UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


____________





FORM
10-Q


(Mark
One)





ý
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended September 30, 2008





OR





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





For the
transition period from ______________ to _____________




Commission
file number:  000-52674







HOMETOWN BANCORP,
INC.


(Exact
name of registrant as specified in its charter)





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








12 Main Street, Walden, New
York 12586


(Address
of principal executive offices)








(845)
778-2171


(Issuer’s
telephone number)





Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)





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


Yes ý                       No
o





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


Large
accelerated filer o    Accelerated
filer o    Non-accelerated
filer o      Smaller
reporting companyý





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


Yes o                       No
ý





As of
November 14, 2008 there were 2,359,000 shares of the registrant’s common stock
outstanding.








HOMETOWN
BANCORP, INC.





FORM
10-Q





Index





Page
      No.PART I.  FINANCIAL INFORMATIONItem 1.
            Financial StatementsConsolidated Balance Sheets at September 30, 2008 and December
      31, 2007 (Unaudited)
            2Consolidated Statements of Income for the three and nine
      monthsended September 30, 2008 and 2007 (Unaudited)
            3Consolidated Statements of Stockholders’ Equity for the nine
      months ended September 30, 2008 and 2007 (Unaudited)
            4Consolidated Statements of Cash Flows for the nine
      months  ended September 30, 2008 and 2007
      (Unaudited)
            5Notes to Unaudited Consolidated Financial
      Statements
            6Item 2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            10Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            19Item 4.
            Controls and Procedures
            19PART II.  OTHER INFORMATIONItem 1.
            Legal Proceedings
            20Item 1A.
            Risk Factors
            20Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            20Item 3.
            Defaults upon Senior Securities
            20Item 4.
            Submission of Matters to a Vote of Security
      Holders
            20Item 5.
            Other Information
            20Item 6.
            Exhibits
            20Signatures





i





Index


PART
I. FINANCIAL INFORMATION





Item
1. Financial Statements


Hometown Bancorp, Inc.


Consolidated
Balance Sheets


(unaudited)




September
      30,
              
              
              December
      31,2008
              
              
              2007(Dollars
      in Thousands,
                Except
      Per Share Data)AssetsCash
      and due from banks
              
              $
              2,444
              
              
              $
              3,642Interest
      earning demand deposits with banks
              
              
              4,573
              
              
              
              371Cash
      and cash equivalents
              
              
              7,017
              
              
              
              4,013Securities
      available for sale
              
              
              1,004
              
              
              
              1,003Securities
      held to maturity (fair value at September 30, 2008 $1,304; and at
      December 31, 2007 $1,776)
              
              
              1,285
              
              
              
              1,774Loans
      held for sale
              
              
              904
              
              
              
              528Loans
      receivable, net of allowance for loan losses (at September 30,
      2008 $1,006; and at December 31, 2007 $787)
              
              
              130,456
              
              
              
              120,982Premises
      and equipment, net
              
              
              4,148
              
              
              
              2,797Federal
      Home Loan Bank stock, at cost
              
              
              333
              
              
              
              142Accrued
      interest receivable and other assets
              
              
              2,136
              
              
              
              1,451Total
      Assets
              
              $
              147,283
              
              
              $
              132,690Liabilities
      and Stockholders’ EquityLiabilitiesDeposits:Non-interest
    bearing
              
              $
              17,196
              
              
              $
              17,441Interest bearing
              
              
              105,458
              
              
              
              94,620Total
      Deposits
              
              
              122,654
              
              
              
              112,061Federal
      Home Loan Bank advances
              
              
              3,000
              
              
              
              -Advances
      from borrowers for taxes and insurance
              
              
              279
              
              
              
              535Accrued
      interest payable
              
              
              111
              
              
              
              262Other
      liabilities
              
              
              2,260
              
              
              
              1,352Total
      Liabilities
              
              
              128,304
              
              
              
              114,210Commitments
      and Contingencies
              
              
              -
              
              
              
              -Stockholders’
      EquityPreferred
      stock, $0.01 par value; 3,000,000 shares authorized and
      unissued
              
              
              -
              
              
              
              -Common
      stock, $0.01 par value; 7,000,000 shares authorized; issued 2,380,500
      shares
              
              
              24
              
              
              
              24Paid-in
      capital
              
              
              10,118
              
              
              
              10,129Retained
      earnings
              
              
              9,774
              
              
              
              9,222Unearned
      ESOP shares, at cost
              
              
              (851
              )
              
              
              (886
              )Treasury
      stock, at cost, 11,500 shares at September 30, 2008 and none at December
      31, 2007
              
              
              (80
              )
              
              
              -Accumulated
      other comprehensive loss
              
              
              (6
              )
              
              
              (9
              )Total
      Stockholders’ Equity
              
              
              18,979
              
              
              
              18,480Total
      Liabilities and Stockholders’ Equity
              
              $
              147,283
              
              
              $
              132,690See
      notes to consolidated financial statements.


2
 Index


Hometown
Bancorp, Inc.


Consolidated
Statements of Income


(Unaudited)




Three
      Months Ended September 30,
              
              
              Nine
      Months EndedSeptember 30,2008
              
              
              2007
              
              
              2008
              
              
              2007(In
      thousands, except per share data)Interest
      IncomeLoans
      receivable, including fees
              
              $
              2,182
              
              
              $
              2,123
              
              
              $
              6,415
              
              
              $
              6,036Securities,
      taxable
              
              
              25
              
              
              
              146
              
              
              
              84
              
              
              
              440Other
              
              
              28
              
              
              
              48
              
              
              
              67
              
              
              
              123Total
      Interest Income
              
              
              2,235
              
              
              
              2,317
              
              
              
              6,566
              
              
              
              6,599Interest
      ExpenseDeposits
              
              
              545
              
              
              
              752
              
              
              
              1,827
              
              
              
              2,250Stock
      subscription funds
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3Federal
      Home Loan Bank advances
              
              
              22
              
              
              
              20
              
              
              
              43
              
              
              
              88Total
      Interest Expense
              
              
              567
              
              
              
              772
              
              
              
              1,870
              
              
              
              2,341Net
      Interest Income
              
              
              1,668
              
              
              
              1,545
              
              
              
              4,696
              
              
              
              4,258Provision
      for Loan Losses
              
              
              134
              
              
              
              66
              
              
              
              234
              
              
              
              160Net
      Interest Income after Provision for Loan Losses
              
              
              1,534
              
              
              
              1,479
              
              
              
              4,462
              
              
              
              4,098Non-interest
      IncomeBanking
      fees and service charges
              
              
              289
              
              
              
              292
              
              
              
              826
              
              
              
              858Mortgage
      banking income, net
              
              
              70
              
              
              
              88
              
              
              
              237
              
              
              
              311Investment
      brokerage fees
              
              
              12
              
              
              
              20
              
              
              
              45
              
              
              
              59Realized
      losses on sales of securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2
              )Other
              
              
              97
              
              
              
              18
              
              
              
              203
              
              
              
              60Total
      Non-interest Income
              
              
              468
              
              
              
              418
              
              
              
              1,311
              
              
              
              1,286Non-interest
      ExpensesSalaries
      and employee benefits
              
              
              978
              
              
              
              864
              
              
              
              2,865
              
              
              
              2,589Occupancy
      and equipment
              
              
              186
              
              
              
              157
              
              
              
              543
              
              
              
              464Professional
      fees
              
              
              79
              
              
              
              50
              
              
              
              263
              
              
              
              133Advertising
      and marketing
              
              
              74
              
              
              
              61
              
              
              
              187
              
              
              
              183Data
      processing
              
              
              137
              
              
              
              141
              
              
              
              402
              
              
              
              376Telephone
      and postage
              
              
              45
              
              
              
              48
              
              
              
              136
              
              
              
              145Other
              
              
              179
              
              
              
              177
              
              
              
              475
              
              
              
              470Total
      Non-interest Expenses
              
              
              1,678
              
              
              
              1,498
              
              
              
              4,871
              
              
              
              4,360Income
      before Income Taxes
              
              
              324
              
              
              
              399
              
              
              
              902
              
              
              
              1,024Income
      Tax Expense
              
              
              131
              
              
              
              151
              
              
              
              350
              
              
              
              391Net
      Income
              
              $
              193
              
              
              $
              248
              
              
              $
              552
              
              
              $
              633
 
 Net
      Income per common share- basic
              
              $
              0.08
              
              
              $
              0.11
              
              
              $
              0.24
              
              
              $
              0.38Weighted
      average number of common shares outstanding – basic
              
              
              2,291
              
              
              
              2,290
              
              
              
              2,292
              
              
              
              1,650





See
notes to consolidated financial statements.


3
 Index


Hometown
Bancorp, Inc.


Consolidated
Statements ofStockholders’ Equity


Nine
Months Ended September 30, 2008 and 2007




(In Thousands, except share data)(Unaudited)




Common
              Stock
            
            
            Paid-In
              Capital
            
            
            Retained
              Earnings
            
            
            Unearned
              ESOP
              Shares
            
            
            Treasury
              Stock
            
            
            Accumulated
              Other
              Comprehensive
              Loss
            
            
            TotalBalance
      - December 31, 2006
            
            $
            -
            
            
            $
            150
            
            
            $
            8,372
            
            
            $
            -
            
            
            $
            -
            
            
            $
            (2
            )
            
            $
            8,520Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            633
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            633Other
      comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (11
            )
            
            
            (11
            )Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            622Shares
      issued in public offering (2,380,500 shares)
            
            
            24
            
            
            
            9,984
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,008Shares
      purchased by ESOP
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (933
            )
            
            
            -
            
            
            
            -
            
            
            
            (933
            )ESOP
      shares committed to be released (3,496 shares)
            
            
            -
            
            
            
            (2
            )
            
            
            -
            
            
            
            35
            
            
            
            -
            
            
            
            -
            
            
            
            33Balance
      - September 30, 2007
            
            $
            24
            
            
            $
            10,132
            
            
            $
            9,005
            
            
            $
            (898
            )
            
            $
            -
            
            
            $
            (13
            )
            
            $
            18,250Balance
      - December 31, 2007
            
            $
            24
            
            
            $
            10,129
            
            
            $
            9,222
            
            
            $
            (886
            )
            
            $
            -
            
            
            $
            (9
            )
            
            $
            18,480Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            552
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            552Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            3
            
            
            
            3Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            555Treasury
      stock purchase (11,500 shares)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (80
            )
            
            
            
            
            
            
            (80
            )ESOP
      shares committed to be released (3,499 shares)
            
            
            -
            
            
            
            (11
            )
            
            
            -
            
            
            
            35
            
            
            
            
            
            
            
            -
            
            
            
            24Balance
      - September 30, 2008
            
            $
            24
            
            
            $
            10,118
            
            
            $
            9,774
            
            
            $
            (851
            )
            
            $
            (80
            )
            
            $
            (6
            )
            
            $
            18,979








See
notes to consolidated financial statements








4
 Index





Hometown Bancorp,
Inc.


Consolidated
Statements of Cash Flows


(Unaudited)





Nine
      Months Ended September 30,2008
                
                
                2007(In
      Thousands)Cash
      Flows from Operating ActivitiesNet
      income
                
                $
                552
                
                
                $
                633Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation and amortization
      expense
                
                
                177
                
                
                
                160Provision for loan
      losses
                
                
                234
                
                
                
                160Amortization of mortgage
      servicing rights
                
                
                112
                
                
                
                116Net amortization (accretion) of
      securities premiums and discounts
                
                
                1
                
                
                
                (26
                )Net realized loss on sales of
      securities
                
                
                -
                
                
                
                2Net gain on sale of
      loans
                
                
                (104
                )
                
                
                (200
                )Loans originated for
      sale
                
                
                (8,859
                )
                
                
                (14,472
                )Proceeds from sale of
      loans
                
                
                8,587
                
                
                
                14,665ESOP
      expense
                
                
                24
                
                
                
                33Increase in accrued interest
      receivable and other assets
                
                
                (797
                )
                
                
                (185
                )Increase in accrued interest
      payable and other liabilities
                
                
                759
                
                
                
                313Net
      Cash Provided by Operating Activities
                
                
                686
                
                
                
                1,199
 Cash
      Flows from Investing ActivitiesActivity
      in held to maturity securities:Purchases
                  
                  
                  -
                  
                  
                  
                  (9,000
                  )Maturities, calls and principal
      repayments
                  
                  
                  488
                  
                  
                  
                  9,235Proceeds
      from sales
                  
                  
                  -
                  
                  
                  
                  8,997Net
      increase in loans receivable
                  
                  
                  (9,708
                  )
                  
                  
                  (19,041
                  )Net
      (increase) decrease in Federal Home Loan Bank stock
                  
                  
                  (191
                  )
                  
                  
                  91Purchases
      of bank premises and equipment
                  
                  
                  (1,528
                  )
                  
                  
                  (403
                  )Net
      Cash Used by Investing Activities
                  
                  
                  (10,939
                  )
                  
                  
                  (10,121
                  )
 
 Cash
      Flows from Financing Activities
  Net
      increase in deposits
                  
                  
                  10,593
                  
                  
                  
                  5,156Net
      increase (decrease) in short-term Federal Home Loan Bank
      advances
                  
                  
                  3,000
                  
                  
                  
                  (2,525
                  )Decrease
      in advances from borrowers for taxes and insurance
                  
                  
                  (256
                  )
                  
                  
                  (232
                  )Net
      proceeds from common stock offering
                  
                  
                  -
                  
                  
                  
                  10,008Purchase
      of shares for ESOP
                  
                  
                  -
                  
                  
                  
                  (933
                  )Treasury
      stock purchased
                  
                  
                  (80
                  )
                  
                  
                  -Net
      Cash Provided by Financing Activities
                  
                  
                  13,257
                  
                  
                  
                  11,474Net
      Increase in Cash and Cash Equivalents
                  
                  
                  3,004
                  
                  
                  
                  2,552Cash
      and Cash Equivalents - Beginning
                  
                  
                  4,013
                  
                  
                  
                  3,265
 
 Cash
      and Cash Equivalents - Ending
                  
                  $
                  7,017
                  
                  
                  $
                  5,817
  Supplementary
      Cash Flows Information
  Interest
      paid
                  
                  $
                  2,021
                  
                  
                  $
                  2,452Income
      taxes paid
                  
                  $
                  480
                  
                  
                  $
                  391








See
notes to consolidated financial statements


5
 Index


Hometown
Bancorp, Inc.


Notes
to the Unaudited Consolidated Financial Statements





Note
1 - Basis of Presentation





The accompanying unaudited consolidated
financial statements of Hometown Bancorp, Inc. (the “Company”) and its
wholly-owned subsidiary, Walden Federal Savings and Loan Association (“Walden
Federal” or the “Bank”) have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and the instructions for Form
10-Q.  Accordingly, they do not include all of the information and
footnotes necessary for a complete presentation of consolidated financial
position, results of operations, and cash flows in conformity with accounting
principles generally accepted in the United States of America.  In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for (i) a fair presentation and (ii) to make the financial
statements not misleading, have been included.  Operating results for
the three and nine months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2008.





The
unaudited consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements for the years ended
December 31, 2007 and 2006, included in its annual report on Form
10-KSB.





The unaudited consolidated financial
statements at September 30, 2008 and for the three and nine months ended
September 30, 2008 and 2007 include the accounts of the Company, the Bank and
the Bank’s wholly-owned subsidiaries, Ever-Green Financial Services, Inc. and
Valley Services, Inc. All intercompany balances and transactions have been
eliminated in consolidation.





Note
2 – Minority Stock Issuance





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 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.





Note
3 – Directors’ Retirement Plan





Effective March 2007, the Bank adopted
an unfunded directors’ retirement plan for the benefit of non-employee
directors.  Under the plan, directors who have attained the normal
retirement age of 65 receive a retirement benefit based on their length of
service upon termination.  Net periodic pension expense for the nine
months ended September 30, 2008 and 2007 is as follows (in
thousands):








2008
            
            
            2007Service
      cost
            
            $
            33
            
            
            $
            41Interest
      cost
            
            
            3
            
            
            
            2Amortization
      of past service liability
            
            
            4
            
            
            
            5Net
      periodic pension expense
            
            $
            40
            
            
            $
            48





Note
4 – Comprehensive Income





Accounting principles generally
accepted in the United States of America require that recognized revenue,
expenses, gains, and losses be included in net income.  Although
certain changes in assets and liabilities, such as unrealized gains and losses
on available for sale securities and gains and losses and past




6
 Index


service
liabilities for pension plans, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.




The components of other comprehensive
income (loss) and related tax effects for the three and nine months ended
September 30, 2008 and 2007 are as follows:




Three
      Months Ended
                  September,
      30
              
              
              Nine
      Months Ended
                  September,
      302008
              
              
              2007
              
              
              2008
              
              
              2007(In
      Thousands)Unrealized
      holding gains on securities available for sale
              
              $
              4
              
              
              $
              5
              
              
              $
              1
              
              
              $
              5Reclassification adjustment for Directors’ retirement plan pension gains
      and past service liability recognized in pension expense
              
              
              1
              
              
              
              2
              
              
              
              4
              
              
              
              (23
              )Other
      comprehensive income (loss) before tax
              
              
              5
              
              
              
              7
              
              
              
              5
              
              
              
              (18
              )Income
      tax effect
              
              
              (2
              )
              
              
              (3
              )
              
              
              (2
              )
              
              
              7Net
      of Tax Amount
              
              $
              3
              
              
              $
              4
              
              
              $
              3
              
              
              $
              (11
              )








At September
30, 2008 and 2007, the components of accumulated other comprehensive loss are as
follows:





2008
            
            
            2007(In
      Thousands)Unrealized
      gain on securities available for sale (net of tax effect 2008 ($2); 2007
      ($1))
            
            $
            2
            
            
            $
            1Net
      gains and past service liability for the Directors’ retirement plan (net
      of tax effect 2008 ($5); 2007 ($9))
            
            
            (8
            )
            
            
            (14
            )$
            (6
            )
            
            $
            (13
            )








Note
5 – Employee Stock Ownership Plan (“ESOP”)





On June
28, 2007, the Bank established an ESOP which acquired 93,315 shares of the
Company’s common stock in the stock offering with funds provided by a loan from
the Company. The stock acquired by the ESOP is shown as a reduction of
stockholders’ equity in the accompanying consolidated balance sheets. The ESOP
loan will be repaid principally from the Bank’s contributions to the ESOP in
annual payments through 2027 at a fixed interest rate of 8.25%. Shares are
released to participants proportionately as the loan is repaid. The Bank will
recognize compensation benefit expense as shares are committed for release at
their current market price. The difference between the market price and the cost
of shares committed to be released is recorded as an adjustment to paid-in
capital. Dividends on allocated shares would be recorded as a reduction of
retained earnings and dividends on unallocated shares would be recorded as a
reduction of debt. The Company committed to release 3,499 shares and 3,496
shares to the ESOP during the nine months ended September 30, 2008 and 2007. The
Company recognized $24,000 and $33,000 of compensation expense related to this
plan for the nine months ended September 30, 2008 and 2007. Unallocated ESOP
shares are not “outstanding” for purposes of earnings per share
calculations.





7
 Index


Note
6 – Earnings Per Share





The Company had 100 shares of common
stock issued and outstanding January 1, 2007 to June 28,
2007.  On June 28, 2007, the Company issued 2,380,500 shares of
common stock and cancelled 100 shares.





Basic earnings per common share is
calculated by dividing net income by the weighted-average number of common
shares outstanding during the period. The 1,309,275 common shares issued to
Hometown Bancorp MHC are assumed to be outstanding for all periods represented,
consistent with the provisions of Statement of Financial Accounting Standards
(“SFAS”) No.128, Earnings per
Share, pertaining to changes in capital structure. The 1,071,225 shares
issued to the public are included in the weighted average common shares
outstanding calculation since the closing of the stock offering on June 28,
2007. Diluted earnings per common share is computed in a manner similar to basic
earnings per share, except that the weighted average number of common shares
outstanding is increased to include the incremental common shares  (as
computed using the treasury stock method) that would have been outstanding if
all potentially dilutive common stock equivalents were issued during the period.
Common stock equivalents may include restricted stock awards and stock options.
The Company has a simple capital structure as it has not granted any restricted
stock awards or stock options and, during the three and nine months ended
September 30, 2008 and 2007, had no potentially dilutive common stock
equivalents.





Note
7 – Estimates





The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of income and expenses during the reporting period.  Actual results
could differ from those estimates.  Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses.





Note
8 – Fair Value Measurements





The Financial Accounting StandardsBoard (FASB) issued SFAS
No. 157, “Fair Value Measurements,” which establishes a fair value hierarchy
that prioritizes the inputs to valuation methods used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1 measurements) and the
lowest priority to unobservable inputs (Level 3 measurements). The three levels
of fair value hierarchy under SFAS No. 157 are as follows:





Level
      1:
            Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities.





Level
      2:
            Quoted
      prices in markets that are not active, or inputs that are observable
      either directly or indirectly, for substantially the full term of the
      asset or liability.





Level
      3:
            Prices
      or valuation techniques that require inputs that are both significant to
      the fair value measurement and unobservable (i.e. supported with little or
      no market activity).





An asset or liability’s level within
the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement.





For assets measured at fair value on a
recurring basis, the fair value measurement by level within the fair value
hierarchy used at September 30, 2008 is as follows:








8
 Index











Description
            September
      30, 2008
            (Level
      1)
              Quoted
      Prices in
              Active
      Markets for
              Identical
      Assets
            (Level
      2)
              Significant
      Other
              Observable
      Inputs
            (Level
      3)
              Significant
              Unobservable
              Inputs(In
      thousands)Securities
      available for sale
            $  1,004
            $      -
            $  1,004
            $      -





Fair
values of available for sale securities are based on quoted market prices of
comparable instruments. When necessary, the Company utilizes matrix pricing from
a third party pricing vendor to determine fair value pricing. Matrix prices are
based on quoted prices for securities with similar coupons, ratings, and
maturities, rather than on specific bids and offers for the designated
security.





Assets
and liabilities measured at fair value on a nonrecurring basis are summarized
below:





Description
            September
      30, 2008
            (Level
      1)
              Quoted
      Prices in
              Active
      Markets for
              Identical
      Assets
            (Level
      2)
              Significant
      Other
              Observable
      Inputs
            (Level
      3)
              Significant
              Unobservable
              Inputs(In
      thousands)Impaired
      loans
            $    650
            $      -
            $      -
            $    650





Impaired
loans are those that are accounted for under SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, in which the Company has measured impairment
generally based on the fair value of the loan’s collateral. Fair value is
generally determined based upon independent third party appraisals of the
properties or other indications of value based on recent comparable sales of
similar properties, or discounted cash flows based upon expected proceeds. These
assets are included in Level 3 fair values, based upon the lowest level of input
that is significant to the fair value measurements. The fair value consists of
loan balances less their valuation allowances as determined under SFAS No.
114.  Impaired loans, which are measured for impairment using the fair
value of the collateral for collateral dependent loans, had a carrying amount of
$808,000, with a valuation allowance of $158,000.





Note
9 - Recent Accounting Pronouncements





FASB Staff Position (FSP)140-3





In
February 2008, the FASB issued  FSP FAS 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions.” This FSP
addresses the issue of whether or not these transactions should be viewed as two
separate transactions or as one "linked" transaction. The FSP includes a
"rebuttable presumption" that presumes linkage of the two transactions unless
the presumption can be overcome by meeting certain criteria. The FSP will be
effective for fiscal years beginning after November 15, 2008 and will apply only
to original transfers made after that date; early adoption will not be allowed.
The Company believes that this new pronouncement will not have any impact on the
Company’s consolidated financial statements in future periods.





SFAS
No. 141(R)





SFAS No.
141 (R) “Business Combinations” was issued in December of 2007. This Statement
establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree. The Statement also provides guidance for recognizing and measuring the
goodwill acquired in the business combination and determines what information to
disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. The guidance will become
effective January 1, 2009. This


9
 Index


new
pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.





SFAS
No. 160





SFAS No.
160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment
of ARB No. 51” was issued in December of 2007. This Statement establishes
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. The guidance will become
effective January 1, 2009. The Company believes that this new pronouncement will
not have any impact on the Company’s consolidated financial statements in future
periods.





SFAS
No. 162





In May
2008, the FASB issued SFAS No.162, “The Hierarchy of General Accepted Accounting
Principles.” This Statement identifies the sources of accounting principles and
the framework for selecting the principles used in the preparation of financial
statements. This Statement is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity with General Accepted Accounting
Principles.” The Company believes that this new pronouncement will not have a
material impact on the Company’s consolidated financial statements in future
periods.





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





Management’s discussion and analysis of
the financial condition and results of operations is intended to assist in
understanding our financial condition and results of operations.  The
information contained in this section should be read in conjunction with the
unaudited consolidated financial statements and the notes thereto, appearing in
Part I, Item 1 of this report.





Forward-Looking
Statements





This quarterly report contains
forward-looking statements that are based on assumptions and may describe our
future plans, strategies and expectations.  These forward-looking
statements are generally identified by use of the words “believe,” “expect,”
“intend,” “anticipate,” “estimate,” “project” or similar
expressions.





Our
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain.  Factors which could have a material adverse
effect on our operations include, but are not limited to, changes in interest
rates, national and regional economic conditions, legislative and regulatory
changes, monetary and fiscal policies of the U.S. government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality and composition
of our loan and investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in our market area, changes in real
estate market values in our area, and changes in relevant accounting principles
and guidelines.





These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements.  Except as required by applicable law or regulation, we do
not undertake, and specifically disclaim any obligation, to release publicly the
result of any revisions that may be made to any forward-looking statements to
reflect events or circumstances after the date of the statements or to reflect
the occurrence of anticipated or unanticipated events.





Critical
Accounting Policies




We consider accounting policies
involving significant judgments and assumptions by management that have, or
could have, a material impact on the carrying value of certain assets,
liabilities or on income to be critical accounting policies.  We have
identified the allowance for loan losses as our critical accounting
policy.


10
 Index


Allowance for
Loan Losses.  The allowance for loan losses is established
through provisions for loan losses charged against income.  Loans
deemed to be uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.




The allowance for loan losses is
maintained at a level considered adequate to provide for losses that can be
reasonably anticipated.  Management’s periodic evaluation of the
adequacy of the allowance is based on the Bank’s past loan loss experience,
known and inherent credit risks in the portfolio, adverse situations that may
affect the borrower’s ability to repay, the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions, and
other relevant factors.  This evaluation is inherently subjective as
it requires material estimates that may be susceptible to significant revision
as more information becomes available.




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




A loan is considered impaired when,
based on current information and events, it is probable that the Bank will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement.  Factors
considered by management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal and
interest payments when due.  Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired.  Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest
owed.  Impairment is measured on a loan by loan basis for commercial,
commercial real estate and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.




Large groups of smaller balance
homogeneous loans are collectively evaluated for
impairment.  Accordingly, the Bank does not separately identify
individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement or
non-performing.




General





Walden Federal operates from six
offices in Orange County, New York. As part of the Bank’s growth strategy to
expand its presence in other selected markets in Orange County, the Bank opened
its sixth office in the Town of Newburgh in September 2007. Walden Federal is
primarily engaged in the business of attracting deposits from the general public
and using 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 term)
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.





The Company completed its stock
offering on June 28, 2007, during which the Company sold 1,071,225 shares of
common stock to subscribers at a price of $10 per share. The Company also issued
1,309,275 shares of its common stock to Hometown Bancorp MHC.


11
 Index


Balance
Sheet Analysis





Overview.Total assets
increased $14.6 million, or 11.0%, to $147.3 million at September 30, 2008,
reflecting the results of our branch expansion and the growth of our loan
portfolio.  In the nine months ended September 30, 2008, the loan
portfolio grew $9.9 million, or 8.1%, with the growth concentrated primarily in
the residential and land loan portfolios.





Asset growth during the nine months
ended September 30, 2008 was primarily funded through an increase in
deposits.  During the nine months ended September 30, 2008, deposits
grew $10.6 million to $122.7 million. The increase in deposits was primarily due
to our branch expansion.  We had borrowings at September 30, 2008, of
$3.0 million, consisting of FHLB advances, as compared to no borrowings at
December 31, 2007. Cash and cash equivalents increased by $3.0 million to $7.0
million at September 30, 2008.


Premise
and equipment increased by $1.4 million to $4.1 million at September 30, 2008,
primarily as a result of the Bank purchasing a commercial building in the Town
of Newburgh. The building consists of four rental spaces, one of which is a
branch office of the Bank. This building will enable the Bank to relocate its
commercial loan department and provide a source of income from the other rental
spaces.





Total stockholders’ equity increased
$499,000 during the nine months ended September 30, 2008 to $19.0 million due
primarily to net income of $552,000, partially offset by common stock
repurchases of approximately $80,000.





Comparison
      of Financial Condition at September 30, 2008 and December 31,
      2007





Loans.  At
September 30, 2008, total loans, net, were $131.4 million, or 89.2% of total
assets as compared with $121.5 million or 91.6% of total assets at December 31,
2007.  In the nine months ended September 30, 2008, the loan portfolio
grew $9.9 million, or 8.1%, with the growth  particularly focused in
one-to four-family residential real estate loans which increased by $10.7
million, and land loans which increased by $2.2 million, offset by a decrease in
commercial business loans of $3.2 million.  The growth in the loan
portfolio has slowed in 2008 due primarily to decreased mortgage originations in
our market area and a decline in the local economy.  The Bank does not
make or hold any subprime loans.





Nonperforming
Assets.  The following table provides information with respect
to our non-performing assets at the dates indicated.  The Company had
no troubled debt restructurings as of or during the nine months ended September
30, 2008 or at December 31, 2007.  There were no accruing loans past
due 90 days or more as of September 30, 2008 or December 31,
2007.


12
 Index





(Dollars
      in thousands)
            
            September
      30,
              2008
            
            
            December
      31,
              2007Nonaccrual
      loans:One-
      to four-family residential real estate
            
            $
            1,218
            
            
            $
            86Construction
            
            
            —
            
            
            
            —Multi-family
      and commercial real estate
            
            
            579
            
            
            
            —Land
            
            
            16
            
            
            
            16Commercial
            
            
            —
            
            
            
            —Consumer
            
            
            19
            
            
            
            22Total
            
            
            1,832
            
            
            
            124Foreclosed
      real estate
            
            
            —
            
            
            
            —Other
      nonperforming assets
            
            
            —
            
            
            
            —Total
      nonperforming assets
            
            
            1,832
            
            
            
            124Troubled
      debt restructurings
            
            
            —
            
            
            
            —Troubled
      debt restructurings and
              total
      nonperforming assets
            
            $
            1,832
            
            
            $
            124Total
      nonperforming loans to total loans
            
            
            1.39
            %
            
            
            0.10
            %Total
      nonperforming loans to total assets
            
            
            1.24
            
            
            
            0.09Total
      nonperforming assets and troubled
              debt
      restructurings to total assets
            
            
            1.24
            
            
            
            0.09





Included
in the one-to four-family residential real estate loans are three first liens on
residential properties totaling $251,000, all with low loan to value ratios. The
Company always works with the owners to avoid foreclosure. Four other loans
totaling $434,000 are secured by junior liens of which $225,000 was paid in full
in October 2008, and one loan totaling $533,000 on a spec home loan is secured
by one-to-four family residential real estate. Included in the multi-family and
commercial real estate loans are two loans totaling $579,000 secured by
non-residential properties. The $16,000 land loan is secured by a residential
building lot.





Included
in the non-performing loans above are four loans totaling $808,000 for which
management evaluated the value of the collateral securing the loans and
determined the loans to have insufficient collateral. A specific reserve of
$158,000 was allocated on these loans. All other non-performing loans were
determined to have sufficient collateral.





Securities.The
investment securities portfolio was $2.3 million, or 1.6% of total assets, at
September 30, 2008 compared to $2.8 million or 2.1% of total assets, at December
31, 2007.  Our investment portfolio consists primarily of U.S.
Government and agency securities and GNMA and FHLMC mortgage-backed securities.
The decrease of $488,000 in investment securities was primarily due to principal
repayments on the mortgage-backed securities.





Deposits.  Our
primary source of funds is retail deposit accounts, which are comprised of
noninterest-bearing demand accounts, interest-bearing demand accounts, money
market accounts, savings accounts and certificates of deposit.  During
the nine months ended September 30, 2008, deposits grew $10.6 million to $122.7
million. The increase was predominately in certificates of deposit which grew by
$10.0 million and with a net increase of $565,000 in core deposits.





Borrowings.We
utilize borrowings from the Federal Home Loan Bank of New York to supplement our
supply of funds for loans and investments.  We are able to utilize
borrowings when necessary or advantageous as an alternative to deposits when a
pricing advantage exists, as a temporary source of funds to meet liquidity needs
or to manage our asset and liability position.  The Bank had $2.3
million in average balances in borrowings during the nine month period ended
September 30, 2008. We had borrowings at September 30, 2008 of $3.0 million
compared with no borrowings at December 31, 2007.





Stockholders’
Equity.Total stockholders’ equity increased $499,000 from
$18.5 million at December 31, 2007 to $19.0 million at September 30, 2008.
Equity increased primarily due to earnings of $552,000 for the nine months ended
September 30, 2008, partially offset by common stock repurchases of
approximately $80,000.


13
 Index





Results
of Operations for the Three Months Ended September 30, 2008 and
2007





Financial
Highlights.Net income decreased $55,000, or 22.2%, to $193,000 for the
three months ended September 30, 2008 compared to $248,000 for the same period
in the prior year.  The decrease reflected an increase in the
provision for loan losses and higher noninterest expenses as a result of our
branch expansion, partially offset by higher net interest income and
non-interest income.





Net Interest
Income.Net interest income increased $123,000, or 8.0%, to
$1.7 million during the three months ended September 30, 2008 compared to $1.5
million for the prior year period, primarily as a result of a reduction in
interest expense and an increase in interest income on loans offset by a
decrease in securities and other interest income. Interest income on loans
increased $59,000, or 2.8%, to $2.2 million during the three months ended
September 30, 2008 as the average balance of the loan portfolio grew $18.7
million, or 16.7%, to $130.5 million, while the average yield on the loan
portfolio decreased 90 basis points to 6.69% for the three months ended
September 30, 2008.  Loan growth was driven by an increase in one- to
four-family residential real estate loans and land loans.  The
decrease in the average yield on loans was mostly the result of the decreases in
market interest rates.





Interest income on investment
securities decreased $121,000 for the three months ended September 30, 2008 to
$25,000 compared to the prior year period, as the average balance of the
securities portfolio decreased $9.1 million during the three months ended
September 30, 2008 to $2.5 million compared to $11.6 million in the prior year
period, and the average yield on investment securities decreased 100 basis
points to 4.04%.  The decrease in the investment portfolio primarily
reflected the call of a $9.0 million U.S. Treasury in September 2007, of which
most of the proceeds were used to fund loan growth in 2007.





The shift in the mix of
interest-earning assets, combined with lower market rates, decreased the average
yield on interest earning assets to 6.49% during the three months ended
September 30, 2008, compared to 7.34% for the three months ended September 30,
2007.





Interest expense decreased from
$772,000 for the three months ended September 30, 2007, to $567,000 for the
three months ended September 30, 2008, a decrease of $205,000, or 26.6%. The
primary reason for the decrease was maturing certificates of deposit repricing
to lower interest rates. The average balance of interest-bearing deposits during
the three months ended September 30, 2008 increased $9.4 million, or 10.1% to
$101.7 million, compared with $92.3 million in the prior year period, due
primarily to an increase in average balances of certificates of deposit of $6.1
million, money market accounts of $1.6 million and savings accounts of $1.6
million. Decreases in market interest rates in late 2007 and early 2008,
combined with the shift in the deposit mix, decreased the average cost of
deposits to 2.14%, for the three months ended September 30, 2008, compared to
3.26% for the three months ended September 30, 2007.





For the three months ended September
30, 2008, our net interest margin decreased 5 basis points to 4.84% from 4.89%
for the prior year period. The interest rate spread increased by 29 basis points
to 4.34% for the three months ended September 30, 2008 from 4.05% for the prior
year period.  The increase in our net interest rate spread for the
quarter was primarily due to the recent decline in short-term interest rates
implemented by the Federal Open Market Committee, resulting in repricing of many
of the Company’s interest-bearing assets and liabilities.





The
following table summarizes average balances and average yields and costs of
interest-earning assets and interest-bearing liabilities for the three months
ended September 30, 2008 and 2007.





14
 Index





Three Months Ended
      September 30,2008
            
            
            2007(Dollars
      in thousands)
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              CostAssets:Interest-earning
      assets:Loans
            
            $
            130,481
            
            
            $
            2,182
            
            
            
            6.69
            %
            
            $
            111,822
            
            
            $
            2,123
            
            
            
            7.59
            %Investment
      securities
            
            
            2,477
            
            
            
            25
            
            
            
            4.04
            
            
            
            11,577
            
            
            
            146
            
            
            
            5.04Other
      interest-earning assets
            
            
            4,869
            
            
            28
            
            
            
            2.30
            
            
            
            2,909
            
            
            48
            
            
            
            6.60Total
      interest-earning assets
            
            
            137,827
            
            
            
            2,235
            
            
            
            6.49
            
            
            
            126,308
            
            
            
            2,317
            
            
            
            7.34Non-interest-earning
      assets
            
            
            6,013
            
            
            
            
            
            
            
            
            
            
            
            5,574Total
      assets
            
            $
            143,840
            
            
            
            
            
            
            
            
            
            
            $
            131,882Liabilities
      and stockholders’ equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            6,268
            
            
            
            5
            
            
            
            0.32
            
            
            $
            6,200
            
            
            
            4
            
            
            
            0.26Money
      market accounts
            
            
            13,212
            
            
            
            53
            
            
            
            1.60
            
            
            
            11,563
            
            
            
            65
            
            
            
            2.25Savings
      accounts
            
            
            14,854
            
            
            
            20
            
            
            
            0.54
            
            
            
            13,286
            
            
            
            17
            
            
            
            0.51Certificates
      of deposit
            
            
            67,321
            
            
            
            467
            
            
            
            2.77
            
            
            
            61,255
            
            
            
            666
            
            
            
            4.35Borrowings
            
            
            3,655
            
            
            22
            
            
            
            2.41
            
            
            
            1,545
            
            
            20
            
            
            
            5.18Total
      interest-bearing liabilities
            
            
            105,310
            
            
            
            567
            
            
            
            2.15
            
            
            
            93,849
            
            
            
            772
            
            
            
            3.29Non-interest-bearing
      demand deposits
            
            
            17,261
            
            
            
            
            
            
            
            
            
            
            
            17,586Other
      non-interest-bearing liabilities
            
            
            2,246
            
            
            
            
            
            
            
            
            
            
            
            2,272Total
      liabilities
            
            
            124,817
            
            
            
            
            
            
            
            
            
            
            
            113,707Stockholders’
      equity
            
            
            19,023
            
            
            
            
            
            
            
            
            
            
            
            18,175Total
      liabilities and stockholders’ equity
            
            $
            143,840
            
            
            
            
            
            
            
            
            
            
            $
            131,882Net
      interest income
            
            
            
            
            
            $
            1,668
            
            
            
            
            
            
            
            
            
            
            $
            1,545Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            4.34
            
            
            
            
            
            
            
            
            
            
            
            4.05Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            4.84
            
            
            
            
            
            
            
            
            
            
            
            4.89Average
      interest-earning assets to
              average
      interest-bearing liabilities
            
            
            130.88
            %
            
            
            
            
            
            
            
            
            
            
            134.59
            %





Provision for
Loan Losses.  The provision for loan losses was $134,000 for
the three months ended September 30, 2008 compared to $66,000 for the three
months ended September 30, 2007.  The increase in the provision
reflected the increase in the levels of nonperforming loans and weakening
economic conditions. Approximately $108,000 of the $134,000 provision for loan
losses was related to management’s evaluation of four impaired loans that
resulted in specific allowance allocations. Nonperforming loans as a percentage
of total loans increased from 0.10% at December 31, 2007, to 1.39% as of
September 30, 2008, primarily because of an increase of $1.7 million in
nonperforming loans to $1.8 million as of September 30, 2008.





Non-Interest
Income.  Non-interest income increased $50,000, or 12.0%, to
$468,000 for the three months ended September 30, 2008 as compared to the prior
year period.  Contributing primarily to the increase in non-interest
income for the three months ended September 30, 2008, was a reduction of an
accrued liability due to the settlement of a litigation matter of approximately
$83,000, offset by a decrease in mortgage banking income, net, of $18,000 for
the three months ended September 30, 2008 as compared to the same period in
2007, as a result of the decrease in the volume of mortgages sold during the
period and the gains derived from these sales.








Non-Interest
Expenses.  Non-interest expenses increased $180,000, or 12.0%,
to $1.7 million, during the three months ended September 30, 2008 as compared to
the prior year period. The primary reason for the increase in non-interest
expenses during the comparable periods was the expenses associated with
operating a new branch office and the related compensation and benefit expenses
for increased branch and support staffing. Non-interest expenses included
expenses of $51,000 during the third quarter of 2008 for the Bank’s newest
branch opened in September 2007 in the Town of Newburgh. Professional fees
increased by $29,000 during the three months ended September 30, 2008, primarily
due to expenses relating to being a public company.


15
 Index





Income Tax
Expense.The
income tax expense was $131,000 for the three months ended September 30, 2008 as
compared to $151,000 for the three months ended September 30, 2007. Lower levels
of pre-tax income have resulted in a decrease in income tax expense. The
effective tax rate was 40.4% for the three months ended September 30, 2008 and
37.8% for the three months ended September 30, 2007.





Results
of Operations for the Nine Months Ended September 30, 2008 and 2007





Financial
Highlights.Net income decreased $81,000, or 12.8%, to $552,000 for the
nine months ended September 30, 2008 compared to $633,000 for the same period in
the prior year.  The primary reasons for the decrease were an increase
in the provision for loan losses and higher noninterest expenses as a result of
our branch expansion, partially offset by higher net interest
income.





Net Interest
Income.Net interest income increased $438,000, or 10.3%, to
$4.7 million during the nine months ended September 30, 2008 compared to $4.3
million for the prior year period, primarily as a result of a reduction in
interest expense and an increase in interest income on loans offset by a
decrease in securities income.





Interest
income on loans increased $379,000, or 6.3%, to $6.4 million during the nine
months ended September 30, 2008 as the average balance of the loan portfolio
grew $19.5 million, or 18.4%, to $125.9 million, while the average yield on the
loan portfolio decreased 77 basis points to 6.79% for the nine months ended
September 30, 2008.  Loan growth was driven by an increase in one- to
four-family residential real estate loans and land loans. The decrease in the
average yield on loans was mostly the result of the decreases in the prime
interest rate since September 2007.





Interest income on investment
securities decreased $356,000 for the nine months ended September 30, 2008 to
$84,000 compared to the prior year period, as the average balance of the
securities portfolio decreased $9.2 million, during the nine months ended
September 30, 2008 to $2.6 million compared to $11.8 million in the prior year
period, and the average yield on investment securities decreased 69 basis points
to 4.26%.  The decrease in the investment portfolio primarily
reflected the call of a $9.0 million U.S. Treasury in September 2007, of which
most of the proceeds were used to fund loan growth in 2007.





The shift in the mix of
interest-earning assets was more than offset by lower market rates, which
decreased the average yield on interest earning assets to 6.65% during the nine
months ended September 30, 2008, compared to 7.25% for the nine months ended
September 30, 2007.





Interest expense decreased $471,000,
from $2.3 million in the nine months ended September 30, 2007 to $1.9 million,
or 20.1% for the nine months ended September 30, 2008. The primary reason for
the decrease was maturing certificates of deposit repricing to lower interest
rates. The average balance of interest-bearing deposits during the nine months
ended September 30, 2008 increased $4.9 million, or 5.3% to $97.6 million,
compared with $92.7 million in the prior year period, due primarily to a $5.3
million increase in the average balance of certificates of deposit, primarily
due to customers’ preference for higher rates.  This increase was
offset by a $1.3 million average balance decline in money market
accounts.  Decreases in market interest rates in late 2007 and early
2008, decreased the average cost of deposits to 2.50%, for the nine months ended
September 30, 2008, compared to 3.24% for the nine months ended September 30,
2007.





For the nine months ended September 30,
2008, our net interest margin increased 8 basis points to 4.76% from 4.68% for
the prior year period and the interest rate spread increased by 18 basis points
to 4.16% for the nine months ended September 30, 2008 compared to 3.98% for the
nine months ended September 30, 2007.





On
September 18, 2007, the Federal Open Market Committee of the Federal Reserve
Board of Governors (the “FOMC”) reduced the overnight lending rate (the “fed
funds rate”) by 50 basis points to 4.75%.  This was the first
reduction in the fed funds rate in 13 quarters.  As of September
30, 2008, the FOMC had reduced the fed funds rate by an additional 275
basis points to 2.00%. Although the reductions in the fed


16
 Index


funds
rate triggered a reduction in market rates of interest, the impact of the FOMC's
rate reduction is unknown at this time.If rates on deposits
reprice slower than rates on our loans and investments, we could experience
compression of our net interest margin which could have a negative effect on our
profitability.





The
following table summarizes average balances and average yields and costs of
interest-earning assets and interest-bearing liabilities for the nine months
ended September 30, 2008 and 2007.





Nine Months Ended
      September 30,2008
            
            
            2007(Dollars
      in thousands)
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              CostAssets:Interest-earning
      assets:Loans
            
            $
            125,938
            
            
            $
            6,415
            
            
            
            6.79
            %
            
            $
            106,393
            
            
            $
            6,036
            
            
            
            7.56
            %Investment
      securities
            
            
            2,629
            
            
            
            84
            
            
            
            4.26
            
            
            
            11,846
            
            
            
            440
            
            
            
            4.95Other
      interest-earning assets
            
            
            3,076
            
            
            67
            
            
            
            2.90
            
            
            
            3,167
            
            
            123
            
            
            
            5.18Total
      interest-earning assets
            
            
            131,643
            
            
            
            6,566
            
            
            
            6.65
            
            
            
            121,406
            
            
            
            6,599
            
            
            
            7.25Non-interest-earning
      assets
            
            
            5,861
            
            
            
            
            
            
            
            
            
            
            
            5,463Total
      assets
            
            $
            137,504
            
            
            
            
            
            
            
            
            
            
            $
            126,869Liabilities
      and stockholders’ equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            6,181
            
            
            
            14
            
            
            
            0.30
            
            
            $
            6,291
            
            
            
            12
            
            
            
            0.25Money
      market accounts
            
            
            11,855
            
            
            
            151
            
            
            
            1.70
            
            
            
            13,163
            
            
            
            233
            
            
            
            2.36Savings
      accounts
            
            
            14,472
            
            
            
            61
            
            
            
            0.56
            
            
            
            13,393
            
            
            
            50
            
            
            
            0.50Certificates
      of deposit
            
            
            65,091
            
            
            
            1,601
            
            
            
            3.28
            
            
            
            59,840
            
            
            
            1,955
            
            
            
            4.36Stock
      subscription funds
            
            
            -
            
            
            
            -
            
            
            
            0.00
            
            
            
            532
            
            
            
            3
            
            
            
            0.75Borrowings
            
            
            2,348
            
            
            43
            
            
            
            2.44
            
            
            
            2,164
            
            
            88
            
            
            
            5.42Total
      interest-bearing liabilities
            
            
            99,947
            
            
            
            1,870
            
            
            
            2.49
            
            
            
            95,383
            
            
            
            2,341
            
            
            
            3.27Non-interest-bearing
      demand deposits
            
            
            16,777
            
            
            
            
            
            
            
            
            
            
            
            17,463Other
      non-interest-bearing liabilities
            
            
            1,954
            
            
            
            
            
            
            
            
            
            
            
            2,027Total
      liabilities
            
            
            118,678
            
            
            
            
            
            
            
            
            
            
            
            114,873Stockholders’
      equity
            
            
            18,826
            
            
            
            
            
            
            
            
            
            
            
            11,996Total
      liabilities and stockholders’ equity
            
            $
            137,504
            
            
            
            
            
            
            
            
            
            
            $
            126,869Net
      interest income
            
            
            
            
            
            $
            4,696
            
            
            
            
            
            
            
            
            
            
            $
            4,258Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            4.16
            
            
            
            
            
            
            
            
            
            
            
            3.98Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            4.76
            
            
            
            
            
            
            
            
            
            
            
            4.68Average
      interest-earning assets to
              average
      interest-bearing liabilities
            
            
            131.71
            %
            
            
            
            
            
            
            
            
            
            
            127.28
            %





Provision for
Loan Losses.  The provision for loan losses was $234,000 for
the nine months ended September 30, 2008 compared to $160,000 for the nine
months ended September 30, 2007.  The increase in the provision
reflects the increase in the levels of nonperforming loans and weakening
economic conditions.  Approximately $158,000 of the $234,000 provision
for loan losses was related to management’s evaluation of four impaired loans
that resulted in specific allowance allocations.  Nonperforming loans
as a percentage of total loans increased from 0.10% at December 31, 2007, to
1.39% as of September 30, 2008, primarily because of an increase of $1.7 million
in nonperforming loans to $1.8 million as of September 30, 2008.





Non-Interest
Income.  Non-interest income increased $25,000, or 1.9%, to
$1.3 million for the nine months ended September 30, 2008 as compared to the
prior year period.  A reduction of an accrued liability due to the
settlement of a litigation matter of approximately $164,000 for the nine months
ended September 30, 2008 was offset by decreases in banking fees and service
charges of $32,000 as compared to the nine months ended September 30, 2007, as a
result of customer preference for service charge free accounts and the
competitive banking environment. In addition, mortgage banking income, net,
decreased $74,000 for the nine months ended September 30, 2008 as compared to
the same period in 2007, as a result of the decrease in the volume of mortgages
sold during the period and the gains derived from these sales.


17
 Index





Non-Interest
Expenses.  Non-interest expenses increased $511,000, or 11.7%,
to $4.9 million, during the nine months ended September 30, 2008 as compared to
the prior year period. The primary reason for the increase in non-interest
expenses during the comparable periods was the expenses associated with
operating a new branch office and the related compensation and benefit expenses
for increased staffing. Non-interest expenses include expenses of $219,000
during the first nine months of 2008 for the Bank’s newest branch opened in
September 2007 in the Town of Newburgh. Professional fees increased by $130,000
during the nine months ended September 30, 2008, primarily due to expenses
relating to being a public company.





Income Tax
Expense.Income
tax expense was $350,000 for the nine months ended September 30, 2008 as
compared to $391,000 for the nine months ended September 30, 2007. Lower levels
of pre-tax income have resulted in a decrease in income tax expense. The
effective tax rate was 38.8% for the nine months ended September 30, 2008 and
38.2% for the nine months ended September 30, 2007.





Liquidity
and Capital Management





Liquidity
Management.  Liquidity is the ability to meet current and
future financial obligations of a short-term nature. Our primary sources of
funds consist of deposit inflows, loan repayments, maturities of and payments on
investment securities and borrowings from the Federal Home Loan Bank of New
York.  While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.





We regularly adjust our investments in
liquid assets based upon our assessment of (1) expected loan demand,
(2) expected deposit flows, (3) yields available on interest-earning
deposits and securities and (4) the objectives of our asset/liability management
policy.





Our most liquid assets are cash and
cash equivalents.  The levels of these assets depend on our operating,
financing, lending and investing activities during any given
period.  At September 30, 2008, cash and cash equivalents totaled $7.0
million.  In addition, at September 30, 2008, we had arrangements to
borrow up to $26.9 million from the Federal Home Loan Bank of New
York.  On September 30, 2008, we had short-term advances outstanding
of $3.0 million.





A significant use of our liquidity is
the funding of loan originations.  At September 30, 2008, we had $23.8
million in loan commitments outstanding, which primarily consisted of $4.0
million in unadvanced portions of construction loans, $5.2 million in
commitments to fund one- to four-family residential real estate loans, $3.1
million in commercial real estate and business loans, $2.9 million in
unused home equity lines of credit and $7.5 million in unused commercial
lines of credit.  Historically, many of the commitments expire without
being fully drawn; therefore, the total amount of commitments does not
necessarily represent future cash requirements.  Another significant
use of our liquidity is the funding of deposit
withdrawals.  Certificates of deposit due within one year of September
30, 2008 totaled $71.6 million, or 97.5% of certificates of
deposit.  The large percentage of certificates of deposit that mature
within one year reflects customers’ hesitancy to invest their funds for long
periods in the recent low interest rate environment.  If these
maturing deposits do not remain with us, we will be required to seek other
sources of funds, including other certificates of deposit and
borrowings.  Depending on market conditions, we may be required to pay
higher than market rates on such deposits or other borrowings than we currently
pay on the certificates of deposit due on or before September 30,
2009.  We believe, however, based on past experience that a
significant portion of our certificates of deposit will remain with
us.  We have the ability to attract and retain deposits by adjusting
the interest rates offered.





Capital
Management.The Bank is subject to various regulatory capital
requirements administered by the Office of Thrift Supervision, including a
risk-based capital measure.  The risk-based capital guidelines include
both a definition of capital and a framework for calculating risk-weighted
assets by assigning balance


18
 Index


sheet
assets and off-balance sheet items to broad risk categories.  At
September 30, 2008, the Bank exceeded all of our regulatory capital requirements
and is considered “well capitalized” under regulatory guidelines.





We may
use capital management tools such as cash dividends and common share
repurchases.  However, under the Office of Thrift Supervision
regulations, we were not allowed to repurchase any shares during the first year
following the offering, except under limited circumstances.





On July
28, 2008, the Company announced that it approved a stock repurchase program to
purchase up to 5% of its outstanding shares (excluding shares held by Hometown
Bancorp, MHC, the Company’s mutual holding company), or up to 53,561 shares for
a period of up to 12 months. The repurchases will depend on certain factors,
including but not limited to, market conditions and prices, the Company’s
liquidity requirements and alternative uses of capital. Any repurchases will be
held as treasury stock and will be available for general corporate purposes. The
Company anticipates conducting such repurchases in accordance with a Rule 10b5-1
trading plan administered by a broker-dealer. Details of repurchases through
September 30, 2008 are included in Part II. Other Information, Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.





Off-Balance
Sheet Arrangements





In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with
accounting principles generally accepted in the United States of America, are
not recorded in our financial statements.  These transactions involve,
to varying degrees, elements of credit, interest rate and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and
take the form of loan commitments and lines and letters of credit.





For the nine months ended September 30,
2008, we did not engage in any off-balance sheet transactions reasonably likely
to have a material effect on our financial condition, results of operations or
cash flows.





Item
3.  Quantitative and Qualitative Disclosures About
Market Risk





Not applicable because the Company is a
smaller reporting company.





Item
4.  Controls and Procedures





The
Company’s management, including the Company’s principal executive officer and
principal financial officer, have evaluated the effectiveness of the Company’s
“disclosure controls and procedures,” as such term is defined in Rule 13a-15(e)
promulgated under the Securities 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, the Company’s disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company 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 the Company’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. The report of
management’s attestation regarding internal controls over financial reporting
will be required for the first time with this year’s annual report since the
Company had a transition period that was established by rules of the Securities
and Exchange Commission for newly public companies.


19
 Index





PART II.  OTHER INFORMATION





Item
1.   Legal Proceedings





Hometown
Bancorp is not involved in any pending legal proceedings.  Walden
Federal is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business.  Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to its financial condition and results of operations.





Item
1A. Risk Factors





Not applicable because the Company is a
smaller reporting company.





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





On July
28, 2008, the Board of Directors of the Company announced a stock repurchase
program pursuant to which the Company intends to purchase up to 5% of its
outstanding shares (excluding shares held by Hometown Bancorp, MHC, the
Company’s mutual holding company), or up to 53,561 shares for a period up to 12
months. The repurchases will depend on certain factors, including but not
limited to, market conditions and prices, the Company’s liquidity requirements
and alternative uses of capital. Any repurchases will be held as treasury stock
and will be available for general corporate purposes. The Company anticipates
conducting such repurchases in accordance with a Rule 10b5-1 trading plan
administered by a broker-dealer.





The table
below sets forth the information with respect to purchases made by or on behalf
of Hometown Bancorp, Inc. or any ‘affiliated purchaser’ (as defined in Rule
240.10b-18(a)(3)) under Regulation S-K, of common stock during the quarter ended
September 30,2008:





Total
      Number
              of
      Shares
              Purchased
            Average
      Price
              Paid
      Per
              Share
            Total
      Number
              of
      Shares
              Purchased
      as
              Part
      of
              Publicly
              Announced
              Plans
      or
              Programs
            Maximum
              Number
      of
              Shares
      That
              May
      Yet Be
              Purchased
              Under
      the
              Plans
      or
              ProgramsJuly
      1 through July 31
            
            -
            $        -
            -
            53,561August
      1 through August 31
            
            5,000
            $  6.95
            5,000
            48,561September
      1 through September 30
            
            6,500
            $  7.04
            11,500
            42,061





Item
3.   Defaults upon Senior Securities





Not Applicable.





Item
4.   Submission ofMatters to a Vote of Security
Holders





Not Applicable





Item
5.   Other Information





None.





Item
6.   Exhibits




20
 Index







3.1
            Charter
      of Hometown Bancorp, Inc. (1)3.2
            Bylaws
      of Hometown Bancorp, Inc. (2)4.0
            Stock
      Certificate of Hometown Bancorp, Inc. (1)31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.0
            Section
      1350 Certification____________________________________(1)
            Incorporated
      by reference into this document from the Exhibits filed with the
      Securities and Exchange Commission on the Registration Statement on Form
      SB-2, and any amendments thereto, Registration No.
    333-141351.(2)
            Incorporated
      by reference into this document from Exhibit 3.2 of the Form 8-K filed
      with the Securities and Exchange Commission on July 25, 2008 (File No.
      000-52674).


21
 Index


SIGNATURES





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








HOMETOWN
      BANCORP, INC.Dated:
      November 14, 2008
            By:
      /s/ Thomas F.
      GibneyThomas
      F. GibneyPresident
      and Chief Executive Officer(principal
      executive officer)Dated:
      November 14, 2008
            By:
      /s/ Stephen W.
      DederickStephen
      W. DederickVice
      President andChief
      Financial Officer(principal
      financial and accounting officer)





22