank stock dividend		(237	)		(88	)
Depreciation and amortization		350			224
Amortization of core deposit intangible		59			61
Loss on equity investment		56			342
Increase in cash surrender value of bank-owned life insurance		(212	)		(214	)
Accretion of net premiums on purchased certificates of deposits		(28	)		(33	)
Amortization of debt exchange costs		37			92
Allocation of ESOP common stock		365			283
Allocation of stock awards		134			231
Stock options earned		102			185
Net change in accrued interest receivable		(298	)		(535	)
Net change in other assets		234			(801	)
Net changes in accrued expenses and other liabilities		(410	)		802
Net cash provided by operating activities		3,010			3,616
Investing Activities
Proceeds from maturities of available-for-sale securities		608			1,180
Purchases of held-to-maturity investments		—			(2,000	)
Proceeds from maturities of held-to-maturity securities		1,924			5,371
Decrease in interest bearing deposits at other institutions		5,940			—
Purchases of loans		(53,461	)		(148,009	)
Net change in loans, excluding loan purchases		16,622			42,121
Purchase of FHLB stock		(70	)		(4,416	)
Purchase of equity investment		—			(167	)
Purchases of premises and equipment		(638	)		(287	)
Net cash used in investing activities		(29,075	)		(106,207	)
Financing Activities
Proceeds from FHLB advances		20,000			124,500
Repayment of FHLB advances		(10,000	)		(15,500	)
Dividends paid on common stock		(911	)		(649	)
Purchase of treasury stock		(2,818	)		(691	)
Net change in deposits		28,546			(4,202	)
Exercise of stock options		149			—
Tax benefit from RRP shares vesting		35			—
Net cash provided by financing activities		35,001			103,458
Net change in cash and cash equivalents		8,936			867
Cash and cash equivalents, at beginning of year		25,579			17,315
Cash and cash equivalents, at end of period	$	34,515		$	18,182
The accompanying notes are an integral part of these financial statements

4

K-FED BANCORP AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Nature of Business and Significant Accounting Policies

Nature of Business: K-Fed Bancorp (or the “Company”) is a majority-owned subsidiary of K-Fed Mutual Holding Company (or the “Parent”). The Company and its Parent are holding companies that are federally chartered. The Company’s sole subsidiary, Kaiser Federal Bank (or the “Bank”), is a federally chartered savings association, which provides retail and commercial banking services to individuals and business customers from its six branch locations 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 Company’s business activities generally are limited to passive investment activities and oversight of our investment in the Bank. Unless the context otherwise requires, all references to the Company include the Bank and the Company on a consolidated basis.

Basis of Presentation: The financial statements of K-Fed Bancorp have been prepared in conformity with accounting principals generally accepted in the United States (“GAAP”) for interim financial information and predominant practices followed by the financial services industry, and are unaudited. In the opinion of the Company’s management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the financial condition and results of operations for the interim periods included herein have been made.

The results of operations for the three and six months ended December 31, 2006 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the fiscal year ending June 30, 2007. Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. Therefore, these consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes included in the 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Principles of Consolidation: The consolidated financial statements presented in this quarterly report include the accounts of K-Fed Bancorp and its wholly-owned subsidiary, Kaiser Federal Bank. All material intercompany balances and transactions have been eliminated in consolidation.

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

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.  We do not expect the adoption of this standard will have a significant impact on our financial condition or results of operations.

5

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” which clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurement would be separately disclosed by level within the fair value hierarchy. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 (January 1, 2008 for us), and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of this standard will have a significant impact on our financial condition or results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 requires the evaluation of prior-year misstatements using both the balance sheet approach and the income statement approach. In the initial year of adoption should either approach result in quantifying an error that is material in light of quantitative and qualitative factors, SAB 108 guidance allows for a one-time cumulative-effect adjustment to beginning retained earnings. In years subsequent to adoption, previously undetected misstatements deemed material shall result in the restatement of previously issued financial statements in accordance with FAS 154. SAB 108 is effective for fiscal years ending on or after November 15, 2006. We do not expect the adoption of this standard will have a significant impact on our financial condition or results of operations.

Under Emerging Issues Task Force (“EITF”) 06-4: Accounting for deferred compensation and postretirement benefit aspects of endorsement split dollar life insurance arrangements, the EITF reached a consensus that requires the recognition of a liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement. The consensus highlights that the employer who is the policy holder has a liability for the benefit it is providing to the employee. The employer has agreed to maintain the insurance policy in force for the employee's benefit during retirement, then the liability recognized during the employee's active service period should be based on the future cost of insurance to be incurred during the employee's retirement. Also, if the employer has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized under SFAS 106. As of September 20, 2006, this FASB board ratified the above. It is applicable for fiscal years beginning after December 15, 2007. We do not expect the adoption of this standard will have a significant impact on our financial condition or results of operations.

Under EITF 06-5: Accounting for Purchases of Life Insurance - Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4, "Accounting for Purchases of Life Insurance", the Task Force reached a consensus that a policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. The task forces agreed that contractual limitations should be considered when determining the realizable amounts. Those amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized. The task force also agreed that fixed amounts that are recoverable by the policyholder in future periods in excess of one year from the surrender of the policy should be recognized at their present value. The task force also reached a consensus that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual -life by individual life policy. The Task force also noted that any amount that is ultimately realized by the policyholder upon the assumed surrender of the final policy shall be included in the amount that could be realized under the insurance contract. The issue should be effective for fiscal years beginning after December 15, 2006, but early adoption is permitted. This was ratified at the Task Force, September 20, 2006 meeting. We do not expect the adoption of this standard will have a significant impact on our financial condition or results of operations.

6

Note 2 – Employee Stock Ownership Plan

In connection with the stock offering of the Company in 2004, the Bank established an Employee Stock Ownership Plan (“ESOP”) for the benefit of its employees. The Company issued 454,940 shares of common stock to the ESOP in exchange for a ten-year note in the amount of approximately $4.5 million. The $4.5 million loan for the ESOP purchase was borrowed from the Company.

Shares issued to the ESOP are allocated to ESOP participants based on principal and interest payments made by the ESOP on the loan from the Company. 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. The $4.5 million loan for the ESOP purchase was borrowed from the Company and requires quarterly payments to be made by the Bank of approximately $139,000, which represents principal plus interest at 4.00%.

As shares are released from collateral, the Company will report compensation expense equal to the current market price of the shares and the shares will become outstanding for earnings-per-share (“EPS”) computations. Dividends on allocated ESOP shares reduce retained earnings; dividends on unearned ESOP shares reduce accrued interest expense.

Note 3 – Employee Stock Compensation

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. Under the SOP, options become exercisable in equal installments over a five-year period from the date of grant and expire ten years from the date of grant. Compensation expense, net of tax effects related to the SOP was $9,000 for the three months ended December 31, 2006 and $88,000 for the six months ended December 31, 2006. Compensation expense, net of tax effects related to the SOP was $82,000 for the three months ended December 31, 2005 and $165,000 for the six months ended December 31, 2005. The reduction in compensation expense related to stock options for the three and six months ended December 31, 2006 was attributable to forfeitures. There were 40,000 and 62,000 shares of stock options granted during the three and six months ended December 31, 2006, respectively. A summary of stock option activity follows:

	Three months ended December 31, 2006				Six months ended December 31, 2006
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of period		327,400	$	14.50		350,720	$	14.50
Granted		40,000		17.40		62,000		16.77
Exercised		5,860		14.50		10,260		14.50
Forfeited or expired		11,680		14.50		52,600		14.50
Outstanding at end of period		349,860	$	14.83		349,860	$	14.90
Options exercisable at end of period		115,144				115,114

7

Stock options granted during the three and six months ended December 31, 2006 were computed using the Black-Scholes option pricing model to determine the fair value of options with the following assumptions as of the date of grant:

	Three months ended December 31, 2006			Six months ended December 31, 2006
Risk-free interest rate		4.62	%		4.67	%
Expected option life		6.25 years			6.52 years
Expected price volatility		23.00	%		23.35	%
Expected dividend yield		2.35	%		2.33	%
Estimated fair value of stock options granted	$	4.26		$	4.25

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 based on the market value at date of grant. These shares vest over a five year period. Compensation expense related to the RRP awards was $69,000 and $134,000 for the three months and six months ended December 31, 2006, respectively. Compensation expense related to the RRP awards was $116,000 and $231,000 for the three months and six months ended December 31, 2005, respectively. The reduction in compensation expense related to RRPs for the three and six months ended December 31, 2006 was attributable to forfeitures. There were 107,660 restricted shares outstanding and the Company had an aggregate of 62,930 restricted shares available for future issuance under the RRP at December 31, 2006.

A summary of changes in the Company’s non-vested shares for the year follows:

	Shares			Weighted Average Grant Date Fair Value
Non-vested at July 1, 2006	120,880		$	14.10
Granted	35,000			17.58
Vested	(24,220	)		14.10
Forfeited	(24,000	)		14.10
Non-vested at December 31, 2006	107,660		$	15.23

8

Note 4 – Earnings Per 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.

	Three months ended December 31,				Six months ended December 31,
	2006		2005		2006		2005
	(Dollars in thousands)
Net income as reported	$	1,145	$	1,322	$	2,460	$	2,376
Weighted average common shares outstanding		13,656,748		13,868,046		13,689,339		13,874,553
Basic earnings per share	$	0.08	$	0.10	$	0.18	$	0.17
Earnings per share assuming dilution
Net income available to common shareholders	$	1,145	$	1,322	$	2,460	$	2,376
Weighted average common shares outstanding
Dilutive effect of stock options		12,835		—		5,297		—
Dilutive effect of stock awards		52,122		—		50,199		—
Average common shares and dilutive potential common shares		13,721,705		13,868,046		13,744,835		13,874,553
Diluted earnings per share	$	0.08	$	0.10	$	0.18	$	0.17

The effect of stock options and stock awards was not included in the calculation of diluted earnings per share for the three and six months ended December 31, 2005 because to do so would have been anti-dilutive.

9

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

This Quarterly Report on Form 10-Q contains certain forward-looking statements and information relating to the Company and the Bank that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in portions of this document the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “should” and similar expressions or the negative thereof, as they relate to the Company or the Bank or their management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company and/or the Bank with respect to forward-looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

Comparison of Financial Condition at December 31, 2006 and June 30, 2006.

Assets: Cash and cash equivalents increased $8.9 million, or 34.9% to $34.5 million at December 31, 2006 from $25.6 million at June 30, 2006. The increase related to federal funds sold, which increased $4.5 million to $22.8 million at December 31, 2006 from $18.3 million at June 30, 2006 and cash and cash equivalents which increased $4.5 million to $11.7 million at December 31, 2006 from $7.2 million at June 30, 2006.

Our investment portfolio decreased $2.3 million, or 6.5%, to $33.7 million at December 31, 2006 from $36.0 million at June 30, 2006. The decrease was attributable to normal repayments of principal on our mortgage-backed securities and collateralized mortgage obligations.

Our net loan portfolio increased $36.5 million, or 5.8% to $670.6 million at December 31, 2006 from $634.1 million at June 30, 2006. One-to-four family real estate loans increased $17.7 million, or 4.1% to $454.7 million at December 31, 2006 from $437.0 million at June 30, 2006. Commercial real estate loans increased $8.5 million, or 14.5% to $67.4 million at December 31, 2006 from $58.9 million at June 30, 2006. Multifamily loans increased $0.1 million to $89.3 million at December 31, 2006 from $89.2 million at June 30, 2006. Other loans which was comprised mostly of auto loans increased $10.3 million, or 19.8% to $62.0 million at December 31, 2006 from $51.7 million at June 30, 2006. The overall loan mix remained relatively constant, with real estate loans comprising 90.8% of the total loan portfolio at December 31, 2006 compared with 91.9% at June 30, 2006.

Deposits: Total deposits increased $28.5 million, or 6.2% to $492.0 million at December 31, 2006 from $463.5 million at June 30, 2006. This increase was primarily due to increases of $4.8 million in checking accounts, $27.7 million in savings accounts and $11.8 million in certificates of deposits. These increases were offset by reductions of $15.8 million in money market accounts. Savings account balances grew as a result of a tiered, high yield product introduced in September and October 2006. Certificates of deposit balances grew as a result of higher yield, short term products introduced in October 2006.

Borrowings: Advances from the Federal Home Loan Bank of San Francisco increased $10.1 million, or 5.6% to $190.0 million at December 31, 2006 from $179.9 million at June 30, 2006. This increase in FHLB borrowings was to fund loan growth during the period. The Company interchanges the use of deposits and borrowings to fund assets depending on various factors including liquidity and asset/liability management strategies.

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Stockholders’ Equity: Stockholders’ equity decreased $360,000 to $92.3 million at December 31, 2006 from $92.7 million at June 30, 2006. The decrease resulted from the repurchase of 169,129 of our outstanding common shares at an average price of $16.66 at a total cost of $2.8 million and a cash payment of $911,000 in dividends to shareholders of record, excluding shares held by K-Fed Mutual Holding Company, of $0.19 per share for the six months ended December 31, 2006 offset by $2.5 million in income earned for the six months ended December 31, 2006 in addition to the allocation of ESOP shares, stock awards, and stock options earned during the same period totaling $385,000.

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

	For the three months ended December 31,
				2006 (4)							2005 (4)
						Average							Average
	Average					Yield/		Average					Yield/
	Balance			Interest		Cost		Balance			Interest		Cost
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(1)	$	639,363		$	9,114	5.70	%	$	617,837		$	8,266	5.35	%
Securities(2)		34,210			336	3.93	%		45,589			401	3.52	%
Fed Funds		45,724			589	5.15	%		23,246			190	3.27	%
Federal Home Loan Bank stock		9,023			124	5.50	%		7,145			47	2.63	%
Interest-bearing deposits in other financial institutions		5,793			46	3.18	%		9,010			76	3.37	%
Other interest-earning assets		2,863			36	5.03	%		2,557			33	5.16	%
Total interest-earning assets		736,976			10,245	5.56	%		705,384			9,013	5.11	%
Noninterest earning assets		35,959							30,116
Total assets	$	772,935						$	735,500
INTEREST-BEARING LIABILITIES
Money Market	$	100,566		$	714	2.84	%	$	111,761		$	557	1.99	%
Savings deposits		114,608			454	1.58	%		95,494			99	0.41	%
Certificates of deposit		224,120			2,581	4.61	%		224,485			2,129	3.79	%
FHLB advances		189,980			2,110	4.44	%		159,852			1,644	4.11	%
Total interest-bearing liabilities		629,274			5,859	3.72	%		591,592			4,429	2.99	%
Noninterest bearing liabilities		51,004							52,000
Total liabilities		680,278							643,592
Equity		92,657							91,908
Total liabilities and equity	$	772,935						$	735,500
Net interest/spread				$	4,386	1.84	%				$	4,584	2.12	%
Margin(3)						2.38	%						2.60	%
Ratio of interest-earning assets to interest bearing liabilities		117.12	%						119.23	%
(1) Calculated net of deferred fees and loss reserves and includes non-accrual loans
(2) Calculated based on amortized cost
(3) Net interest income divided by interest-earning assets
(4) Rates have been annualized

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	For the six months ended December 31,
				2006 (4)							2005 (4)
						Average							Average
	Average					Yield/		Average					Yield/
	Balance			Interest		Cost		Balance			Interest		Cost
	(Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(1)	$	636,244		$	18,017	5.66	%	$	584,601		$	15,296	5.23	%
Securities(2)		34,797			684	3.93	%		46,897			827	3.53	%
Fed Funds		32,364			833	5.15	%		17,316			313	3.62	%
Federal Home Loan Bank stock		8,936			237	5.30	%		5,814			88	3.03	%
Interest-bearing deposits in other financial institutions		7,171			128	3.57	%		9,010			141	3.13	%
Other interest-earning assets		2,407			71	5.90	%		1,564			34	4.35	%
Total interest-earning assets		721,919			19,970	5.53	%		665,202			16,699	5.02	%
Noninterest earning assets		34,746							29,866
Total assets	$	756,665						$	695,068
INTEREST-BEARING LIABILITIES
Money Market	$	105,521		$	1,513	2.87	%	$	109,858		$	1,012	1.84	%
Savings deposits		103,961			544	1.05	%		97,216			206	0.42	%
Certificates of deposit		226,634			4,863	4.29	%		225,137			4,212	3.74	%
FHLB advances		185,685			4,092	4.41	%		121,401			2,315	3.81	%
Total interest-bearing liabilities		621,800			11,012	3.54	%		553,612			7,745	2.80	%
Noninterest bearing liabilities		42,134							49,928
Total liabilities		663,934							603,540
Equity		92,731							91,528
Total liabilities and equity	$	756,665						$	695,068
Net interest/spread				$	8,958	1.99	%				$	8,954	2.22	%
Margin(3)						2.48	%						2.69	%
Ratio of interest-earning assets to interest bearing liabilities		116.10	%						120.16	%
(1) Calculated net of deferred fees and loss reserves and includes non-accrual loans
(2) Calculated based on amortized cost
(3) Net interest income divided by interest-earning assets
(4) Rates have been annualized

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Comparison of Results of Operations for the Three Months Ended December 31, 2006 and December 31, 2005.

General. Net income for the three months ended December 31, 2006 was $1.1 million, a decrease of $177,000, or 13.4% compared to net income of $1.3 million for the three months ended December 31, 2005. Earnings per basic and diluted common share were $0.08 for the three months ended December 31, 2006 compared to $0.10 for the three months ended December 31, 2005. The change in net income resulted from the fluctuations described below.

Interest Income. Interest income increased by $1.2 million, or 13.7% to $10.2 million for the three months ended December 31, 2006 from $9.0 million for the three months ended December 31, 2005. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $21.6 million, or 3.5% from $617.8 million for the three months ended December 31, 2005 to $639.4 million for the three months ended December 31, 2006. This increase was primarily due to whole loan purchases of one-to-four family residential real estate loans. Interest income was also positively impacted by a 35 basis point increase in the average yield on loans receivable from 5.35% for the three months ended December 31, 2005 to 5.70% for the three months ended December 31, 2006. The increase was primarily attributable to the addition of higher-yielding single-family loans to our portfolio, commensurate with increases in general market rates.

Interest income on securities decreased by $65,000, or 16.2% to $336,000 for the three months ended December 31, 2006 from $401,000 for the three months ended December 31, 2005. The decrease resulted from an $11.4 million, or 25.0% decrease in the average balance of securities as a result of principal repayments. The decrease was partially offset by a 41 basis point increase in the average yield on the securities investment portfolio from 3.52% for the three months ended December 31, 2005 to 3.93% for the three months ended December 31, 2006, commensurate with increases in general market rates.

Other interest income increased by $372,000, or 124.4% to $671,000 for the three months ended December 31, 2006 from $299,000 for the three months ended December 31, 2005. The increase was attributable to an increase in the average balance of fed funds sold of $22.5 million, or 96.7% from $23.2 million for the three months ended December 31, 2005 to $45.7 million for the three months ended December 31, 2006. The increase in fed funds was attributable to deposit growth during the comparable periods. Interest income was also positively impacted by a 188 basis point increase in the average yield earned on fed funds sold from 3.27% for the three months ended December 31, 2005 to 5.15% for the three months ended December 31, 2006. The increase was primarily attributable to increases in general market rates.

Interest Expense. Interest expense increased $1.4 million, or 32.3% for the three months ended December 31, 2006 to $5.9 million as compared to $4.4 million for the three months ended December 31, 2005. The increase was primarily attributable to an increase in average deposits and FHLB advances, combined with higher interest rates. The average interest rates on interest-bearing liabilities increased 73 basis points to 3.72% for the three months ended December 31, 2006 from 2.99% for the three months ended December 31, 2005. Average interest-bearing liabilities increased $37.7 million, or 6.4% to $629.3 million for the three months ended December 31, 2006 from $591.6 million for the three months ended December 31, 2005.

Net Interest Income. Net income before provision for loan losses decreased $198,000, or 4.3% from $4.6 million for the three months ended December 31, 2005 to $4.4 million for the three months ended December 31, 2006. The decline was attributable to continued compression in out net interest margin as a result of the continued flattening of the yield curve. As a result, the net interest margin decreased 22 basis points from 2.60% for the three months ended December 31, 2005 to 2.38% for the three months ended December 31, 2006.

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.

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The loss ratio analysis component of the allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of the loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based both on our historical loss experience as well as on significant factors that, in management’s judgment, affect the 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 above permits adjustments to any loss factor used in the computation of the formula allowance in the event that, in management’s judgment, significant factors which affect the 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 was $180,000 for the three months ended December 31, 2006 compared to $195,000 for the three months ended December 31, 2005. The allowance for loan losses as a percent of total loans was 0.44% at December 31, 2006 compared to 0.43% at June 30, 2006. The assumptions are based both on current industry and economic trends in addition to incurring no losses within our real estate portfolio since 1997. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for consumer and real estate loans for both periods.

Noninterest Income. Our noninterest income increased $58,000, or 6.1% to $1.0 million for the three months ended December 31, 2006 from $951,000 for the three months ended December 31, 2005. The increase was primarily the result of fee and transaction income related to the deployment of additional ATM’s.

Noninterest Expense. Our noninterest expense increased $282,000, or 8.6% to $3.5 million for the three months ended December 31, 2006 from $3.3 million for the three months ended December 31, 2005. The increase was primarily due to a $92,000 increase in salaries and benefits, an $88,000 increase in occupancy and equipment expense and a $59,000 increase in other operating expense.

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Salaries and benefits represented 53.7% of total noninterest expense for the three months ended December 31, 2006 compared to 55.5% for the three months ended December 31, 2005. Total salaries and benefits increased $92,000, or 5.1%, to $1.9 million for the three months ended December 31, 2006 from $1.8 million for the three months ended December 31, 2005. The increase was primarily due to an increase of $109,000 in compensation commensurate with annual salary increases, a $61,000 increase in fair market value costs related to our employee stock ownership plan offset by a $79,000 reduction in stock option expense as a result of forfeitures.

Occupancy and equipment expense increased $88,000, or 20.9% to $510,000 for the three months ended December 31, 2006 from $422,000 for the three months ended December 31, 2005. The increase was primarily due to costs associated with non-capitalizable costs and lease expense related to build-outs of financial service centers in Bellflower, Harbor City, Los Angeles and Riverside opened during the periods of March 2006 through July 2006 in addition to increased equipment maintenance expense.

Other operating expense increased $5,000 to $383,000 for the three months ended December 31, 2006 from $324,000 for the three months ended December 31, 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 three months ended December 31, 2006 was $537,000 compared to $767,000 for the three months ended December 31, 2005. This decrease was primarily the result of lower pre-tax income of $1.7 million for the three months ended December 31, 2006 compared to $2.1 million for the three months ended December 31, 2005. The effective tax rate was 31.9% and 36.7% for the three months ended December 31, 2006 and 2005, respectively. The effective tax rate decreased due to a certainty realized in one uncertain tax position taken by management. As such, management recognized a benefit of approximately, $80,000. Absent this adjustment, the effective tax rate would have been 36.7%.

Comparison of Results of Operations for the Six Months Ended December 31, 2006 and December 31, 2005.

General. Net income for the six months ended December 31, 2006 was $2.5 million, an increase of $84,000, or 3.5% compared to $2.4 million for the six months ended December 31, 2005. Earnings per basic and diluted common share were $0.18 for the six months ended December 31, 2006 compared to $0.17 for six months ended December 31, 2005. The change in net income resulted from the fluctuations described below.

Interest Income. Interest income increased by $3.3 million, or 19.6% to $20.0 million for the six months ended December 31, 2006 from $16.7 million for the six months ended December 31, 2005. The primary factor for the increase in interest income was an increase in the average loans receivable balance of $51.6 million, or 9.6% from $584.6 million for the six months ended December 31, 2005 to $636.2 million for the six months ended December 31, 2006. The increase was primarily due to whole loan purchases of one-to-four family residential real estate loans. Interest income was also positively impacted by a 43 basis point increase in the average yield on loans receivable, from 5.23% for the six months ended December 31, 2005 to 5.66% for the six months ended December 31, 2006.

Interest income on securities decreased by $143,000, or 17.3% to $684,000 for the six months ended December 31, 2006 from $827,000 for the six months ended December 31, 2005. The decrease resulted from a $12.1 million, or 25.8% decrease in the average balance of securities as a result of principal repayments. The decrease was partially offset by a 40 basis point increase in the average yield on the securities investment portfolio from 3.93% for the six months ended December 31, 2006 compared to 3.53% for the six months ended December 31, 2005.

Other interest income increased by $544,000, or 111.5% to $1.0 million for the six months ended December 31, 2006 from $488,000 for the six months ended December 31, 2005. The increase was attributable to an increase in the average balance of fed funds sold of $15.1 million, or 86.9% from $17.3 million for the six months ended December 31, 2005 to $32.4 million for the six months ended December 31, 2006. The increase in fed funds was attributable to deposit growth during the comparable periods. Interest income was also positively impacted by a 153 basis point increase in the average yield earned on fed funds sold, from 3.62% for the six months ended December 31, 2005 to 5.15% for the six months ended December 31, 2006. The increase was primarily attributable to increases in general market rates.

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Interest Expense. Interest expense increased $3.3 million, or 42.2% for the six months ended December 31, 2006 to $11.0 million as compared to $7.7 million for the six months ended December 31, 2005. The increase is primarily attributable to an increase in average deposits and FHLB advances, combined with higher interest rates. The average interest rate on interest-bearing liabilities increased 74 basis points to 3.54% for the six months ended December 31, 2006 from 2.80% for the six months ended December 31, 2005. Average interest-bearing liabilities increased $68.2 million, or 12.3% to $621.8 million for the six months ended December 31, 2006 from $553.6 million for the six months ended December 31, 2005.

Provision for Loan Losses. Our provision for loan losses was $303,000 for the six months ended December 31, 2006 compared to $360,000 for the six months ended December 31, 2005. The decrease in provision is attributable to continued low levels of charge-offs, adjustments made for current peer ratios and changes in other economic factors affecting the loan loss analysis. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for consumer and real estate loans for both periods.

Noninterest Income. Our noninterest income increased $391,000, or 23.1% to $2.1 million for the six months ended December 31, 2006 from $1.7 million for the six months ended December 31, 2005. The increase is primarily the result of a $286,000 reduction in the loss on our equity investment in a California Affordable Housing Program tax credit fund, a $47,000 increase in service charges and fees and a $36,000 increase in fee and transaction income related to the deployment of additional ATM’s.

Noninterest Expense. Our noninterest expense increased $403,000, or 6.1% to $7.0 million for the six months ended December 31, 2006 from $6.6 million for the six months ended December 31, 2005. The increase was primarily due to a $112,000 increase in salaries and benefits, a $216,000 increase in occupancy and equipment expense and a $79,000 increase in other operating expense.

Salaries and benefits represented 53.1% and 54.7% of total noninterest expense for the six months ended December 31, 2006 and December 31, 2005, respectively. Total salaries and benefits increased $112,000, or 3.1%, to $3.7 million for the six months ended December 31, 2006 from $3.6 million for the six months ended December 31, 2005. The increase was primarily due to an increase of $200,000 in compensation commensurate with annual salary increases, an $82,000 increase in fair market value costs related to our employee stock ownership plan offset by a $180,000 reduction in stock option expense and stock awards as a result of forfeitures.

Occupancy and equipment expense increased $216,000 to $1.0 million for the six months ended December 31, 2006 from $814,000 for the six months ended December 31, 2005. The increase was primarily due to costs associated with non-capitalizable costs and lease expense related to build-outs of financial service centers in Bellflower, Harbor City, Los Angeles and Riverside opened during the periods of March 2006 through July 2006 in addition to increased equipment maintenance expense.

Other operating expense increased $79,000 to $755,000 for the six months ended December 31, 2006 from $676,000 for the six months ended December 31, 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 was $1.3 million for the six months ended December 31, 2006 compared to $1.4 million for the six months ended December 31, 2005. The effective tax rate was 34.9% and 36.3% for the six months ended December 31, 2005 and 2005, respectively. The effective tax rate decreased due to a certainty realized in one uncertain tax position taken by management. As such, management recognized a benefit of approximately, $80,000. Absent this adjustment, the effective tax rate would have been 37.0%.

Liquidity 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 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. See “Consolidated Statements of Cash Flows” contained in the Consolidated Financial Statements included in this document.

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Our liquidity, represented by cash and cash equivalents and mortgage-backed and related securities, is a product of 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. 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 December 31, 2006, the total approved loan commitments unfunded amounted to $7.4 million, which includes the unadvanced portion of loans of $7.0 million.

Time deposits and advances from the Federal Home Loan Bank of San Francisco scheduled to mature in one year or less at December 31, 2006, totaled $121.3 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. We anticipate that we will continue to have sufficient funds, through deposits and borrowings, to meet our current commitments.

At December 31, 2006, we had available additional advances from the Federal Home Loan Bank of San Francisco in the amount of $106.6 million. Kaiser Federal Bank’s credit limit with the Federal Home Loan Bank is limited to 40 percent of the Bank’s total assets.

Capital

The table below sets forth Kaiser Federal Bank’s capital position relative to its Office of Thrift Supervision capital requirements at December 31, 2006. The definitions of the terms used in the table are those provided in the capital regulations issued by the Office of Thrift Supervision.

	Actual			Minimum Capital Requirements			Minimum required to be Well Capitalized Under Prompt Corrective Actions Provisions
	Amount	Ratio		Amount	Ratio		Amount	Ratio
	(Dollars in thousands)
Total risk-based capital (to risk-weighted assets)	$64,834	13.47	%	$38,500	8.00	%	$48,124	10.00	%
Tier 1 risk-based capital (to risk-weighted assets)	61,973	12.88		19,250	4.00		28,875	6.00
Tier 1 (core) capital (to adjusted tangible assets)	61,973	8.26		30,025	4.00		37,531	5.00

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. At December 31, 2006, Kaiser Federal Bank was a “well-capitalized” institution under regulatory standards.

Impact of Inflation

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

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

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Our 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 directors sets and recommends the asset and liability policies of Kaiser Federal Bank, which are implemented by the asset/liability management committee.

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

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

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

18

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. In the future, we intend to continue our existing strategy of originating and purchasing relatively short-term and/or adjustable rate loans. The Bank does not maintain any securities for trading purposes. The Bank does not currently engage in trading activities or use instruments such as interest rate swaps, hedges, or other similar derivatives to control interest rate risk.

The Office of Thrift Supervision provides Kaiser Federal Bank with the information presented in the following table, 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 September 30, 2006 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.

	September 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	$	61,898	$	(21,909	)	(26	)%	8.84	%	(240	)bp
+200 bp		70,876		(12,931	)	(15	)	9.89		(135	)
+100 bp		78,758		(5,049	)	(6	)	10.75		(49	)
0 bp		83,807		—		—		11.24		—
-100 bp		86,147		2,341		3		11.39		15
-200 bp		84,485		678		1		11.07		(17	)

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.

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

ITEM 4. Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 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 Rules 13a-15(f) or 15(d)-15(f) under the Act) that occurred during the most recent fiscal quarter that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There have been no material changes to the risk factors that were previously disclosed in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2006.

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

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
10/1/06 – 10/31/06	55,000	$	16.60	102,500	164,716
11/1/06 – 11/30/06	23,000		17.39	125,500	141,716
12/1/06 – 12/31/06	31,000		18.97	156,500	110,716

^* On July 5, 2006, the Company completed its previously disclosed stock repurchase plan of 281,129 shares. On July 5, 2006, the Company announced its intention to repurchase an additional 5% of its outstanding publicly held common stock, or 267,216 shares of stock.

Item 3. Defaults Upon Senior Securities

None.

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

The Annual Meeting of Shareholders for K-Fed Bancorp was held on October 24, 2006. At that meeting, the shareholders elected the following persons to three-year terms to the Board of Directors: Gerald A. Murbach by a vote of 12,977,321 for and 204,730 withheld and Robert C. Steinbach by a vote of 13,143,575 for and 38,476 withheld. Kay M. Hoveland was elected to a two-year term by a vote of 12,977,565 for and 204,486 withheld. There were 536,099 non-voting shares. James L. Breeden, Frank G. Nicewicz, and Rita H. Zwern also continued to serve as directors after the meeting. There were no broker non-votes.

The appointment of Crowe Chizek and Company LLP as independent registered public accounting firm for the fiscal year ending June 30, 2007 was ratified by a vote of 13,178,622 for, 131 against and 3,297 abstain.

Item 5. Other Information

None.

Item 6. Exhibits

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

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SIGNATURES

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

K-Fed Bancorp

Registrant

Date: February 12, 2007	/s/ Kay M. Hoveland
		Kay M. Hoveland
		President, Chief Executive Officer

/s/ Dustin Luton

Chief Financial Officer

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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 Quarterly Report on Form 10-Q 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: February 12, 2007 /s/ Kay M. Hoveland

Kay M. Hoveland

President and Chief Executive Officer

EXHIBIT 31.2

Certification of the Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act

I, Dustin Luton, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q 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: February 12, 2007 /s/ Dustin Luton

Dustin Luton

Chief Financial Officer

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 Quarterly Report of K-Fed Bancorp (the “Company”) on Form 10-Q for the period ended December 31, 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 quarterly report on Form 10-Q 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: February 12, 2007 /s/ Kay M. Hoveland

Kay M. Hoveland

Chief Executive Officer

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 Quarterly Report of K-Fed Bancorp (the “Company”) on Form 10-Q for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dustin Luton, 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 quarterly report on Form 10-Q 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: February 12, 2007 /s/ Dustin Luton

Dustin Luton

Chief Financial Officer