Forward-Looking Statements

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

Market Area

Our success depends primarily on the general economic conditions in the California counties of Los Angeles, Orange, San Diego, San Bernardino, Riverside, Santa Clara and Alameda, as nearly all of our loans are to customers in this market area. Economic conditions remain weak both nationally and in our market area of California. We continue to experience distressed home prices and California in particular has experienced significant declines in real estate values. In addition, while both California and national unemployment rates improved during the nine month ended March 31, 2012, unemployment rates remain at historically high levels. In particular, California continues to experience elevated unemployment rates as compared to the national average. Unemployment rates in California were 11.0% in March 2012 as compared to 11.8% in June 2011. This compares to the national unemployment rate of 8.2% in March 2012 and 9.2% in June 2011.

Comparison of Financial Condition at March 31, 2012 and June 30, 2011.

Assets. Total assets increased $88.5 million, or 10.3% to $945.0 million at March 31, 2012 from $856.4 million at June 30, 2011. The increase primarily reflected growth in cash and cash equivalents, securities available-for-sale and net loans receivable. The increase in assets was funded with Federal Home Loan Bank advances and increased deposits.

Cash and cash equivalents increased by $49.1 million, or 54.8% to $138.8 million at March 31, 2012 from $89.7 million at June 30, 2011. The increase was primarily due to an increase in FHLB advances and deposits partially offset by purchases of securities. Cash and cash equivalents remain at historically elevated levels as we continue deploying capital received from the second-step stock offering. We expect to leverage our capital in the future with increased loan originations and purchases, as well as the repurchase of Company stock.

Securities available-for-sale increased by $42.0 million, or 261.6%, to $58.0 million at March 31, 2012 from $16.0 million at June 30, 2011 due to the purchase of $57.3 million in securities, offset by $15.3 million in maturities, principal repayments, and amortization on our mortgage-backed securities and collateralized mortgage obligations. During the nine months ended March 31, 2012, the purchased securities included six government-sponsored enterprise ("GSE") mortgage backed securities with a fair value of $20.9 million in the aggregate and carried a weighted average yield of 2.49% and seven GSE collateralized mortgage obligations with a fair value of $29.2 million in the aggregate and carried a weighted average yield of 0.98%. The purchased investments were funded with FHLB advances.

Our net loan portfolio increased by $11.1 million, or 1.6% to $707.8 million at March 31, 2012 from $696.6 million at June 30, 2011 due primarily to the purchase of adjustable and fixed rate one-to-four family real estate loans in the amount of $47.8 million net of a $1.0 million purchase premium, partially offset by loan maturities and repayments of $36.8 million. One-to-four family real estate loans increased $35.0 million, or 12.4% to $317.1 million at March 31, 2012 from $282.1 million at June 30, 2011. Multi-family loans decreased $8.4 million, or 2.9% to $279.4 million at March 31, 2012 from $287.8 million at June 30, 2011. Commercial real estate loans decreased $18.9 million, or 17.5% to $89.1 million at March 31, 2012 from $108.0 million at June 30, 2011. Other loans, which were comprised primarily of automobile and unsecured loans decreased $718,000, or 2.4% to $28.8 million at March 31, 2012 from $29.6 million at June 30, 2011. Real estate loans comprised 96.0% of the total loan portfolio at March 31, 2012, compared with 95.8% at June 30, 2011.

The allowance for loan losses decreased by $3.5 million, or 30.3% to $7.9 million at March 31, 2012 from $11.4 million at June 30, 2011. The decrease was due primarily to $2.2 million in charge-offs of previously identified specific valuation allowances on loans generally six months or more delinquent or otherwise deemed uncollectible. Prior to the quarter ended December 31, 2011, specific valuation allowances were carried in the allowance for loan losses and charged-off at foreclosure. Loans charged-off during the nine months ended March 31, 2012 totaled $3.6 million as compared to $2.6 million for the nine months ended March 31, 2011. While charge-offs increased, historical loss ratios declined as specific valuation allowances were included in the historical loss experience ratios in the earlier periods they were originally identified.

Deposits. Total deposits increased $48.2 million, or 7.6% to $682.9 million at March 31, 2012 from $634.7 million at June 30, 2011. The growth was comprised of increases of $16.3 million in noninterest bearing deposits and $31.8 million in interest bearing deposits. The $31.8 million increase in interest bearing deposits consisted of a $16.8 million, or 12.8%, increase in money market accounts from $132.0 million at June 30, 2011 to $148.8 million at March 31, 2012; a $10.7 million, or 8.0%, increase in savings account from $133.9 million at June 30, 2011 to $144.6 million at March 31, 2012; a $222,000, or 0.1%, increase in certificates of deposit from $311.3 million at June 30, 2011 to $311.6 million at March 31, 2012; and the introduction of a new interest-bearing checking product with a balance of $4.1 million at March 31, 2012. The increase in noninterest bearing deposits was typical this time of year due to tax refunds as well as an extra payroll deposit received by a significant number of our customers at the end of the quarter. The increase in interest bearing deposits was primarily a result of the introduction of new money market and interest-bearing checking products as well as continued growth in existing money market and savings products. Money market and savings accounts have steadily increased as certain customers prefer the short-term flexibility of non-certificate accounts in a low interest rate environment.

Borrowings. FHLB advances increased to $100.0 million at March 31, 2012 as compared to $60.0 million at June 30, 2011. During the nine months ended March 31, 2012, the Bank borrowed $60.0 million in FHLB advances at a weighted average cost of 1.64%. This borrowing was partially offset by $20.0 million in FHLB advance maturities. The increase in borrowings has allowed the Bank to improve its interest rate risk position by locking in longer term funding as the weighted average term on the new borrowings is five years.

Stockholders' Equity. Stockholders' equity decreased $1.3 million to $156.1 million at March 31, 2012 from $157.4 million at June 30, 2011. The decrease in stockholders' equity was primarily attributable to shares repurchased during the nine months ended March 31, 2012 pursuant to the stock repurchase program and cash dividends paid offset by earnings.

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

The following table sets forth certain information for the three months ended
March 31, 2012 and 2011, respectively.



                                                            For the three months ended March 31,
                                                    2012 (1)                                     2011 (1)
                                                                    Average                                     Average
                                      Average                       Yield/         Average                      Yield/
                                      Balance        Interest        Cost          Balance       Interest        Cost
                                                                   (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(2)                  $ 700,318      $    9,652          5.52 %    $ 716,481      $  10,568          5.90 %
Securities(3)                           62,182             187          1.20          4,774             43          3.60
Federal funds sold                     118,926              69          0.23         99,928             55          0.22
Federal Home Loan Bank stock             9,305              12          0.52         11,131              8          0.29
Interest-earning deposits in other
financial institutions                   2,508               4          0.64         11,766             21          0.71

Total interest-earning assets          893,239           9,924          4.45        844,080         10,695          5.07

Noninterest earning assets              39,078                                       40,087

Total assets                         $ 932,317                                    $ 884,167

INTEREST-BEARING LIABILITIES
Interest-bearing checking            $   2,440      $        1          0.16 %    $       0      $       0          0.00 %
Money market                           144,896             136          0.38        125,414            201          0.64
Savings deposits                       136,248              53          0.16        127,446            107          0.34
Certificates of deposit                314,128           1,657          2.11        320,950          1,884          2.35
Borrowings                             100,000             713          2.85         85,000            967          4.55

Total interest-bearing liabilities     697,712           2,560          1.47        658,810          3,159          1.92

Noninterest bearing liabilities         75,410                                       70,964

Total liabilities                      773,122                                      729,774
Equity                                 159,195                                      154,393

Total liabilities and equity         $ 932,317                                    $ 884,167

Net interest/spread                                 $    7,364          2.98 %                   $   7,536          3.15 %

Margin(4)                                                               3.30 %                                      3.57 %

Ratio of interest-earning assets
to interest bearing liabilities         128.02 %                                     128.12 %

(1) Yields earned and rates paid have been annualized.

(2) Calculated net of deferred fees, loss reserves and includes non-accrual loans.

(3) Calculated based on amortized cost.

(4) Net interest income divided by interest-earning assets.

The following table sets forth certain information for the nine months ended March 31, 2012 and 2011, respectively.

                                                           For the nine months ended March 31,
                                                   2012 (1)                                    2011 (1)
                                                                  Average                                     Average
                                     Average                      Yield/         Average                      Yield/
                                     Balance       Interest        Cost          Balance       Interest        Cost
                                                                  (Dollars in thousands)
INTEREST-EARNING ASSETS
Loans receivable(2)                 $ 701,349      $  29,835          5.67 %    $ 734,673      $  32,675          5.93 %
Securities(3)                          45,144            521          1.54          5,176            163          4.20
Federal funds sold                    111,669            201          0.24         73,954            127          0.23
Federal Home Loan Bank stock            9,693             26          0.36         11,526             34          0.39
Interest-earning deposits in
other financial institutions            6,380             34          0.71         11,410             86          1.00

Total interest-earning assets         874,235         30,617          4.67        836,739         33,085          5.27

Noninterest earning assets             38,997                                      39,856

Total assets                        $ 913,232                                   $ 876,595

INTEREST-BEARING LIABILITIES
Interest-bearing checking           $     976      $       1          0.14 %    $       0      $       0          0.00 %
Money market                          140,032            540          0.51        124,123            638          0.69
Savings deposits                      136,055            245          0.24        129,051            355          0.37
Certificates of deposit               313,776          5,141          2.18        323,772          6,064          2.50
Borrowings                             93,000          2,227          3.19        107,800          3,807          4.71

Total interest-bearing
liabilities                           683,839          8,154          1.59        684,746         10,864          2.12

Noninterest bearing liabilities        70,465                                      67,011

Total liabilities                     754,304                                     751,757
Equity                                158,928                                     124,838

Total liabilities and equity        $ 913,232                                   $ 876,595

Net interest/spread                                $  22,463          3.08 %                   $  22,221          3.15 %

Margin(4)                                                             3.43 %                                      3.54 %

Ratio of interest-earning assets
to interest bearing liabilities        127.84 %                                    122.20 %

(1) Yields earned and rates paid have been annualized.

(2) Calculated net of deferred fees, loss reserves and includes non-accrual loans.

(3) Calculated based on amortized cost.

(4) Net interest income divided by interest-earning assets.

Comparison of Results of Operations for the Three Months Ended March 31, 2012 and March 31, 2011.

General. Net income for the three months ended March 31, 2012 was $1.6 million, a decrease of $614,000 as compared to net income of $2.3 million for the three months ended March 31, 2011. Earnings per basic and diluted common share were $0.18 for the three months ended March 31, 2012, compared to $0.25 for the three months ended March 31, 2011. The decrease in net income was primarily due to a decrease in net interest income and an increase in noninterest expense partially offset by a decrease in income tax expense.

Interest Income. Interest income decreased $770,000, or 7.2%, to $9.9 million for the three months ended March 31, 2012 from $10.7 million for the three months ended March 31, 2011. The decrease in interest income was primarily due to a decline in interest and fees on loans of $916,000 to $9.7 million for the three months ended March 31, 2012 from $10.6 million for the three months ended March 31, 2011. The decrease in interest and fees on loans was primarily due to a decline in the average balance of loans receivable which decreased by $16.2 million to $700.3 million for the three months ended March 31, 2012 from $716.5 million for the three months ended March 31, 2011, and a decrease of 38 basis points in the average yield on loans from 5.90% for the three months ended March 31, 2011 to 5.52% for the three months ended March 31, 2012. The decrease in the average yield on loans was primarily a result of lower yields earned on loan originations during the period as a result of the low interest rate environment.

Partially offsetting the decrease in interest and fees on loans was an increase in interest on securities of $144,000, or 334.9%, to $187,000 for the three months ended March 31, 2012 from $43,000 for the three months ended March 31, 2011. The increase in interest income on securities was primarily due to an increase in the average balance of securities of $57.4 million to $62.2 million for the three months ended March 31, 2012 from $4.8 million for the three months ended March 31, 2011 due to new securities purchased.

Interest Expense. Interest expense decreased $598,000, or 18.9% to $2.6 million for the three months ended March 31, 2012 from $3.2 million for the three months ended March 31, 2011. The decrease was primarily attributable to a 45 basis point decline in the average cost of interest bearing liabilities to 1.47% for the three months ended March 31, 2012 from 1.92% for the three months ended March 31, 2011 as a result of low interest rates during the period. The decrease in interest expense reflected a significant reduction in the cost of funds such as interest on deposits and borrowings as a result of the low interest rate environment and repayment of higher costing FHLB advances which were replaced by lower costing advances.

Provision for Loan Losses. There was no provision for loan losses for the three months ended March 31, 2012 and March 31, 2011, respectively. The lack of a provision in both quarters was a result of a decline in historical loss ratios and peer group loss factors on loans collectively evaluated for impairment. Delinquent loans 60 days or more decreased to $10.0 million, or 1.4% of total loans, at March 31, 2012 from $10.5 million, or 1.48% of total loans, at June 30, 2011. Non-performing loans decreased to $25.1 million, or 3.50% of total loans, at March 31, 2012 from $26.4 million, or 3.73% of total loans, at June 30, 2011. Annualized net charge-offs decreased to 0.15% of average outstanding loans for the three months ended March 31, 2012 as compared to 0.26% of average outstanding loans for the three months ended March 31, 2011.

While the net provision for loan losses was zero for the three months ended March 31, 2012, it was comprised of a $117,000 provision on one-to-four family real estate loans, a $92,000 reduction in provision on multi-family loans, a $33,000 reduction in provision on commercial real estate loans, a $16,000 reduction in provision on automobile loans, a $21,000 provision on home equity loans and a $3,000 provision on other loans. The reduction in provision on multi-family loans was primarily due to a decline in the overall historical peer group loss factors on loans collectively evaluated for impairment, and a reduction in the valuation allowance on multi-family loans that were individually evaluated for impairment. The provision reflects management's continuing assessment of the credit quality of the Company's loan portfolio, which is affected by various trends, including current economic conditions.

Noninterest Income. Our noninterest income decreased slightly by $64,000, or 5.5% to $1.1 million for the three months ended March 31, 2012 from $1.2 million for the three months ended March 31, 2011. The decrease in noninterest income was primarily a result of an increase in a loss on an equity method investment in an affordable housing fund partially offset by an increase in ATM fees and charges.

Noninterest Expense. Our noninterest expense increased $835,000, or 16.7% to $5.8 million for the three months ended March 31, 2012 from $5.0 million for the three months ended March 31, 2011. The increase in noninterest expense was primarily due to an increase in salaries and benefits of $517,000, or 21.3%, to $2.9 million for the three months ended March 31, 2012 from $2.4 million for the three months ended March 31, 2011; an increase in professional services of $107,000, or 21.1%, to $615,000 for the three months ended March 31, 2012 from $508,000 for the three months ended March 31, 2011; and an increase in REO and foreclosure expenses of $130,000 from $32,000 for the three months ended March 31, 2011 to $162,000 for the three months ended March 31, 2012. The increase in salaries and benefits was a result of an increase in employees hired primarily in the areas of eCommerce and Lending. Employees hired in eCommerce will focus on expanding customer relationships through enhanced eCommerce delivery channels such as online and mobile banking as well as bill payment services. We have also hired seasoned loan officers, underwriters and support staff in the income property and one-to-four family origination departments. Professional services increased due to an increase in financial advisory, strategic and leadership advisory services as well as recruitment costs. The increase in REO and foreclosure expenses was primarily due to an increase of $118,000 in foreclosure expenses from $44,000 for the three months ended March 31, 2011 to $162,000 for the three months ended March 31, 2012.

Income Tax Expense. Income tax expense decreased $457,000, or 32.0% to $972,000 for the three months ended March 31, 2012 compared to $1.4 million for the three months ended March 31, 2011. This decrease was primarily the result of lower pretax income for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The effective tax rates were 37.1% and 38.7% for the three months ended March 31, 2012 and 2011, respectively.

Comparison of Results of Operations for the Nine Months Ended March 31, 2012 and March 31, 2011.

General. Net income for the nine months ended March 31, 2012 was $5.7 million, a decrease of $547,000 as compared to net income of $6.3 million for the nine months ended March 31, 2011. Earnings per basic and diluted common share were $0.63 for the nine months ended March 31, 2012, compared to $0.68 for the nine months ended March 31, 2011. The decrease in net income resulted primarily from an increase in noninterest expense offset by an increase in net interest income, a reduction in the provision for loan losses, and a decrease in income tax expense.

Interest Income. Interest income decreased $2.5 million, or 7.5%, to $30.6 million for the nine months ended March 31, 2012 from $33.1 million for the nine months ended March 31, 2011. The decrease in interest income was primarily due to a decline in interest and fees on loans of $2.8 million to $29.8 million for the nine months ended March 31, 2012 from $32.7 million for the nine months ended March 31, 2011. The decrease in interest and fees on loans was primarily due to a decline in the average balance of loans receivable of $33.3 million to $701.3 million for the nine months ended March 31, 2012 from $734.7 million for the nine months ended March 31, 2011, and a decrease of 26 basis points in the average yield on loans from 5.93% for the nine months ended March 31, 2011 to 5.67% for the nine months ended March 31, 2012. The decrease in the average yield on loans was primarily a result of lower yields earned on loan originations during the period as a result of the low interest rate environment.

Partially offsetting the decrease in interest and fees on loans was an increase in interest on securities of $358,000, or 219.6%, to $521,000 for the nine months ended March 31, 2012 from $163,000 for the nine months ended March 31, 2011. The increase in interest income on securities was primarily due to an increase in the average balance of securities of $40.0 million to $45.1 million for the nine months ended March 31, 2012 from $5.2 million for the nine months ended March 31, 2011 due to new securities purchased.

Interest Expense. Interest expense decreased $2.7 million, or 25.0% to $8.2 million for the nine months ended March 31, 2012 from $10.9 million for the nine months ended March 31, 2011. The decrease was primarily attributable to a 53 basis point decline in the average cost of interest bearing liabilities to 1.59% for the nine months ended March 31, 2012 from 2.12% for the nine months ended March 31, 2011 as a result of low interest rates during the period. The decrease in interest expense reflected a significant reduction in the cost of funds such as interest on deposits and borrowings as a result of the low interest rate environment and repayment of higher costing FHLB advances which were replaced by lower costing advances.

Provision for Loan Losses. There was no provision for loan losses for the nine months ended March 31, 2012 as compared to $950,000 in provision for loan losses for the nine months ended March 31, 2011. The decline in overall provision was a result of a decline in historical loss ratios and peer group loss factors on loans collectively evaluated for impairment. During the nine months ended March 31, 2012, we charged-off $2.2 million of previously identified specific valuation allowances on loans generally six months or more delinquent. While the charge-offs resulted in an increase in annualized charge-offs to 0.65% of average outstanding loans for the nine months ended March 31, 2012 as compared to 0.43% of average outstanding loans for the nine months ended March 31, 2011, historical loss ratios declined as specific valuation allowances were included in the historical loss factors in the periods they were originally identified.

While the net provision for loan losses was zero for the nine months ended March 31, 2012, it was comprised of a $844,000 provision on one-to-four family loans, a $62,000 provision on multi-family loans, a $935,000 reduction in provision on commercial real estate loans, a $54,000 reduction in provision on automobile loans, a $54,000 provision on home equity loans and a $29,000 provision on other loans. The reduction in provision on commercial real estate loans was primarily due to a decline in the overall historical peer group loss factors on loans collectively evaluated for impairment, a decline in the balance of commercial real estate loans collectively evaluated for impairment and a reduction in the valuation allowance on commercial real estate loans that were individually evaluated for impairment. The provision reflects management's continuing assessment of the credit quality of the Company's loan portfolio, which is affected by various trends, including current economic conditions.

Noninterest Income. Our noninterest income decreased slightly by $47,000, or 1.4% to $3.3 million for the nine months ended March 31, 2012 from $3.4 million for the nine months ended March 31, 2011. The decrease in noninterest income was . . .