UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-KSB





(Mark
One)





T
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
fiscal year ended December 31,
2007





OR





£
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
    1934





For the
transition period from ___________ to





Commission
file number: 000-52674


HOMETOWN
      BANCORP, INC.(Name
      of small business issuer in its charter)





United
      States
            02-0783010(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer Identification No.)





12
      Main Street, Walden, New York
            12586(Address
      of principal executive offices)
            (Zip
      Code)





(845)
778-2171


(Issuer’s
telephone number)





Securities
registered under Section 12(b) of the Exchange Act:  None





Securities
registered under Section 12(g) of the Exchange Act:





Common
Stock, par value $0.01 per share


Title of
each class





Check
whether the issuer is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. £





Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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 T     No
£





Check if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B contained in this form, and no disclosure will be contained, to the best of
the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. T





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes £     No
T





The
issuer’s revenues for its most recent fiscal year were $10.6
million.





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates at February 29, 2008 was $6.8 million, based upon the closing
price of $7.35 as quoted on OTC Electronic Bulletin Board for February 29,
2008.  Solely for purposes of this calculation, the shares held by
Hometown Bancorp MHC, Employee Stock Ownership Plan and the directors and
officers of the issuer are deemed to be held by affiliates.





As of
March 28, 2008, the issuer had 2,380,500 shares of common stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE:





1.
Portions of the 2007 Annual Report to Stockholders are incorporated by reference
in Part II of this Form 10-KSB.





2.
Portions of the Proxy Statement for the 2008 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form
10-KSB.





Transitional
Small Business Disclosure Format (Check One):   Yes £     No
T













INDEX








PagePART IItem 1.
              Description of Business
              K-  3Item 2.
              Description of Property
              K-
      26Item 3.
              Legal Proceedings
              K-
      27Item 4.
              Submission of Matters to a Vote of Security
      Holders
              K-
      27PART IIItem 5.
              Market for Common Equity, Related Stockholder Matters, and
      Small Business Issuer Purchases of Equity Securities
              K-
      27Item 6.
              Management’s Discussion and Analysis or Plan of
      Operation
              K-
      28Item 7.
              Financial Statements
              K-
      28Item 8.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              K-
      28Item 8A.
              Controls and Procedures
              K-
      28Item 8B.
              Other Information
              K-
      29PART IIIItem 9.
              Directors, Executive Officers, Promoters, Control Persons
      and Corporate Governance; Compliance With Section 16(a) of the Exchange
      Act
              K-
      29Item 10.
              Executive Compensation
              K-
      30Item 11.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              K-
      30Item 12.
              Certain Relationships and Related Transactions, and
      Director Independence
              K-
      31Item 13.
              Exhibits
              K-
      31Item 14.
              Principal Accountant Fees and Services
              K-
      32SIGNATURES





Index





This
report contains certain “forward-looking statements” within the meaning of the
federal securities laws. These statements are not historical facts, rather
statements based on Hometown Bancorp, Inc.’s current expectations regarding its
business strategies, intended results and future performance. Forward-looking
statements are preceded by terms such as “expects,” “believes,” “anticipates,”
“intends” and similar expressions.





Management’s
ability to predict results or the effect of future plans or strategies is
inherently uncertain. Factors which could affect actual results include the
following: interest rate trends; the general economic climate in the market area
in which Hometown Bancorp, Inc. operates, as well as nationwide; Hometown
Bancorp, Inc.’s ability to control costs and expenses; competitive products and
pricing; loan delinquency rates and changes in federal and state legislation and
regulation. In addition, additional factors that may affect our results are
discussed in our prospectus which was filed with the Securities and Exchange
Commission on May 22, 2007, under “Risk Factors,” which is available through the
SEC’s website at www.sec.gov.  These
factors should be considered in evaluating the forward-looking statements and
undue reliance should not be placed on such statements. Hometown Bancorp, Inc.
assumes no obligation to update any forward-looking statements.





PART I





ITEM 1.
            DESCRIPTION
      OF BUSINESS





General





Hometown
Bancorp, Inc. (“Hometown Bancorp” or the “Company”) is a federally chartered
mid-tier stock holding company formed in 2006 to be the holding company for
Walden Federal Savings and Loan Association (“Walden Federal” or the “Bank”).
Hometown Bancorp’s primary business activity is the ownership of the outstanding
capital stock of Walden Federal. Hometown Bancorp does not own or lease any
property, but uses the premises, equipment and other property of Walden Federal
with the payment of appropriate rental fees, as required by applicable law and
regulations, under the terms of an expense allocation agreement. In the future,
Hometown Bancorp may acquire or organize other operating subsidiaries; however,
there are no current plans, arrangements, agreements or understandings, written
or oral, to do so.





On June
28, 2007, the Company completed its minority stock offering of 45% of the
aggregate total voting stock of the Company. In connection with the minority
offering, 2,380,500 shares of common stock were issued, of which 1,071,225
shares were sold to the Bank’s eligible account holders and the employee stock
ownership plan (the “ESOP”), resulting in net proceeds of approximately $9.1
million after offering expenses and the ESOP. Currently, 55% of the Company’s
outstanding common stock, or 1,309,275 shares, are owned by Hometown Bancorp
MHC. Costs of approximately $717,000 were incurred in connection with the stock
offering and were deducted from the net offering proceeds.





Walden
Federal is a federally chartered savings association originally founded in
1919.  We operate as a community-oriented financial institution
offering financial services to consumers and businesses in our market
area.  We attract deposits from the general public and use those funds
to originate one- to four-family real estate, multi-family and commercial real
estate loans and construction, land, commercial and consumer loans, which, with
the exception of long-term (more than 10 year terms) fixed-rate one- to
four-family real estate loans, we primarily hold for investment.  In
addition, a segment of our lending business involves the purchase and sale of
loan participation interests.  We also offer insurance and investment
services through Walden Federal.





Our
website address is www.waldenfederal.com. Information on
our website should not be considered a part of this Annual Report on Form
10-KSB.





K-3
 Index





Market
Area





We are
headquartered in Walden, New York.  Our main office (12 Main Street)
functions out of three locations within Walden.  In addition to our
main office, we operate five full-service branch offices in Montgomery,
Otisville, Newburgh and Monroe, New York.  Each of our branch offices
are located in Orange County, New York, situated approximately 70 miles
northwest from New York City.  We generate deposits through our six
offices and conduct lending activities throughout Orange, lower Sullivan and
lower Ulster Counties, New York.





Competition





We face
significant competition for the attraction of deposits and origination of
loans.  Our most direct competition for deposits has historically come
from the many financial institutions and credit unions operating in our market
area and, to a lesser extent, from other financial service companies such as
brokerage firms and insurance companies.  Several large holding
companies operate banks in our market area, including Bank of America, JP Morgan
Chase, Keycorp and Citizens Financial Group, Inc.  These institutions
are significantly larger than us and, therefore, have significantly greater
resources.  We also face competition for investors’ funds from money
market funds, mutual funds and other corporate and government
securities.  At June 30, 2007, which is the most recent date for which
data is available from the Federal Deposit Insurance Corporation, we held 2.36%
of the deposits in Orange County, New York.





Our
competition for loans comes from financial institutions and credit unions in our
market area and from other financial service providers, such as mortgage
companies and mortgage brokers.  Competition for loans also comes from
the increasing number of non-depository financial service companies entering the
mortgage market, such as insurance companies, securities companies and specialty
finance companies.





We expect
competition to remain intense in the future as a result of legislative,
regulatory and technological changes and the continuing trend of consolidation
in the financial services industry.  Technological advances, for
example, have lowered barriers to entry, allowed banks to expand their
geographic reach by providing services over the Internet and made it possible
for non-depository institutions to offer products and services that
traditionally have been provided by banks.  Changes in federal law
permit affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services
industry.  Competition for deposits and the origination of loans could
limit our growth in the future.





Lending
Activities





Loan
Portfolio Analysis





The
following table sets forth the composition of our loan portfolio, by type of
loan at the dates indicated, excluding loans held for sale of $528,000 and $1.2
million at December 31, 2007 and 2006, respectively.





K-4
 Index




December 31,2007
              
              
              2006(Dollars in thousands)
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              PercentReal
      estate loans:One-
      to four-family residential
              
              $
              49,558
              
              
              
              40.7
              %
              
              $
              40,807
              
              
              
              41.9
              %Construction(1)
              
              
              10,990
              
              
              
              9.0
              
              
              
              10,760
              
              
              
              11.1Multi-family
      and commercial real estate
              
              
              22,316
              
              
              
              18.4
              
              
              
              15,938
              
              
              
              16.4Land
              
              
              10,309
              
              
              
              8.5
              
              
              
              7,648
              
              
              
              7.9Total
      real estate loans
              
              
              93,173
              
              
              
              76.6
              
              
              
              75,153
              
              
              
              77.3Commercial
      loans
              
              
              15,479
              
              
              
              12.7
              
              
              
              10,163
              
              
              
              10.4Consumer
      loans:Home
      equity
              
              
              12,538
              
              
              
              10.3
              
              
              
              11,381
              
              
              
              11.7Other
              
              
              525
              
              
              
              0.4
              
              
              
              583
              
              
              
              0.6Total
      consumer loans
              
              
              13,063
              
              
              
              10.7
              
              
              
              11,964
              
              
              
              12.3Total
      loans
              
              
              121,715
              
              
              
              100.0
              %
              
              
              97,280
              
              
              
              100.0
              %Net
      deferred loan costs
              
              
              54
              
              
              
              
              
              
              
              8Allowance
      for losses
              
              
              (787
              )
              
              
              
              
              
              
              (623
              )Loans, net
              
              $
              120,982
              
              
              
              
              
              
              $
              96,665


__________________


(1)
            Amount
      does not include the unadvanced portions of construction
      loans.  At December 31, 2007 and 2006, the additional unadvanced
      portions of construction loans were $3.6 million and $7.0 million,
      respectively.





The
following table sets forth certain information at December 31, 2007 regarding
the dollar amount of loan principal repayments becoming due during the periods
indicated.  The table does not include any estimate of prepayments
which significantly shorten the average life of all loans and may cause our
actual repayment experience to differ from that shown below.  Demand
loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less.  The amounts shown below exclude
applicable unadvanced portions of construction loans and net deferred loan
costs.  The table also sets forth the scheduled repayments of fixed
and adjustable rate loans at December 31, 2007 that are contractually due after
December 31, 2008.





Contractual
Maturities and Interest Rate Sensitivity







December 31, 2007 (Dollars in
      thousands)
            
            Real Estate Loans
            
            
            Commercial Loans
            
            
            Consumer Loans
            
            
            Total LoansAmounts
      due in:One
      year or less
            
            $
            16,193
            
            
            $
            9,713
            
            
            $
            1,470
            
            
            $
            27,376More
      than one to five years
            
            
            12,924
            
            
            
            4,841
            
            
            
            1,542
            
            
            
            19,307More
      than five years
            
            
            64,056
            
            
            
            925
            
            
            
            10,051
            
            
            
            75,032Total
            
            $
            93,173
            
            
            $
            15,479
            
            
            $
            13,063
            
            
            $
            121,715Interest
      rate terms on  amounts due after one year:Fixed-rate
      loans
            
            $
            14,585
            
            
            $
            2,743
            
            
            $
            7,654
            
            
            $
            24,982Adjustable-rate
      loans
            
            
            62,395
            
            
            
            3,023
            
            
            
            3,939
            
            
            
            69,357Total
            
            $
            76,980
            
            
            $
            5,766
            
            
            $
            11,593
            
            
            $
            94,339








One- to
Four-Family Residential Loans.The largest segment of our
loan portfolio is comprised of mortgage loans to enable borrowers to purchase or
refinance existing homes most of which serve as the primary residence of the
owner.  We offer fixed-rate and adjustable-rate loans with terms up to
30 years.  Our adjustable-rate mortgage loans generally adjust
annually after an initial fixed period that ranges from one to 10
years.  Interest rates and payments on our adjustable-rate loans
generally are adjusted to a rate equal to a percentage above the one year U.S.
Treasury index.  The maximum amount by which the interest rate may be
increased or decreased is generally 2% per adjustment period and the lifetime
interest rate cap is generally 6% over the initial interest rate of the
loan.





K-5
 Index





Borrower
demand for adjustable-rate compared to fixed-rate loans is a function of the
level of interest rates, the expectations of changes in the level of interest
rates, and the difference between the interest rates and loan fees offered for
fixed-rate mortgage loans as compared to the interest rates and loan fees for
adjustable-rate loans.  The relative amount of fixed-rate and
adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment.  The
loan fees, interest rates and other provisions of mortgage loans are determined
by us on the basis of our own pricing criteria and competitive market
conditions.





While
one- to four-family residential real estate loans are normally originated with
up to 30-year terms, such loans typically remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full either upon
sale of the property pledged as security or upon refinancing the original
loan.  Therefore, average loan maturity is a function of, among other
factors, the level of purchase and sale activity in the real estate market,
prevailing interest rates and the interest rates payable on outstanding
loans.  We do not offer loans with negative amortization and generally
do not offer interest-only one- to four-family residential real estate
loans.  Additionally, our current practice is generally to (1) sell to
the secondary market newly originated longer term (more than 10 year terms)
fixed-rate one- to four-family residential real estate loans, and (2) to hold in
our portfolio shorter-term fixed-rate loans and adjustable-rate
loans.  Generally, loans are sold to the Federal Home Loan Mortgage
Corporation (“Freddie Mac”) with servicing retained and sold to other investors
on a servicing released basis.





We will
make loans with loan-to-value ratios up to 95%; however, we require private
mortgage insurance or other credit enhancements for loans with a loan-to-value
ratio over 80%.  We require all properties securing mortgage loans to
be appraised by a board-approved independent appraiser.  We generally
require title insurance on all first mortgage loans.  Borrowers must
obtain hazard insurance, and flood insurance is required for loans on properties
located in a flood zone.





The
majority of one- to four-family residential loans originated by Walden Federal
are sold to Freddie Mac or kept in portfolio, in both instances with servicing
retained.  We also sell loans to the State of New York Mortgage Agency
(SONYMA) and other investors, with servicing released.  In each case,
we utilize the guidelines of the applicable investor that set forth underwriting
criteria which factor in various aspects of loan risk, including loan purpose,
the borrower’s credit history and credit rating and the ability of the borrower
to repay the loan.  Walden Federal does not make subprime
loans.  All of the loans sold by us are sold without
recourse.





Generally,
all one- to four-family residential mortgage loans to be sold to Freddie Mac or
retained in portfolio are underwritten to Freddie Mac standards, generally using
Loan Prospector, Freddie Mac’s automated loan underwriting standards, although
on occasion a loan may be manually underwritten.  Borrower information
is input into Loan Prospector by our loan processor and reviewed by the
underwriter, whose primary responsibility is to ensure that underwriting
standards are in conformance with Freddie Mac guidelines.  Once it is
determined that the loan meets the Freddie Mac criteria and guidelines, the loan
is subject to review and approval by the underwriter and by our loan area
manager or chief lending officer. Freddie Mac requires that a sampling of loans
be reviewed within two to three months of closing for quality control and to
ensure that processing and underwriting are within guidelines.  If it
is determined that there were inadequacies or exceptions in the underwriting
process, we could be required to repurchase the loan.  In the past ten
years, we have not been required to repurchase any loans sold to Freddie
Mac.





We also
sell one- to four-family residential loans, servicing released, to a third party
mortgage conduit and to SONYMA.  These loans are underwritten and
approved by the investor or SONYMA, as applicable, based on the information that
we provide them.  Once the loan is approved by the investor or SONYMA,
as applicable, the loan is subject to review and approval by the underwriter and
by our loan area manager or chief lending officer.





In an
effort to provide financing for first-time buyers, we offer fixed-rate 30-year
residential real estate loans through the State of New York Mortgage Agency,
Freddie Mac and the United States





K-6
 Index





Department
of Agriculture.  We offer mortgage loans through these programs to
qualified individuals and originate the loans using modified underwriting
guidelines, reduced interest rates and loan conditions.





Multi-Family and
Commercial Real Estate Loans .We
offer fixed- and adjustable-rate mortgage loans secured by a variety of
commercial and multi-family real estate, such as small office buildings,
warehouses, retail properties and small apartment buildings.  We
originate a variety of fixed- and adjustable-rate commercial real estate and
multi-family real estate loans generally with rates fixed for up to 10 years and
for terms of up to 20 years.  Adjustable-rate loans are typically
based on the 1- to 5-year U.S. Treasury Bill or Prime Rate as published in The Wall Street Journal plus
a specified percentage over the initial rate of interest.  Loans are
secured by first mortgages, and amounts generally do not exceed 75% of the
property’s appraised value.  These loans are typically repaid or the
term is extended before maturity, in which case a new rate is negotiated to meet
market conditions and an extension of the loan is executed for a new term with a
new amortization schedule.  We require all properties securing
multi-family and commercial real estate loans to be appraised by a
board-approved independent licensed appraiser.  In most cases,
multi-family and commercial real estate loans also are supported by personal
guarantees.





Construction
Loans.We
originate fixed-rate loans to individuals and to builders to finance the
construction of residential dwellings.  We also make construction
loans for small commercial development projects. Our construction loans
generally are interest-only loans that provide for the payment of only interest
during the construction phase, which is usually up to 12 months for residential
and commercial properties and up to 24 months for builder development
properties.  At the end of the construction phase, the loan generally
converts to a permanent mortgage loan.  Loans generally can be made
with a maximum loan to value ratio of 95% on residential construction (with
credit enhancements) and 75% on commercial construction, based on appraised
value as if complete.  Before making a commitment to fund a
construction loan, we require an appraisal of the property by an independent
licensed appraiser.  We also will generally require an inspection of
the property before disbursement of funds during the term of the construction
loan.





Commercial Loans.We offer
commercial business loans to professionals, sole proprietorships and small
businesses in our market area.  The maximum amount of our commercial
loans is limited by our in-house loans-to-one borrower limit.  We
offer term loans for capital improvements, equipment acquisition and long-term
working capital.  We originate these on both a fixed-rate and
adjustable-rate basis with terms up to 10 years.  Adjustable-rate
loans are generally based on the Prime Rate as published by The Wall Street
Journal.  Secured commercial loans are secured by real estate
or business assets other than real estate, such as business equipment and
inventory.  In addition, in most cases, our commercial loans are
backed by the personal guarantee of the borrower.  We also make
unsecured commercial loans, but generally only on a short-term
basis.





We
originate lines of credit to finance the working capital needs of businesses to
be repaid by seasonal cash flows or to provide a period of time during which the
business can borrow funds for planned equipment purchases. Commercial lines of
credit can be fixed- or adjustable-rate.





When
making commercial business loans, we consider the financial statements of the
borrower, the borrower’s payment history of both corporate and personal debt,
the debt service capabilities of the borrower, the projected cash flows of the
business, the viability of the industry in which the customer operates and the
value of the collateral.





Land
Loans.We also
originate loans secured by developed and undeveloped land to individuals and
builders.   Loans to individual borrowers who either own or are
purchasing building lots are underwritten in accordance with our consumer loan
guidelines discussed below.  These loans typically carry fixed-rates
and are written on a 15- year amortization basis but with a short-term balloon
maturity (typically five years).  Loans to builders and developers are
underwritten using our commercial loan guidelines and are dependent upon the
collateral value, borrower financial strength and other loan specific
data.  Generally, land loans to builders and developers are written
for up to a two-year term on an interest-only basis, with the rate tied to the
Prime Rate as published by The
Wall Street Journal on an adjustable rate basis or on a fixed-rate basis
in





K-7
 Index





accordance
with commercial loan pricing.  Loan amounts generally do not exceed
65% of the lesser of the appraised value or the purchase price.  Our
land loans are not made on a speculative basis, but rather for the development
of either residential or commercial real estate.





Included
within our portfolio of land loans are loans issued to collateralize letters of
credit issued by Walden Federal.  These letters of credit typically
are issued to municipalities to ensure completion of roads and other
improvements in subdivisions.





Consumer Loans.Our consumer
loans consist primarily of home equity loans and lines of credit.  We
occasionally make loans secured by passbook or certificate accounts, unsecured
loans, overdraft loans and automobile loans.





We offer
fixed-rate home equity loans with a maximum combined loan to value ratio of 90%
or less for terms up to 15 years.  Home equity lines of credit have
adjustable rates of interest with five-year draws amortized over 15 years that
are indexed to the Prime Rate as published by The Wall Street
Journal.  Home equity loans have fixed and adjustable interest
rates and terms up to 20 years.





The
procedures for underwriting consumer loans include an assessment of the
applicant’s payment history on other debts and ability to meet existing
obligations and payments on the proposed loan.  Although the
applicant’s creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the collateral, if any, to
the proposed loan amount.  The procedures for underwriting one- to
four-family residential real estate loans apply equally to home equity
loans.





Loan
Underwriting Risks.





Adjustable-Rate
Loans.  While we
anticipate that adjustable-rate loans will better offset the adverse effects of
an increase in interest rates as compared to fixed-rate mortgages, an increased
monthly mortgage payment required of adjustable-rate loan borrowers in a rising
interest rate environment could cause an increase in delinquencies and
defaults.  The marketability of the underlying property also may be
adversely affected in a high interest rate environment.  In addition,
although adjustable-rate mortgage loans make our asset base more responsive to
changes in interest rates, the extent of this interest rate sensitivity is
limited by the annual and lifetime interest rate adjustment limits.





Multi-Family and
Commercial Real Estate Loans.Loans secured by commercial
and multi-family real estate generally have larger balances and involve a
greater degree of risk than one- to four-family residential mortgage
loans.  Of primary concern in commercial and multi-family real estate
lending is the borrower’s creditworthiness and the feasibility and cash flow
potential of the project.  Payments on loans secured by income
properties often depend on successful operation and management of the
properties.  As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans, to adverse conditions in the
real estate market or the economy.  To monitor cash flows on income
properties, we require borrowers and loan guarantors, if any, to provide annual
financial statements on commercial and multi-family real estate
loans.  In reaching a decision on whether to make a commercial or
multi-family real estate loan, we consider and review a global cash flow
analysis of the borrower and consider the net operating income of the property,
the borrower’s expertise, credit history and profitability and the value of the
underlying property.  We have generally required that the properties
securing these real estate loans have debt service coverage ratios (the ratio of
earnings before debt service to debt service) of at least 1.10x.  An
environmental phase one report is obtained when the possibility exists that
hazardous materials may have existed on the site, or the site may have been
impacted by adjoining properties that handled hazardous materials.





Construction
Loans.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk of
loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction and the estimated
cost (including interest) of construction.  During the construction
phase, a number of factors could





K-8
 Index





result in
delays and cost overruns. If the estimate of construction costs proves to be
inaccurate, we may be required to advance funds beyond the amount originally
committed to permit completion of the building or be confronted, at or before
the maturity of the loan, with a building having a value which is insufficient
to assure full repayment.  If we are forced to foreclose on a building
before or at completion due to a default, there can be no assurance that we will
be able to recover all of the unpaid balance of, and accrued interest on, the
loan as well as related foreclosure and holding costs.





Commercial
Loans.  Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans are of higher risk and typically are made on the
basis of the borrower’s ability to make repayment from the cash flow of the
borrower’s business.  As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself.  Further, any collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in
value.





Land
Loans.  Loans secured by
undeveloped land or improved lots generally involve greater risks than
residential mortgage lending because land loans are more difficult to
evaluate.  If the estimate of value proves to be inaccurate, in the
event of default and foreclosure, we may be confronted with a property the value
of which is insufficient to assure full payment.





Consumer
Loans.Consumer
loans may entail greater risk than do residential mortgage loans, particularly
in the case of consumer loans that are unsecured or secured by assets that
depreciate rapidly, such as motor vehicles.  Repossessed collateral
for a defaulted consumer loan may not provide an adequate source of repayment
for the outstanding loan and a small remaining deficiency often does not warrant
further substantial collection efforts against the borrower.  Consumer
loan collections depend on the borrower’s continuing financial stability, and
therefore are likely to be adversely affected by various factors, including job
loss, divorce, illness or personal bankruptcy.  Furthermore, the
application of various federal and state laws, including federal and state
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans.





Loan
Originations, Purchases and Sales.  Loan originations
come from a number of sources.  The primary sources of loan
originations are existing customers, walk-in traffic, advertising and referrals
from customers.  We advertise in newspapers that are widely circulated
throughout our market area.





Our
customary practice is to sell almost all newly originated conforming long-term
(more than 10 year terms) fixed-rate one- to four-family residential real estate
loans and to hold in our portfolio shorter-term fixed-rate loans and
adjustable-rate loans.  Generally, loans are sold to Freddie Mac with
servicing retained and sold to other investors on a servicing released
basis.  In addition, we sell participation interests to local
financial institutions, primarily on construction and commercial real estate
loans that exceed our lending limits.





From time
to time, we will purchase participations in loans from local financial
institutions to supplement our lending portfolio.  Loan participations
that we purchase are also subject to the same credit analysis and approvals as
loans we originate.  We are required to review all of the
documentation relating to any loan in which we participate.  However,
in a purchased participation loan, we do not service the loan and thus are
subject to the policies and practices of the lead lender with regard to
monitoring delinquencies, pursuing collections and instituting foreclosure
proceedings.





We have
not historically purchased any whole loans.  However, we would
entertain doing so if a loan was presented to us that met our underwriting
criteria and was consistent with our interest rate risk strategy.





K-9
 Index





Summary
of Loan Activity







Year Ended
December 31,(Dollars in thousands)
            
            2007
            
            
            2006Total
      loans at beginning of period
            
            $
            98,448
            
            
            $
            83,507Originations:Real
      estate loans (2)
            
            
            58,807
            
            
            
            42,807Commercial
      loans
            
            
            11,445
            
            
            
            3,757Consumer
      loans, net activity
            
            
            1,099
            
            
            
            737Total
      loans originated
            
            
            71,351
            
            
            
            47,301Purchases
      of loan participations (1)
            
            
            613
            
            
            
            2,228Less:Principal
      payments
            
            
            23,384
            
            
            
            15,430Loan
      sales
            
            
            24,785
            
            
            
            19,158Transfers
      to foreclosed real estate
            
            
            —
            
            
            
            —Total loans at end of period
      (2)
            
            $
            122,243
            
            
            $
            98,448


_____________________


(1)
            From
      time to time, we purchase loan participations from local financial
      institutions to supplement our loan portfolio.  We purchased a
      total of two construction loan participations during 2006, which advances
      were made in 2007 for completed construction stages.  All of
      these loans were purchased from local community banks and all were
      underwritten by Walden Federal in accordance with its underwriting
      standards.  We anticipate considering future participations, but
      do not expect to match the level of 2006.  For a complete
      discussion of the risks associated with the specific types of loans that
      comprise our loan participations, see “Item1. Description of
      Business – Loan Underwriting
Risks.”





(2)
            Includes
      $528,000 and $1.2 million in real estate loans held-for-sale which are not
      reflected in our loan portfolio for the years ended December 31, 2007 and
      2006, respectively.  These loans are investor loans that were
      closed but not funded at the end of the respective
  periods.






Loan Approval
Procedures and Authority.  Our lending
activities follow written, non-discriminatory underwriting standards and loan
origination procedures established by our board of directors and
management.  The board of directors has granted loan approval
authority to certain officers or groups of officers up to prescribed
limits.  All unsecured commercial loans, including commercial loans
with collateral other than marketable securities or real estate, over $500,000
must be approved by the board of directors.  Commercial loans over
$750,000 secured by real estate and commercial loans over $850,000 secured by
marketable securities, cash or cash equivalents, must be approved by the board
of directors.  All one- to four-family residential loans, including
construction and land loans, over $750,000 and all consumer loans over $250,000
must be approved by the board of directors.  The same approval
procedures for commercial loans are applicable to commercial real estate and
multi-family real estate loans.





Loans-to-One
Borrower Limit and Loan Category Concentration.A federal savings bank
generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and surplus. An additional
amount my be loaned, equal to 10% of unimpaired capital and surplus, if the loan
is secured by readily marketable collateral, Which generally does not include
real estate. At December 31, 2007, our regulatory limit on loans-to-one borrower
was $2.2 million.  At that date, our largest lending relationship
consisted of two loans totaling $3.0 million that was secured by marketable
securities, which permits us to exceed the regulatory loans-to-one borrower
limit.  This loan was performing in accordance with its original terms
at December 31, 2007.





Pursuant
to a risk management policy adopted by our board of directors, and in an effort
to closely monitor the origination and portfolio balances of higher risk real
estate loans and commercial business loans, Walden Federal has established a
goal to limit its combined balance of higher risk real estate loans plus
commercial business loans to a maximum of 450% of Tier 1 capital, with the
commercial business loans component not exceeding 100% of Tier 1
capital.  At December 31, 2007, the combined balance of our higher
risk real estate loans and commercial business loans was 353.1% of Tier 1
capital, with the commercial business loan component at 107.9% of Tier 1
capital.  We will continue to closely monitor the origination and
portfolio balances of these types of loans and may adjust these ratios after
consideration of all relevant factors, including consultations with the Office
of Thrift Supervision.





K-10
 Index





Loan
Commitments.  We issue
commitments for fixed- and adjustable-rate mortgage loans conditioned upon the
occurrence of certain events.  Commitments to originate mortgage loans
are legally binding agreements to lend to our customers.  Generally,
our loan commitments expire after 60 days.





Risk
Management





Overview.  Managing risk is
an essential part of successfully managing a financial
institution.  Our most prominent risk exposures are credit risk,
interest rate risk and market risk.  Credit risk is the risk of not
collecting the interest and/or the principal balance of a loan or investment
when it is due.  Interest rate risk is the potential reduction of net
interest income as a result of changes in interest rates.  Market risk
arises from fluctuations in interest rates that may result in changes in the
values of financial instruments, such as available-for-sale securities that are
accounted for on a mark-to-market basis.  Other risks that we face are
operational risks, liquidity risks and reputation risk.  Operational
risks include risks related to fraud, regulatory compliance, processing errors,
technology and disaster recovery.  Liquidity risk is the possible
inability to fund obligations to depositors, lenders or
borrowers.  Reputation risk is the risk that negative publicity or
press, whether true or not, could cause a decline in our customer base or
revenue.





Credit Risk
Management.  Our strategy for
credit risk management focuses on having well-defined credit policies and
uniform underwriting criteria and providing prompt attention to potential
problem loans.





When a
borrower fails to make a required loan payment, we take a number of steps to
have the borrower cure the delinquency and restore the loan to current status,
including contacting the borrower by letter and phone at regular
intervals.  When the borrower is in default, we may commence
collection proceedings.  If a foreclosure action is instituted and the
loan is not brought current, paid in full, or refinanced before the foreclosure
sale, the real property securing the loan generally is sold at
foreclosure.  Generally, when a consumer loan becomes 60 days past
due, we institute collection proceedings and attempt to repossess any personal
property that secures the loan.  Management informs the board of
directors monthly of the amount of loans delinquent more than 30
days.  Management provides detailed information to the board of
directors on loans 60 or more days past due and all loans in foreclosure and
repossessed property that we own.





Loans
that we sell are sold without recourse and therefore, there is generally no risk
that we would have to repurchase a previously sold loan due to early
default.  However, if it is determined that there were inadequacies or
exceptions in the underwriting process, we could be required to repurchase the
loan.  In the past ten years, we have not been required to repurchase
any loans sold to Freddie Mac.





Analysis of Nonperforming and
Classified Assets.  We consider repossessed assets and loans
that are 90 days or more past due to be nonperforming assets.  The
accrual of interest is generally discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing.  A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well
secured.  When a loan is placed on nonaccrual status, unpaid interest
is reversed against interest income.  Interest received on nonaccrual
loans generally is either applied against principal or reported as interest
income, according to management’s judgment as to the collectibility of
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time, and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.





Real
estate that we acquire as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until it is sold.  When
property is acquired, it is initially recorded at the fair market value at the
date of foreclosure. Holding costs and declines in fair value after acquisition
of the property results in charges against income. We had no foreclosed real
estate at December 31, 2007.





K-11
 Index





The
following table provides information with respect to our nonperforming assets at
the dates indicated. We did not have any troubled debt restructurings or any
accruing loans past due 90 days or more at the dates presented.





Nonperforming
Assets







December 31,(Dollars in thousands)
            
            2007
            
            
            2006Nonaccrual
      loans:One-
      to four-family residential real estate
            
            $
            86
            
            
            $
            199Construction
            
            
            —
            
            
            
            —Multi-family
      and commercial real estate
            
            
            —
            
            
            
            191Land
            
            
            16
            
            
            
            —Commercial
            
            
            —
            
            
            
            49Consumer
            
            
            22
            
            
            
            —Total
      nonaccrual loans
            
            
            124
            
            
            
            439Foreclosed
      real estate
            
            
            —
            
            
            
            —Other
      nonperforming assets
            
            
            —
            
            
            
            —Total
      nonperforming assets
            
            
            124
            
            
            
            439Troubled
      debt restructurings
            
            
            —
            
            
            
            —Total
      nonperforming assets and troubled debt restructurings
            
            $
            124
            
            
            $
            439Total
      nonperforming loans to total loans
            
            
            0.10
            %
            
            
            0.45
            %Total
      nonperforming loans to total assets
            
            
            0.09
            
            
            
            0.37Total nonperforming assets and troubled debt
      restructurings to total assets
            
            
            0.09
            
            
            
            0.37








For the
year ended December 31, 2007, gross interest income that would have been
recorded had our non-accruing loans been current in accordance with their
original terms was approximately $8,000.





Federal
regulations require us to review and classify our assets on a regular
basis.  In addition, the Office of Thrift Supervision has the
authority to identify problem assets and, if appropriate, require them to be
classified.  There are three classifications for problem
assets:  substandard, doubtful and loss.  “Substandard
assets” must have one or more defined weaknesses and are characterized by the
distinct possibility that we will sustain some loss if the deficiencies are not
corrected.  “Doubtful assets” have the weaknesses of substandard
assets with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss.  An
asset classified “loss” is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.  The
regulations also provide for a “special mention” category, described as assets
which do not currently expose us to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving our close attention.  When we classify an asset as
substandard or doubtful we evaluate the need to establish a specific allowance
for loan losses.  If we classify an asset as loss, we charge off an
amount equal to 100% of the portion of the asset classified as
loss.





The
following table shows the aggregate amounts of our classified and criticized
assets at the dates indicated.





K-12
 Index





Classified
and Criticized Assets








At
      December 31,(Dollars in thousands)
            
            2007
            
            
            2006Special
      mention assets
            
            $
            283
            
            
            $
            396Substandard
      assets
            
            
            63
            
            
            
            355Doubtful
      assets
            
            
            —
            
            
            
            —Loss
      assets
            
            
            —
            
            
            
            —Total classified assets
            
            $
            346
            
            
            $
            751








Other
than disclosed in the above tables, there are no other loans that management has
serious doubts about the ability of the borrowers to comply with the present
loan repayment terms.





Delinquencies.  The
following table provides information about delinquencies in our loan portfolio
at the dates indicated.





Loss
Delinquencies








December 31,2007
            
            
            2006(Dollars in thousands)
            
            30-59 Days Past Due
            
            
            60-89 Days Past Due
            
            
            30-59 Days Past Due
            
            
            60-89 Days Past DueOne-
      to four-family residential real estate
            
            $
            333
            
            
            $
            79
            
            
            $
            647
            
            
            $
            —Construction
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Commercial
      and multi-family real estate
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Land
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Commercial
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Consumer
            
            
            1
            
            
            
            1
            
            
            
            —
            
            
            
            1Total
            
            $
            334
            
            
            $
            80
            
            
            $
            647
            
            
            $
            1








Analysis and Determination of the
Allowance for Loan Losses.  The allowance for loan losses is a
valuation allowance for probable losses inherent in the loan
portfolio.  We evaluate the need to establish allowances against
losses on loans on a quarterly basis.  We review previously classified
assets and any new nonaccrual loans and other loans where collectibility may be
in question as part of determining whether additional allowances are
necessary.  When additional allowances are necessary, a provision for
loan losses is charged to earnings.





Our
methodology for assessing the appropriateness of the allowance for loan losses
consists of:  (1) a specific valuation allowance on identified problem
loans; and (2) a general valuation allowance on the remainder of the loan
portfolio.  Although we determine the amount of each element of the
allowance separately, the entire allowance for loan losses is available to
absorb losses in the loan portfolio.





We
establish a specific allowance on certain identified problem loans based on such
factors as:  (1) the strength of the customer’s personal or business
cash flows and personal guarantees; (2) the availability of other sources of
repayment; (3) the amount due or past due; (4) the type and value of collateral;
(5) the strength of our collateral position; (6) the estimated cost to sell the
collateral; and (7) the borrower’s effort to cure the delinquency.





We
establish a general allowance for loans that are not classified to recognize the
inherent losses associated with lending activities.  This general
valuation allowance is determined by segregating the loans by loan category and
assigning allowance percentages to each category.  The allowance
percentages have been derived using percentages commonly applied under the
regulatory framework for Walden Federal and other similarly-sized
institutions.  The percentages may be adjusted for significant factors
that, in





K-13
 Index





management’s
judgment, affect the collectibility of the portfolio as of the evaluation
date.  These significant factors may include changes in lending
policies and procedures, changes in existing general economic and business
conditions affecting our primary lending areas, credit quality trends,
collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, recent loss experience in particular segments of the portfolio,
duration of the current business cycle and bank regulatory examination
results.  The applied loss factors are reevaluated periodically to
ensure their relevance in the current economic environment.





We
identify loans that may need to be charged off as a loss by reviewing all
delinquent loans, classified loans and other loans that management may have
concerns about collectibility.  For individually reviewed loans, the
borrower’s inability to make payments under the terms of the loan or a shortfall
in collateral value would result in our charging off the loan or the portion of
the loan that was impaired.





The
Office of Thrift Supervision, as an integral part of its examination process,
periodically reviews our allowance for loan losses.  The Office of
Thrift Supervision may require us to make additional provisions for loan losses
based on judgments different from ours.





At
December 31, 2007, our allowance for loan losses represented 0.64% of total
gross loans. The allowance for loan losses increased by 26.3% from December 31,
2006 to December 31, 2007, increased by the provision for loan losses of
$185,000 and reduced by net charge-offs of $21,000.  The decision to
increase the allowance reflected the increase in the loan portfolio by 25.1% and
the shift in the mix of the loan portfolio to a larger percentage of commercial,
multi-family and commercial real estate and land loans.  Other factors
affecting the allowance calculation, such as charge-offs, national and local
economic trends and conditions, industry conditions, changes in credit
concentrations, quality of lending management and staff and lending standards
remained reasonably stable during this period.





The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.





Allocation
of Allowance of Loan Losses








December 31,2007
            
            
            2006(Dollars in thousands)
            
            Amount
            
            
            % of Loans in Category to Total
      Loans
            
            
            Amount
            
            
            % of Loans in Category to Total
      LoansOne-
      to four-family residential real estate
            
            $
            99
            
            
            
            41.0
            %
            
            $
            83
            
            
            
            41.9
            %Construction
            
            
            120
            
            
            
            9.0
            
            
            
            124
            
            
            
            11.1Multi-family
      and commercial real estate
            
            
            157
            
            
            
            18.2
            
            
            
            114
            
            
            
            16.4Land
            
            
            155
            
            
            
            8.4
            
            
            
            115
            
            
            
            7.9Commercial
            
            
            174
            
            
            
            12.7
            
            
            
            120
            
            
            
            10.4Consumer
            
            
            82
            
            
            
            10.7
            
            
            
            67
            
            
            
            12.3Total allowance for loan
    losses
            
            $
            787
            
            
            
            100.0
            %
            
            $
            623
            
            
            
            100.0
            %








Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations.  Furthermore, while we believe we have established our
allowance for loan losses in conformity with generally accepted accounting
principles, there can be no assurance that regulators, in reviewing our loan
portfolio, will not require us to increase our allowance for loan
losses.  In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
the existing allowance for loan losses is adequate or that increases will not be
necessary should the quality of any loans deteriorate as a result of the factors
discussed above.  Any material increase in the allowance for loan
losses may adversely affect our financial condition and results of
operations.





K-14
 Index





The
following table sets forth an analysis of the allowance for loan losses for the
periods indicated.





Analysis of Loan Loss
Experience.








Year
      Ended December 31,(Dollars in thousands)
            
            2007
            
            
            2006Allowance
      at beginning of period
            
            $
            623
            
            
            $
            531Provision
      for loan losses
            
            
            185
            
            
            
            102Charge
      offs:One-
      to four-family residential real estate loans
            
            
            —
            
            
            
            —Construction
            
            
            —
            
            
            
            —Commercial
      and multi-family real estate loans
            
            
            —
            
            
            
            —Land
            
            
            —
            
            
            
            —Commercial
      loans
            
            
            —
            
            
            
            9Consumer
      loans
            
            
            25
            
            
            
            1Total
      charge-offs
            
            
            25
            
            
            
            10Recoveries:One-
      to four-family residential real estate loans
            
            
            —
            
            
            
            —Construction
            
            
            —
            
            
            
            —Commercial
      and multi-family real estate loans
            
            
            —
            
            
            
            —Land
            
            
            —
            
            
            
            —Commercial
      loans
            
            
            —
            
            
            
            —Consumer
      loans
            
            
            4
            
            
            
            —Total
      recoveries
            
            
            4
            
            
            
            —Net
      charge-offs
            
            
            21
            
            
            
            10Allowance
      at end of period
            
            $
            787
            
            
            $
            623Allowance
      to nonperforming loans
            
            
            634.7
            %
            
            
            141.9
            %Allowance
      to total loans outstanding at the end of the period
            
            
            0.64
            
            
            
            0.64Net charge-offs to average loans outstanding
      during the period
            
            
            0.02
            
            
            
            0.01








Investment
Activities





We have
legal authority to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various federal agencies and of state and
municipal governments, mortgage-backed securities and certificates of deposit of
federally insured institutions.  Within certain regulatory limits, we
also may invest a portion of our assets in corporate securities and mutual
funds.  We also are required to maintain an investment in Federal Home
Loan Bank of New York stock.





At
December 31, 2007, our investment portfolio totaled $2.8 million, or 2.1% of
total assets, and consisted primarily of mortgage-backed securities and U.S.
agency securities.





Our
investment objectives are to provide and maintain liquidity, to establish an
acceptable level of interest rate and credit risk, to provide an alternate
source of low-risk investments when demand for loans is weak and to generate a
favorable return.  Our board of directors has the overall
responsibility for the investment portfolio, including approval of our
investment policy.  The Investment Committee is responsible for
implementation of the investment policy and monitoring our investment
performance.  Our board of directors reviews the status of our
investment portfolio on a quarterly basis, or more frequently if
warranted.





At the
time of purchase, we designate a security as either held to maturity,
available-for-sale, or trading, based upon our ability and intent. Securities
available-for-sale are reported at estimated market value, trading securities
are reported at estimated fair value and the securities held to maturity are
reported at





K-15
 Index





amortized
cost. A periodic review and evaluation of the available-for-sale and held to
maturity securities portfolios is conducted to determine if the fair value of
any security has declined below its carrying value and whether such decline is
other-than-temporary. If such decline is deemed to be other-than-temporary, the
security is written down to a new cost basis and the resulting loss is charged
against earnings. At December 31, 2007, we had no securities classified as
trading.





The
following table sets forth the amortized cost and fair values of our securities
portfolio at the dates indicated.





Investment
Securities








December 31,2007
            
            
            2006(Dollars in thousands)
            
            Amortized Cost
            
            
            Fair Value
            
            
            Amortized Cost
            
            
            Fair ValueSecurities
      available for sale:U.S.
      Government agency securities
            
            $
            1,000
            
            
            $
            1,003
            
            
            $
            1,000
            
            
            $
            997Total
      available for sale
            
            
            1,000
            
            
            
            1,003
            
            
            
            1,000
            
            
            
            997Securities
      held to maturity:U.S.
      Treasury and Government agency securities
            
            
            500
            
            
            
            502
            
            
            
            9,475
            
            
            
            9,460Mortgage-backed
      securities
            
            
            1,274
            
            
            
            1,274
            
            
            
            1,569
            
            
            
            1,556Total
      held to maturity
            
            
            1,774
            
            
            
            1,776
            
            
            
            11,044
            
            
            
            11,016Total
            
            $
            2,774
            
            
            $
            2,779
            
            
            $
            12,044
            
            
            $
            12,013








The
following table sets forth the stated maturities and weighted average yields of
investment securities at December 31, 2007.  Certain mortgage-backed
securities have adjustable interest rates and will reprice annually within the
various maturity ranges.  These repricing schedules are not reflected
in the table below.  Approximately $118,000 of the mortgage-backed
securities listed have adjustable interest rates.





Investment
Maturities Schedule








One Year or Less
            
            
            More than One Year to Five
      Years
            
            
            More than Five Years to Ten
      Years
            
            
            More than Ten Years
            
            
            TotalDecember 31, 2007
              (Dollars in thousands)
            
            Carrying Value
            
            
            Weighted Average Yield
            
            
            Carrying Value
            
            
            Weighted Average Yield
            
            
            Carrying Value
            
            
            Weighted Average Yield
            
            
            Carrying Value
            
            
            Weighted Average Yield
            
            
            Carrying Value
            
            
            Weighted Average YieldSecurities
      available-for-sale:U.S.
      Government agency securities
            
            
            —
            
            
            
            —
            
            
            $
            1,003
            
            
            
            4.25
            %
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            $
            1,003
            
            
            
            4.25
            %Total
      available for sale
            
            
            —
            
            
            
            —
            
            
            
            1,003
            
            
            
            4.25
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,003
            
            
            
            4.25Securities
      held to maturity:U.S.
      Government agency securities
            
            
            —
            
            
            
            —
            
            
            
            500
            
            
            
            4.50
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            500
            
            
            
            4.50Mortgage-backed
      securities
            
            $
            378
            
            
            
            3.27
            
            
            
            —
            
            
            
            —
            
            
            $
            778
            
            
            
            5.25
            %
            
            $
            118
            
            
            
            5.27
            %
            
            
            1,274
            
            
            
            4.67Total
      held to maturity
            
            
            378
            
            
            
            3.27
            
            
            
            500
            
            
            
            4.50
            
            
            
            778
            
            
            
            5.25
            
            
            
            118
            
            
            
            5.27
            
            
            
            1,774
            
            
            
            4.62Total
            
            $
            378
            
            
            
            3.27
            %
            
            $
            1,503
            
            
            
            4.33
            %
            
            $
            778
            
            
            
            5.25
            %
            
            $
            118
            
            
            
            5.27
            %
            
            $
            2,777
            
            
            
            4.48
            %








Deposit
Activities and Other Sources of Funds





General.  Deposits,
borrowings and loan repayments are the major sources of our funds for lending
and other investment purposes.  Scheduled loan repayments are a
relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and money
market conditions.





K-16
 Index





Deposit
Accounts.Substantially all of our depositors are residents of the State of New
York.  Deposits are attracted from within our market area through
advertising and the offering of a broad selection of deposit instruments,
including noninterest-bearing demand deposits (such as checking accounts),
interest-bearing demand accounts (such as NOW and money market accounts),
savings accounts and certificates of deposit.  In addition to accounts
for individuals, we also offer commercial checking accounts designed for the
businesses operating in our market area.  We do not have any brokered
deposits. Municipal deposits comprise a portion of our total
deposits.  The New York State Banking Department has designated the
Town of Mount Hope, including the village of Otisville, as a Banking Development
District.  The objective of the program is to encourage the
establishment of bank branches in geographic locations where there is a
demonstrated need for banking services.  The New York State Office of
the Comptroller is authorized to deposit funds with our Otisville
branch.  Additionally, Walden Federal can accept public funds from the
Town of Mount Hope and the Village of Otisville.  At December 31,
2007, $10.0 million, or 8.9% of our total deposits consisted of one municipal
deposit from the New York State Office of the Comptroller.  We expect
to renew this $10.0 million certificate of deposit for one additional year in
April 2008.  We do not expect this certificate of deposit to remain
with us past April 2009. At December 31, 2007, we had a total of $63.4 million
in certificates of deposit, of which $60.9 million had remaining maturities of
one year or less. Based on historical experience, we believe we will retain a
large portion of these accounts upon maturity.





The
following table sets forth the balances of our deposit products at the dates
indicated.





Deposits








December 31,2007
            
            
            2006(Dollars in thousands)
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            PercentNoninterest-bearing
      demand deposits
            
            $
            17,441
            
            
            
            15.6
            %
            
            $
            18,692
            
            
            
            17.9
            %Interest-bearing
      demand deposits
            
            
            6,446
            
            
            
            5.7
            
            
            
            6,546
            
            
            
            6.2Money
      market accounts
            
            
            11,170
            
            
            
            10.0
            
            
            
            15,968
            
            
            
            15.3Savings
      accounts
            
            
            13,645
            
            
            
            12.2
            
            
            
            13,343
            
            
            
            12.8Certificates
      of deposit
            
            
            63,359
            
            
            
            56.5
            
            
            
            49,969
            
            
            
            47.8Total
            
            $
            112,061
            
            
            
            100.0
            %
            
            $
            104,518
            
            
            
            100.0
            %








Time
Deposit Maturities of $100,000 or more








December 31, 2007 (Dollars in
      thousands)
            
            Certificates of DepositMaturity
      PeriodThree
      months or less
            
            $
            17,619Over
      three through six months
            
            
            3,658Over
      six through twelve months
            
            
            2,452Over
      twelve months
            
            
            949Total
            
            $
            24,678








Borrowings.We have the ability to
utilize advances from the Federal Home Loan Bank of New York to supplement our
investable funds.  The Federal Home Loan Bank functions as a central
reserve bank providing credit for member financial institutions.  As a
member, we are required to own capital stock in the Federal Home Loan Bank and
are authorized to apply for advances on the security of such stock and certain
of our mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States), provided certain standards
related to creditworthiness have been met.  Advances are made under
several different programs, each having its own interest rate and range of
maturities.  Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution’s net worth or
on the Federal Home Loan Bank’s assessment of the institution’s
creditworthiness. We had no





K-17
 Index





Federal
Home Loan Bank advances at December 31, 2007. As of December 31, 2007, we had
the ability to borrow $24.7 million under our line of credit facilities with the
Federal Home Loan Bank.





The
borrowings are secured by qualifying assets of the Association which include the
Federal Home Loan Bank stock, securities and first mortgage
loans.  The Association has a maximum borrowing capacity with the
Federal Home Loan Bank of approximately $39.8 million, including line of credit
facilities, of which $10.0 million was used at December 31, 2007, to secure a
municipal letter of credit.





Borrowings








Year
      Ended December 31,(Dollars in thousands)
            
            2007
            
            
            2006Maximum
      amount outstanding at any month end during the period:FHLB
      advances
            
            $
            6,325
            
            
            $
            6,900Average
      amount outstanding during the period:FHLB
      advances
            
            $
            1,638
            
            
            $
            1,968Weighted
      average interest rate during the period:FHLB
      advances
            
            
            5.43
            %
            
            
            5.34
            %Balance
      outstanding at end of period:FHLB
      advances
            
            
            —
            
            
            $
            2,525Weighted
      average interest rate at end of period:FHLB advances
            
            
            0.00
            %
            
            
            5.35
            %








Personnel





At
December 31, 2007, we had 55 full-time employees and six part-time employees,
none of whom is represented by a collective bargaining unit.





Subsidiaries





Hometown
Bancorp’s only direct subsidiary is Walden Federal.  Walden Federal
has two active wholly-owned subsidiaries, Ever-Green Financial Services Inc. and
Valley Services, Inc., both of which are New York
corporations.  Evergreen was formed in 1984.  Evergreen’s
sole business activity is a 50% ownership interest in Evergreen Title Agency,
LP.  Valley Services was formed in 1999 to hold real estate
owned.





REGULATION
AND SUPERVISION





General





Walden
Federal is subject to extensive regulation, examination and supervision by the
Office of Thrift Supervision, as its primary federal regulator, and the Federal
Deposit Insurance Corporation, as the insurer of its deposits.  Walden
Federal is a member of the Federal Home Loan Bank System and its deposit
accounts are insured up to applicable limits by the Deposit Insurance Fund
managed by the Federal Deposit Insurance Corporation.  Walden Federal
must file reports with the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation concerning its activities and financial condition in
addition to obtaining regulatory approvals before entering into certain
transactions such as mergers with, or acquisitions of, other financial
institutions.  There are periodic examinations by the Office of Thrift
Supervision and, under certain circumstances, the Federal Deposit Insurance
Corporation to evaluate Walden Federal’s safety and soundness and compliance
with various regulatory requirements.  This regulatory structure is
intended primarily for the protection of the insurance fund and
depositors.  The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect
to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes.  Any change in such policies,
whether by the Office of Thrift





K-18
 Index





Supervision,
the Federal Deposit Insurance Corporation or Congress, could have a material
adverse impact on Hometown Bancorp, Hometown Bancorp MHC and Walden Federal and
their operations.  Hometown Bancorp and Hometown Bancorp MHC, as
savings and loan holding companies, are required to file certain reports with,
are subject to examination by, and otherwise must comply with the rules and
regulations of the Office of Thrift Supervision.





Certain
of the regulatory requirements that are applicable to Walden Federal, Hometown
Bancorp and Hometown Bancorp MHC are described below.  This
description of statutes and regulations is not intended to be a complete
explanation of such statutes and regulations and their effects on Walden
Federal, Hometown Bancorp and Hometown Bancorp MHC and is qualified in its
entirety by reference to the actual statutes and regulations.





Regulation
of Federal Savings Associations





Capital
Requirements.The
Office of Thrift Supervision’s capital regulations require federal savings
institutions to meet three minimum capital standards:  a 1.5% tangible
capital to total assets ratio, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system) and an 8%
risk-based capital ratio.  In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS system) and, together with the risk-based capital standard
itself, a 4% Tier 1 risk-based capital standard.  The Office of Thrift
Supervision regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.





The
risk-based capital standard requires federal savings institutions to maintain
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively.  In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet assets, recourse obligations,
residual interests and direct credit substitutes, are multiplied by a
risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision
capital regulation based on the risks believed inherent in the type of
asset.  Core (Tier 1) capital is defined as common stockholders’
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus and minority interests in equity accounts of
consolidated subsidiaries, less intangibles other than certain mortgage
servicing rights and credit card relationships.  The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values.  Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core
capital.





The
Office of Thrift Supervision also has authority to establish individual minimum
capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the
particular circumstances.  At December 31, 2007, Walden Federal met
each of these capital requirements.





Prompt Corrective
Regulatory Action. The Office of Thrift
Supervision is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution’s degree of undercapitalization.  Generally, a savings
institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than
4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
“undercapitalized.”  A savings institution that has a total risk-based
capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be “significantly undercapitalized”
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be “critically
undercapitalized.”  Subject to a narrow exception, the Office
of





K-19
 Index





Thrift
Supervision is required to appoint a receiver or conservator within specified
time frames for an institution that is “critically
undercapitalized.”  An institution must file a capital restoration
plan with the Office of Thrift Supervision within 45 days of the date it
receives notice that it is “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized.”  Compliance with the plan must be
guaranteed by any parent holding company in the amount of the lesser of 5% of
the savings association’s total assets when it was deemed undercapitalized or
the amount necessary to achieve compliance with applicable capital
regulations.  In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion.  “Significantly undercapitalized”
and “critically undercapitalized” institutions are subject to more extensive
mandatory regulatory actions.  The Office of Thrift Supervision could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.  At December 31, 2007, Walden Federal was
well-capitalized.





Standards for
Safety and Soundness.  As required by statute, the federal
banking agencies have adopted Interagency Guidelines prescribing Standards for
Safety and Soundness.  The guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired.  If the Office of Thrift Supervision determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
Office of Thrift Supervision may require the institution to submit an acceptable
plan to achieve compliance with the standard.  Walden Federal has not
received any notice from the Office of Thrift Supervision that it has failed to
meet any standard prescribed by the guidelines.





Limitation on
Capital Distributions.  Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out
merger.  Under the regulations, an application to and the prior
approval of the Office of Thrift Supervision is required before any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination
and Community Reinvestment Act ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the Office of
Thrift Supervision.  If an application is not required, the
institution must still provide prior notice to the Office of Thrift Supervision
of the capital distribution if, like Walden Federal, it is a subsidiary of a
holding company.  If Walden Federal’s capital were ever to fall below
its regulatory requirements or the Office of Thrift Supervision notified it that
it was in need of increased supervision, its ability to make capital
distributions could be restricted.  In addition, the Office of Thrift
Supervision could prohibit a proposed capital distribution that would otherwise
be permitted by the regulation, if the agency determines that such distribution
would constitute an unsafe or unsound practice.





Qualified Thrift
Lender Test.  Federal law requires savings institutions to meet
a qualified thrift lender test.  Under the test, a savings association
is required to either qualify as a “domestic building and loan association”
under the Internal Revenue Code or maintain at least 65% of its “portfolio
assets” (total assets less:  (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain “qualified thrift investments”
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12 month
period.  Education loans, credit card loans and small business loans
may be considered “qualified thrift investments.”  A savings
institution that fails the qualified thrift lender test is subject to certain
operating restrictions and may be required to convert to a bank
charter.  As of December 31, 2007, Walden Federal met the qualified
thrift lender test.





Transactions with
Related Parties.  Federal law limits Walden Federal’s authority
to lend to, and engage in certain other transactions with (collectively,
“covered transactions”), “affiliates” (e.g., any company that
controls or is under common control with an institution, including Hometown
Bancorp,





K-20
 Index





Hometown
Bancorp MHC and their non-savings institution subsidiaries).  The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings
institution.  The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institution’s capital and
surplus.  Loans and other specified transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
federal law.  The purchase of low quality assets from affiliates is
generally prohibited.  Transactions with affiliates must be on terms
and under circumstances that are at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies.  In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.





The
Sarbanes-Oxley Act generally prohibits loans by Hometown Bancorp to its
executive officers and directors.  However, the Sarbanes-Oxley Act
contains a specific exemption from such prohibition for loans by Walden Federal
to its executive officers and directors in compliance with federal banking
regulations.  Federal regulations require that all loans or extensions
of credit to executive officers and directors of insured institutions must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons
and must not involve more than the normal risk of repayment or present other
unfavorable features.  Walden Federal is therefore prohibited from
making any new loans or extensions of credit to executive officers and directors
at different rates or terms than those offered to the general
public.  Notwithstanding this rule, federal regulations permit Walden
Federal to make loans to executive officers and directors at reduced interest
rates if the loan is made under a benefit program generally available to all
other employees and does not give preference to any executive officer or
director over any other employee.





In
addition, loans made to a director or executive officer in an amount that, when
aggregated with the amount of all other loans to the person and his or her
related interests, are in excess of the greater of $25,000 or 5% of Walden
Federal’s capital and surplus, up to a maximum of $500,000, must be approved in
advance by a majority of the disinterested members of the board of
directors.





Insurance of
Deposit Accounts.  Deposits of Walden Federal are insured by
the Deposit Insurance Fund of the Federal Deposit Insurance
Corporation.  The FDIC determines insurance premiums based on a number
of factors, primarily the agency’s assessment of the risk of loss that insured
institutions pose to the Deposit Insurance Fund.  Recent legislation
eliminated the minimum 1.25% reserve ratio for the insurance funds, the
mandatory assessments when the ratio fall below 1.25% and the prohibition on
assessing the highest quality banks when the ratio is above
1.25%.  The FDIC has the ability to adjust the new insurance fund’s
reserve ratio between 1.15% and 1.5%, depending on projected losses, economic
changes and assessment rates at the end of a calendar year.  The FDIC
has adopted regulations that set assessment rates that took effect at the
beginning of 2007.  The new assessment rates for most banks vary
between five cents and seven cents for every $100 of deposits.  A
change in insurance premiums could have an adverse effect on the operating
expenses and results of operations of Walden Federal.  We cannot
predict what insurance assessment rates will be in the future.





Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the Federal
Deposit Insurance Corporation or the Office of Thrift Supervision.  We
do not know of any practice, condition or violation that might lead to
termination of deposit insurance.





In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund.





Federal Home Loan
Bank System.  Walden Federal is a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan
Banks.  The Federal Home Loan Bank provides a





K-21
 Index





central
credit facility primarily for member institutions.  Walden Federal, as
a member of the Federal Home Loan Bank of New York, is required to acquire and
hold shares of capital stock in that Federal Home Loan Bank.  Walden
Federal was in compliance with this requirement with an investment in Federal
Home Loan Bank stock at December 31, 2007 of $142,000.





Community
Reinvestment Act.Under the Community
Reinvestment Act, as implemented by Office of Thrift Supervision regulations, a
savings association has a continuing and affirmative obligation consistent with
its safe and sound operation to help meet the credit needs of its entire
community, including low and moderate income neighborhoods.  The
Community Reinvestment Act does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution’s
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the Community
Reinvestment Act.  The Community Reinvestment Act requires the Office
of Thrift Supervision, in connection with its examination of a savings
association, to assess the institution’s record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution.





The
Community Reinvestment Act requires public disclosure of an institution’s rating
and requires the Office of Thrift Supervision to provide a written evaluation of
an association’s Community Reinvestment Act performance utilizing a four-tiered
descriptive rating system.





Walden
Federal received a “satisfactory” rating as a result of its most recent
Community Reinvestment Act assessment.





Holding
Company Regulation





General.Hometown
Bancorp and Hometown Bancorp MHC are savings and loan holding companies within
the meaning of federal law.  As such, they are registered with the
Office of Thrift Supervision and are subject to Office of Thrift Supervision
regulations, examinations, supervision, reporting requirements and regulations
concerning corporate governance and activities.  In addition, the
Office of Thrift Supervision has enforcement authority over Hometown Bancorp and
Hometown Bancorp MHC and their non-savings institution
subsidiaries.  Among other things, this authority permits the Office
of Thrift Supervision to restrict or prohibit activities that are determined to
be a serious risk to Walden Federal.





Restrictions
Applicable to Mutual Holding Companies.According to federal
law and Office of Thrift Supervision regulations, a mutual holding company, such
as Hometown Bancorp MHC, may generally engage in the following
activities:  (1) investing in the stock of a bank; (2) acquiring a
mutual association through the merger of such association into a bank subsidiary
of such holding company or an interim bank subsidiary of such holding company;
(3) merging with or acquiring another holding company, one of whose subsidiaries
is a bank; and (4) any activity approved by the Federal Reserve Board for a bank
holding company or financial holding company or previously approved by Office of
Thrift Supervision for multiple savings and loan holding
companies.  In addition, mutual holding companies may engage in
activities permitted for financial holding companies.  Financial
holding companies may engage in a broad array of financial service activities
including insurance and securities.





Federal
law prohibits a savings and loan holding company, including a federal mutual
holding company, from directly or indirectly, or through one or more
subsidiaries, acquiring more than 5% of the voting stock of another savings
institution, or its holding company, without prior written approval of the
Office of Thrift Supervision.  Federal law also prohibits a savings
and loan holding company from acquiring more than 5% of a company engaged in
activities other than those authorized for savings and loan holding companies by
federal law; or acquiring or retaining control of a depository institution that
is not insured by the Federal Deposit Insurance Corporation.  In
evaluating applications by holding companies to acquire savings institutions,
the Office of Thrift Supervision must consider the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the insurance funds, the convenience
and needs of the community and competitive factors.





K-22
 Index





The
Office of Thrift Supervision is prohibited from approving any acquisition that
would result in a multiple savings and loan holding company controlling savings
institutions in more than one state, except:  (1) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(2) the acquisition of a savings institution in another state if the laws of the
state of the target savings institution specifically permit such
acquisitions.  The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.





If the
savings institution subsidiary of a savings and loan holding company fails to
meet the qualified thrift lender test, the holding company must register with
the Federal Reserve Board as a bank holding company within one year of the
savings institution’s failure to so qualify.





Stock Holding
Company Subsidiary Regulation.The Office of Thrift
Supervision has adopted regulations governing the two-tier mutual holding
company form of organization and subsidiary stock holding companies that are
controlled by mutual holding companies.  We have adopted this form of
organization.  Hometown Bancorp is the stock holding company
subsidiary of Hometown Bancorp MHC.  Hometown Bancorp is permitted to
engage in activities that are permitted for Hometown Bancorp MHC subject to the
same restrictions and conditions.





Waivers of
Dividends by Hometown Bancorp MHC.Office of Thrift
Supervision regulations require Hometown Bancorp MHC to notify the Office of
Thrift Supervision if it proposes to waive receipt of dividends from Hometown
Bancorp.  The Office of Thrift Supervision reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to a waiver
if:  (i) the waiver would not be detrimental to the safe and sound
operation of the savings association; and (ii) the mutual holding company’s
board of directors determines that such waiver is consistent with such
directors’ fiduciary duties to the mutual holding company’s
members.  We anticipate that Hometown Bancorp MHC will waive dividends
that Hometown Bancorp may pay, if any.





Conversion of
Hometown Bancorp MHC to Stock Form.Office of Thrift
Supervision regulations permit Hometown Bancorp MHC to convert from the mutual
form of organization to the capital stock form of organization.  There
can be no assurance when, if ever, a conversion transaction will occur, and the
board of directors has no current intention or plan to undertake a conversion
transaction.  In a conversion transaction, a new holding company would
be formed as the successor to Hometown Bancorp, Hometown Bancorp MHC’s corporate
existence would end, and certain depositors of Walden Federal would receive the
right to subscribe for additional shares of the new holding
company.  In a conversion transaction, each share of common stock held
by stockholders other than Hometown Bancorp MHC would be automatically converted
into a number of shares of common stock of the new holding company based on an
exchange ratio determined at the time of conversion that ensures that
stockholders other than Hometown Bancorp MHC own the same percentage of common
stock in the new holding company as they owned in Hometown Bancorp immediately
before conversion.  The total number of shares held by stockholders
other than Hometown Bancorp MHC after a conversion transaction would be
increased by any purchases by such stockholders in the stock offering conducted
as part of the conversion transaction.





Acquisition of
Control.Under the federal Change in Bank Control Act, a
notice must be submitted to the Office of Thrift Supervision if any person
(including a company), or group acting in concert, seeks to acquire “control” of
a savings and loan holding company or savings association.  An
acquisition of “control” can occur upon the acquisition of 10% or more of the
voting stock of a savings and loan holding company or savings institution or as
otherwise defined by the Office of Thrift Supervision.  Under the
Change in Bank Control Act, the Office of Thrift Supervision has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition.  Any company that so
acquires control would then be subject to regulation as a savings and loan
holding company.





K-23
 Index





FEDERAL
AND STATE TAXATION





Federal
Income Taxation





General.We
report our income on a fiscal year basis using the accrual method of
accounting.  The federal income tax laws apply to us in the same
manner as to other corporations with some exceptions, including particularly our
reserve for bad debts discussed below.  The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to us.  Our
federal income tax returns have been either audited or closed under the statute
of limitations through tax year 2002.  For its 2007 fiscal year,
Walden Federal’s maximum federal income tax rate was 34%.





Hometown
Bancorp and Walden Federal have entered into a tax allocation
agreement.  Because Hometown Bancorp owns 100% of the issued and
outstanding capital stock of Walden Federal, Hometown Bancorp and Walden Federal
are members of an affiliated group within the meaning of Section 1504(a) of the
Internal Revenue Code, of which group Hometown Bancorp is the common parent
corporation.  As a result of this affiliation, Walden Federal may be
included in the filing of a consolidated federal income tax return with Hometown
Bancorp and, if a decision to file a consolidated tax return is made, the
parties agree to compensate each other for their individual share of the
consolidated tax liability and/or any tax benefits provided by them in the
filing of the consolidated federal income tax return.





Bad Debt
Reserves.For fiscal years beginning before September 30, 1996, thrift
institutions that qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve.  A reserve could be established
for bad debts on qualifying real property loans, generally secured by interests
in real property improved or to be improved, under the percentage of taxable
income method or the experience method.  The reserve for nonqualifying
loans was computed using the experience method.  Federal legislation
enacted in 1996 repealed the reserve method of accounting for bad debts and the
percentage of taxable income method for tax years beginning after 1995 and
required savings institutions to recapture or take into income certain portions
of their accumulated bad debt reserves.  Approximately $500,000 of our
accumulated bad debt reserves would not be recaptured into taxable income unless
Walden Federal makes a “non-dividend distribution” to Hometown Bancorp as
described below.





Distributions.  If
Walden Federal makes “non-dividend distributions” to Hometown Bancorp, the
distributions will be considered to have been made from Walden Federal’s
unrecaptured tax bad debt reserves, including the balance of its reserves as of
March 31, 1987, to the extent of the “non-dividend distributions,” and then from
Walden Federal’s supplemental reserve for losses on loans, to the extent of
those reserves, and an amount based on the amount distributed, but not more than
the amount of those reserves, will be included in Walden Federal’s taxable
income.  Non-dividend distributions include distributions in excess of
Walden Federal’s current and accumulated earnings and profits, as calculated for
federal income tax purposes, distributions in redemption of stock, and
distributions in partial or complete liquidation.  Dividends paid out
of Walden Federal’s current or accumulated earnings and profits will not be so
included in Walden Federal’s taxable income.





The
amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution.  Therefore, if Walden Federal makes a
non-dividend distribution to Hometown Bancorp, approximately one and one-half
times the amount of the distribution not in excess of the amount of the reserves
would be includable in income for federal income tax purposes, assuming a 34%
federal corporate income tax rate.  Walden Federal does not intend to
pay dividends that would result in a recapture of any portion of its bad debt
reserves.





State
Taxation





New York
Taxation.  Hometown Bancorp reports income on a calendar year
basis to New York State.  New York State franchise tax on corporations
is imposed in an amount equal to the greater of (a) 7.1%





K-24
 Index





of
“entire net income” allocable to New York State, (b) 3% of “alternative entire
net income” allocable to New York State, or (c) 0.01% of the average value of
assets allocable to New York State plus nominal minimum tax of $250 per
company.  Entire net income is based on federal taxable income,
subject to certain modifications.  Alternative entire net income is
equal to entire net income without certain modifications.





Bad Debt
Reserves.  Deferred tax liabilities have not been recognized
with respect to the New York State base-year reserve of approximately $4.2
million at December 31, 2007, since Walden Federal does not expect that these
amounts will become taxable in the foreseeable future.





K-25
 Index





ITEM 2.
            DESCRIPTION
      OF PROPERTY





We
conduct our business through our main office and branch offices. The following
table sets forth certain information relating to these facilities at December
31, 2007 (dollars in thousands).








Location
            
            Owned/ Leased
            
            Date of Lease Expiration (including lease
      extensions)
            
            Net Book Value of Property or Leasehold
      Improvements at December 31, 2007(In
      thousands)Main
      Office:12
      Main Street
              Walden,
      New York 12586
            
            Owned
            
            N/A
            
            $
      1,180Branches:(Montgomery)
              201
      Ward Street, Suite L
              Montgomery,
      New York 12549
            
            Leased
            
            10/01/2011
            
            5(Monroe
      Wal-Mart)
              288
      Larkin Drive
              Monroe,
      New York 10950
            
            Leased
            
            10/31/2015
            
            106(Otisville)
              2
      Sanatorium Avenue, Suite 2
              Otisville,
      New York 10963
            
            Leased
            
            11/01/2014
            
            77(Monroe
      ShopRite)
              785
      Route 17M
              Monroe,
      New York 10950
            
            Leased
            
            06/01/2021
            
            123Newburgh
              211
      South Plank Road
              Newburgh,
      New York 12550
            
            Leased
            
            05/01/2027
            
            300Other
      Properties:(Loan
      Center)
              74
      W. Main Street
              Walden,
      New York 12586
            
            Owned
            
            N/A
            
            517(Loan
      Annex)
              8
      Main Street
              Walden,
      New York 12586
            
            Owned
            
            N/A
            
            80





As of
December 31, 2007, the total net book value of Walden Federal’s offices was $2.4
million.





K-26
 Index





ITEM 3.
            LEGAL
      PROCEEDINGS





Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business. At December 31, 2007, we were not a party
to any pending legal proceedings that we believe would have a material adverse
effect on our financial condition, results of operations or cash
flows.





ITEM 4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





None.





PART II





ITEM 5.
            MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES





Market,
Holder and Dividend Information





The
Company’s common stock is listed on the OTC Bulletin Board under the trading
symbol “HTWC.OB” The Company completed its initial public offering on June 28,
2007 and commenced trading on June 29, 2007. The following table sets forth the
high and low bid prices of the common stock for the 2007 fiscal year, as
reported on the OTC Bulletin Board. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission, and may not represent actual
transactions.








For the Year EndedDecember31, 20074thQuarter
            
            
            3rdQuarter
            
            
            2ndQuarter
            
            
            1st QuarterHigh
            
            $
            8.20
            
            
            $
            10.05
            
            
            $
            10.00
            
            
            
            N/ALow
            
            
            7.40
            
            
            
            7.55
            
            
            
            10.00
            
            
            
            N/A








As of
December 31, 2007, there were approximately 324 holders of record of the
Company’s common stock, excluding the number of persons or entities holding
stock in street name through various brokerage firms.





Hometown
Bancorp is not subject to OTS regulatory restrictions on the payment of
dividends.  However, Hometown Bancorp’s ability to pay dividends may
depend, in part, upon its receipt of dividends from Walden Federal because
Hometown Bancorp has no source of income other than earnings from the investment
of the net proceeds from the offering that it retained.  Payment of
cash dividends on capital stock by a savings institution is limited by OTS
regulations.  Walden Federal may not make a distribution that would
constitute a return of capital during the three-year term of the business plan
submitted in connection with its reorganization.  No insured
depository institution may make a capital distribution if, after making the
distribution, the institution would be undercapitalized.





As of
December 31, 2007, Hometown Bancorp satisfied all prescribed capital
requirements.  Future dividend payments will depend on the Company’s
profitability, approval by its Board of Directors and prevailing OTS
regulations.  To date, we have not declared any cash
dividends.





Since
completion of the offering on June 28, 2007, we have not repurchased any of our
shares of common stock and have not publicly announced repurchase plans or
programs.





K-27
 Index





ITEM 6.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION





The
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of the Company’s 2007 Annual Report to Stockholders filed as
Exhibit 13 to this Form 10-KSB is incorporated herein by reference.





ITEM 7.
            FINANCIAL
      STATEMENTS





The
Financial Statements in the Company’s 2007 Annual Report to Stockholders filed
as Exhibit 13 to this Form 10-KSB are incorporated herein by
reference.





ITEM 8.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





Walden
Federal became a wholly-owned subsidiary of Hometown Bancorp upon Walden
Federal’s reorganization into the mutual holding company structure in May, 2006.
Prior to the offering, Walden Federal’s consolidated financial statements were
audited by Nugent & Haeussler, P.C. In connection with Hometown Bancorp’s
preparation for the offering, on November 10, 2006, Nugent & Haeussler, P.C.
resigned and, on December 6, 2006, Hometown Bancorp engaged Beard Miller Company
LLP to audit the consolidated financial statements of Walden Federal and
Hometown Bancorp as of December 31, 2006 and 2005, and for each of the two years
in the period ended December 31, 2006.  Before its engagement, Walden
Federal and Hometown Bancorp did not consult Beard Miller Company LLP regarding
either: (1) the application of accounting principles to a specified transaction
or the type of audit opinion that might be rendered on Hometown Bancorp’s
financial statements; or (2) on any matter that was subject of a disagreement
with its former accountants or on any matter that was a reportable
event.





Nugent
& Haeussler, P.C.’s reports on the consolidated financial statements of
Walden Federal did not contain an adverse opinion or disclaimer of opinion, nor
were they modified as to uncertainty, audit scope or accounting principles. The
resignation of Nugent & Haeussler, P.C. and the engagement of Beard Miller
Company LLP was due to the stock offering and associated registration
requirements, including the need for Hometown Bancorp’s consolidated financial
statements to be audited by an accounting firm registered with the Public
Company Accounting Oversight Board (the “PCAOB”). Nugent & Haeussler, P.C.
is not registered with the PCAOB. The engagement of Beard Miller Company LLP was
approved by the boards of directors of Hometown Bancorp MHC, Hometown Bancorp
and Walden Federal.





There has
not been any disagreement between Nugent & Haeussler, P.C. and Walden
Federal or Hometown Bancorp with respect to the consolidated financial
statements for 2006 or 2005, whether or not resolved, on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which, if not resolved to the satisfaction of Nugent &
Haeussler, would have caused it to make a reference to the subject matter of the
disagreement in connection with its reports. Nor have any of Nugent &
Haeussler, P.C.’s reports on the consolidated financial statements of Walden
Federal contained an adverse opinion or a disclaimer of opinion, or any
modification as to uncertainty, audit scope, or accounting principles. Nugent
& Haeussler, P.C. has furnished a letter addressed to the Securities and
Exchange Commission and filed as an exhibit to our Registration Statement on
Form SB-2, initially filed on March 16, 2007, stating its agreement with the
statements made herein.





ITEM 8A.
            CONTROLS
      AND PROCEDURES





Hometown
Bancorp’s management, including Hometown Bancorp’s principal executive officer
and principal financial officer, have evaluated the effectiveness of Hometown
Bancorp’s “disclosure controls and procedures,” as such term is defined in Rule
13a-15(e) promulgated under the Securities





K-28
 Index





Exchange
Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the
principal executive officer and principal financial officer concluded that, as
of the end of the period covered by this report, Hometown Bancorp’s disclosure
controls and procedures were effective for the purpose of ensuring that the
information required to be disclosed in the reports that Hometown Bancorp files
or submits under the Exchange Act with the Securities and Exchange Commission
(the “SEC”) (1) is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and (2) is accumulated and
communicated to Hometown Bancorp’s management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. There have been no changes in the Company’s
internal control over financial reporting identified in connection with the
evaluation required by Rule 13(a)-15(e) that occurred during the Company’s last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial
reporting.  This annual report does not include a report of
management’s assessment regarding internal control over financial reporting or
an attestation report of the Company’s registered public accounting firm due to
a transition period established by rules of the Securities and Exchange
Commission for newly public companies.





ITEM 8B.
            OTHER
      INFORMATION





None.





PART III





ITEM 9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
  ACT





DIRECTORS





For
information concerning the directors of Hometown Bancorp, the information
contained under the section captioned “Proposal 1 – Election of
Directors” in Hometown Bancorp’s Proxy Statement for the 2007 Annual
Meeting of Stockholders the (“Proxy Statement”) is incorporated by
reference.





EXECUTIVE
OFFICERS OF THE REGISTRANT





The
executive officers of Hometown Bancorp MHC, Hometown Bancorp and Walden Federal
are elected annually by the boards of directors and serve at the boards’
discretion.  The executive officers of Hometown Bancorp MHC, Hometown
Bancorp and Walden Federal are:





Name
            
            PositionThomas
      F. Gibney
            
            President
      and Chief Executive OfficerStephen
      W. Dederick
            
            Vice
      President and Chief Financial OfficerJudith
      B. Weyant
            
            Senior
      Vice President, Chief Operating Officer and Corporate
      SecretaryL.
      Bruce Lott
            
            Senior
      Vice President and Chief Lending
Officer





K-29
 Index





Below is
information regarding the executive officers.  Each officer has held
his or her current position for at least the last five years, unless otherwise
stated.  Ages presented are as of December 31, 2007.





Thomas F. Gibney has been
President and Chief Executive Officer of the Bank since 1991.  Age
59.  Director of the Bank, Hometown Bancorp MHC and Hometown Bancorp
since June 2006.





Stephen W. Dederick has been
Vice President and Chief Financial Officer of Walden Federal since
2004.  Prior to joining Walden Federal, Mr. Dederick served as Vice
President and Chief Financial Officer of Community Bank of Orange, NA from April
2002 until March 2004.  Mr. Dederick served as Senior Vice President
at Berkshire Bank from March 2001 until January 2002.  Mr. Dederick
served as Senior Vice President and Chief Financial Officer of Goshen Savings
Bank from 1997 until its acquisition.  Mr. Dederick has served as Vice
President and Chief Financial Officer of Hometown Bancorp MHC and Hometown
Bancorp since their formation.  Mr. Dederick joined Walden Federal in
2004.  Age 51.





Judith B. Weyant has been
Senior Vice President and Chief Operating Officer of Walden Federal since
1992.  Ms. Weyant has served as Senior Vice President and Chief
Operating Officer of Hometown Bancorp MHC and Hometown Bancorp since their
formation and as Corporate Secretary of Walden Federal, Hometown Bancorp MHC and
Hometown Bancorp since January 2007.  Ms. Weyant joined Walden Federal
in 1984.  Age 55.





L. Bruce Lott has been Senior
Vice President and Chief Lending Officer of Walden Federal since
2004.  Mr. Lott served as Vice President and Senior Loan Officer of
Walden Federal since 2000 and joined Walden Federal in 1995.  Mr. Lott
has also served as Senior Vice President of Hometown Bancorp MHC and Hometown
Bancorp since their formation.  Age 54.





COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT





Reference
is made to the cover page of this report and to the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement for information regarding
compliance with Section 16(a) of the Exchange Act.





DISCLOSURE
OF AUDIT COMMITTEE FINANCIAL EXPERT





For
information regarding the audit committee and its composition and the audit
committee financial expert, reference is made to the section captioned “Corporate Governance–Meetings and
Committees of the Board of Directors–Audit Committee” in the Proxy
Statement.





DISCLOSURE
OF CODE OF ETHICS AND BUSINESS CONDUCT





Hometown
Bancorp has adopted a Code of Ethics for Senior Financial Officers that applies
to its Chief Executive Officer, Chief Financial Officer, principal accounting
officer or controller or persons performing similar functions.  A copy
of the Code of Ethics is available on our website at www.waldenbank.com.





ITEM 10.
            EXECUTIVE
      COMPENSATION





The
information contained under the sections captioned “Executive Compensation” and
“Directors’
Compensation” in the Proxy Statement is incorporated herein by
reference.





ITEM 11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MAN­AGEMENT AND RELATED
      STOCKHOLDER MATTERS





(a)
            Security
      Ownership of Certain Beneficial
Owners





K-30
 Index





Information
required by this item is incorporated herein by reference to the section
captioned “Stock
Ownership” in the Proxy Statement.





(b)
            Security
      Ownership of Management





Information
required by this item is incorporated herein by reference to the section
captioned “Stock
Ownership” in the Proxy Statement.





(c)
            Changes
      in Control





Management
of Hometown Bancorp knows of no arrangements, including any pledge by any person
of securities of Hometown Bancorp, the operation of which may at a subsequent
date result in a change in control of the registrant.





(d)
            Equity
      Compensation Plan Information





Hometown
Bancorp has not adopted an equity incentive plan.





ITEM 12.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Certain
Relationships and Related Transactions





The
information required by this item is incorporated herein by reference to the
section titled “Transactions
with Related Persons” in the Proxy Statement.





Director
Independence





The
information related to director independence required by this item is
incorporated herein by reference to the section titled “Proposed 1 – Election of
Directors” in the Proxy Statement.





ITEM 13.
            EXHIBITS





3.1
            Charter
      of Hometown Bancorp, Inc.(1)


3.2
            Bylaws
      of Hometown Bancorp, Inc.(1)


4.0
            Specimen
      Stock Certificate of Hometown Bancorp, Inc.(1)


10.1
            Change
      in Control Agreement between Walden Federal Savings and Loan Association,
      Hometown Bancorp, Inc. and Thomas F. Gibney.(2)


10.2
            Change
      in Control Agreement between Walden Federal Savings and Loan
      Association,  Hometown Bancorp, Inc. and Stephen W. Dederick
      (2)


10.3
            Change
      in Control Agreement between Walden Federal Savings and Loan
      Association,  Hometown Bancorp, Inc. and L. Bruce Lott (2)


10.4
            Change
      in Control Agreement between Walden Federal Savings and Loan
      Association,  Hometown Bancorp, Inc. and Judith B. Weyant (2)


10.5
            Walden
      Federal Savings and Loan Association Directors’ Retirement Plan (1)


10.6
            Walden
      Federal Savings and Loan Association Employee Stock Ownership Plan (1)


13.0
            2007
      Annual Report to Stockholders


16.1
            Letter
      re: Change in Certifying Accountant(1)


21.0
            Subsidiaries
      of the Registrant (1)


31.1
            Rule
      13(a)-14(a)/15d-14(a) Certification of Chief Executive
    Officer


31.2
            Rule
      13(a)-14(a)/15d-14(a) Certification of Principal Financial
      Officer


32.0
            Section
      1350 Certification of Chief Executive Officer and Principal Financial
      Officer





K-31
 Index





(1)
            Incorporated
      herein by reference to the Exhibits to the Registration Statement on Form
      SB-2, and amendments thereto, initially filed on March 16, 2007,
      Registration No. 333-141351.





(2)
            Incorporated
      herein by reference to the Exhibits to Hometown Bancorp, Inc.’s Form
      10-QSB filed on August 14, 2007.





ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





The
information relating to the principal accountant fees and expenses is
incorporated herein by reference to the section captioned “Proposal 3 –
Ratification of Independent Registered Public Accounting Firm in the
Proxy Statement for the 2008 Annual Meeting of Stockholders.





K-32
 Index





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





Hometown
      Bancorp, Inc.Date:
      March 31, 2008
            /s/ Thomas F. GibneyBy:
      Thomas F. GibneyPresident,
      Chief Executive Officer








In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.








Name
            
            Title
            
            Date/s/ Thomas F. Gibney
            
            President,
      Chief Executive
            
            March
      31, 2008Thomas
      F. Gibney
            
            Officer
      and Director(principal
      executive officer)/s/ Stephen W. Dederick
            
            Chief
      Financial Officer and
            
            March
      31, 2008Stephen
      W. Dederick
            
            Vice
      President(principal
      accounting and financial officer)/s/ Joseph B. Horan, III
            
            Director
            
            March
      31, 2008Joseph
      B. Horan, III/s/ Gerald N. Jacobowitz
            
            Director
            
            March
      31, 2008Gerald
      N. Jacobowitz/s/ Graham S. Jamison
            
            Director
            
            March
      31, 2008Graham
      S. Jamison/s/ Stephen E. Sabine
            
            Director
            
            March
      31, 2008Stephen
      E. Sabine/s/ Kenneth R. Schliphack
            
            Director
            
            March
      31, 2008Kenneth
      R. Schliphack/s/ Curt J. Schoeberl, Sr.
            
            Director
            
            March
      31, 2008Curt
      J. Schoeberl, Sr.






K-33