UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


____________


FORM
10-Q


(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended June 30, 2010





OR





o
            TRANSITION
      REPORT PURSUANT TO 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 x                          
No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes o                           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 company x





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


Yes o                           No
x





As of
August 16, 2010 there were 2,326,939 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 atJune 30, 2010 and December 31, 2009
      (Unaudited)
            2Consolidated
      Statements of Income for the three and six monthsended June 30,
      2010 and 2009 (Unaudited)
            3Consolidated
      Statements of Stockholders’ Equity for the six monthsended June
      30, 2010 and 2009 (Unaudited)
            4Consolidated
      Statements of Cash Flows for the six monthsended June 30, 2010 and
      2009 (Unaudited)
            5Notes to Unaudited Consolidated Financial
      Statements
            6Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Resultsof
      Operations
            16Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            24Item
      4T.
            Controls and Procedures
            24PART
      II.  OTHER INFORMATIONItem
      1.
            Legal Proceedings
            25Item
      1A.
            Risk Factors
            25Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            25Item
      3.
            Defaults upon Senior Securities
            25Item
      4.
            Removed and Reserved
            25Item
      5.
            Other Information
            25Item
      6.
            Exhibits
            25Signatures


i
 Index


PART
I. FINANCIAL INFORMATION





Item 1. Financial Statements


Hometown Bancorp, Inc.


Consolidated
Balance Sheets


(Unaudited)


June
      30,
            
            
            December
      31,2010
            
            
            2009(Dollars
      in Thousands,
              Except
      Share Data)AssetsCash
      and due from banks
            
            $
            4,722
            
            
            $
            6,458Interest
      earning demand deposits with banks
            
            
            1,149
            
            
            
            1,654Cash
      and cash equivalents
            
            
            5,871
            
            
            
            8,112Certificates
      of deposit
            
            
            25
            
            
            
            -Securities
      available for sale
            
            
            1,001
            
            
            
            -Securities
      held to maturity (fair value at June 30, 2010 $1,212; and at December
      31,2009
      $1,323)
            
            
            1,188
            
            
            
            1,290Loans
      held for sale
            
            
            1,293
            
            
            
            1,175Loans
      receivable, net of allowance for loan losses (at June 30, 2010 $1,957; and
      atDecember
      31, 2009 $1,918)
            
            
            137,794
            
            
            
            136,793Premises
      and equipment, net
            
            
            3,997
            
            
            
            4,103Restricted
      investments in bank stock, at cost
            
            
            499
            
            
            
            491Other
      real estate owned
            
            
            2,019
            
            
            
            1,435Accrued
      interest receivable and other assets
            
            
            3,232
            
            
            
            2,868Total Assets
            
            $
            156,919
            
            
            $
            156,267Liabilities
      and Stockholders’ EquityLiabilitiesDeposits:Non-interest
      bearing
            
            $
            19,893
            
            
            $
            19,770Interest
      bearing
            
            
            113,131
            
            
            
            111,978Total
      Deposits
            
            
            133,024
            
            
            
            131,748Federal
      Home Loan Bank advances
            
            
            2,000
            
            
            
            3,000Advances
      from borrowers for taxes and insurance
            
            
            976
            
            
            
            736Accrued
      interest payable
            
            
            29
            
            
            
            33Other
      liabilities
            
            
            1,384
            
            
            
            1,461Total
      Liabilities
            
            
            137,413
            
            
            
            136,978Commitments
      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; 2,380,500 shares
      issued
            
            
            24
            
            
            
            24Paid-in
      capital
            
            
            10,078
            
            
            
            10,088Retained
      earnings
            
            
            10,487
            
            
            
            10,285Unearned
      ESOP shares, at cost
            
            
            (770
            )
            
            
            (793
            )Treasury
      stock, at cost, 53,561 shares at June 30, 2010 and at December 31,
      2009
            
            
            (311
            )
            
            
            (311
            )Accumulated
      other comprehensive loss
            
            
            (2
            )
            
            
            (4
            )Total
      Stockholders’ Equity
            
            
            19,506
            
            
            
            19,289Total
      Liabilities and Stockholders’ Equity
            
            $
            156,919
            
            
            $
            156,267






See
notes to consolidated financial statements.


2
 Index


Hometown Bancorp, Inc.


Consolidated
Statements of Income


(Unaudited)







Three
      Months Ended June 30,
                    
                    
                    Six
      Months Ended June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009(Dollars
      in thousands, except per share data)Interest
      IncomeLoans
      receivable, including fees
                    
                    $
                    1,936
                    
                    
                    $
                    2,051
                    
                    
                    $
                    3,917
                    
                    
                    $
                    4,173Securities
                    
                    
                    12
                    
                    
                    
                    18
                    
                    
                    
                    25
                    
                    
                    
                    39Other
                    
                    
                    6
                    
                    
                    
                    8
                    
                    
                    
                    14
                    
                    
                    
                    11Total
      Interest Income
                    
                    
                    1,954
                    
                    
                    
                    2,077
                    
                    
                    
                    3,956
                    
                    
                    
                    4,223Interest
      ExpenseDeposits
                    
                    
                    292
                    
                    
                    
                    528
                    
                    
                    
                    606
                    
                    
                    
                    1,091Federal
      Home Loan Bank advances
                    
                    
                    5
                    
                    
                    
                    2
                    
                    
                    
                    11
                    
                    
                    
                    20Total
      Interest Expense
                    
                    
                    297
                    
                    
                    
                    530
                    
                    
                    
                    617
                    
                    
                    
                    1,111Net
      Interest Income
                    
                    
                    1,657
                    
                    
                    
                    1,547
                    
                    
                    
                    3,339
                    
                    
                    
                    3,112Provision
      for Loan Losses
                    
                    
                    338
                    
                    
                    
                    158
                    
                    
                    
                    388
                    
                    
                    
                    318Net
      Interest Income after Provision for Loan Losses
                    
                    
                    1,319
                    
                    
                    
                    1,389
                    
                    
                    
                    2,951
                    
                    
                    
                    2,794Non-interest
      IncomeBanking
      fees and service charges
                    
                    
                    256
                    
                    
                    
                    278
                    
                    
                    
                    501
                    
                    
                    
                    518Mortgage
      banking income, net
                    
                    
                    126
                    
                    
                    
                    295
                    
                    
                    
                    267
                    
                    
                    
                    561Investment
      brokerage fees
                    
                    
                    23
                    
                    
                    
                    17
                    
                    
                    
                    38
                    
                    
                    
                    34Other
                    
                    
                    -
                    
                    
                    
                    20
                    
                    
                    
                    11
                    
                    
                    
                    48Total
      Non-interest Income
                    
                    
                    405
                    
                    
                    
                    610
                    
                    
                    
                    817
                    
                    
                    
                    1,161Non-interest
      ExpensesSalaries
      and employee benefits
                    
                    
                    974
                    
                    
                    
                    1,032
                    
                    
                    
                    1,952
                    
                    
                    
                    2,018Occupancy
      and equipment
                    
                    
                    178
                    
                    
                    
                    181
                    
                    
                    
                    369
                    
                    
                    
                    382Professional
      fees
                    
                    
                    66
                    
                    
                    
                    89
                    
                    
                    
                    130
                    
                    
                    
                    161Advertising
      and marketing
                    
                    
                    35
                    
                    
                    
                    30
                    
                    
                    
                    62
                    
                    
                    
                    55Data
      processing
                    
                    
                    156
                    
                    
                    
                    145
                    
                    
                    
                    316
                    
                    
                    
                    290Telephone
      and postage
                    
                    
                    37
                    
                    
                    
                    52
                    
                    
                    
                    78
                    
                    
                    
                    103FDIC
      premium
                    
                    
                    54
                    
                    
                    
                    195
                    
                    
                    
                    110
                    
                    
                    
                    219Other
      real estate owned expense
                    
                    
                    79
                    
                    
                    
                    22
                    
                    
                    
                    123
                    
                    
                    
                    22Other
                    
                    
                    124
                    
                    
                    
                    151
                    
                    
                    
                    231
                    
                    
                    
                    288Total
      Non-interest Expenses
                    
                    
                    1,703
                    
                    
                    
                    1,897
                    
                    
                    
                    3,371
                    
                    
                    
                    3,538Income
      before Income Taxes
                    
                    
                    21
                    
                    
                    
                    102
                    
                    
                    
                    397
                    
                    
                    
                    417Income
      Tax Expense
                    
                    
                    9
                    
                    
                    
                    40
                    
                    
                    
                    154
                    
                    
                    
                    162Net
      Income
                    
                    $
                    12
                    
                    
                    $
                    62
                    
                    
                    $
                    243
                    
                    
                    $
                    255Net
      Income per common share- basic
                    
                    $
                    0.01
                    
                    
                    $
                    0.03
                    
                    
                    $
                    0.11
                    
                    
                    $
                    0.11Weighted
      average number of common shares outstanding–
      basic
                    
                    
                    2,249
                    
                    
                    
                    2,244
                    
                    
                    
                    2,249
                    
                    
                    
                    2,246Dividends
      per share
                    
                    $
                    0.02
                    
                    
                    $
                    0.02
                    
                    
                    $
                    0.04
                    
                    
                    $
                    0.02






See
notes to consolidated financial statements.


3
 Index


Hometown Bancorp, Inc.


Consolidated
Statements of Stockholders’ Equity


Six
Months Ended June 30, 2010 and 2009


(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, 2008
            
            $
            24
            
            
            $
            10,112
            
            
            $
            9,787
            
            
            $
            (840
            )
            
            $
            (284
            )
            
            $
            (5
            )
            
            $
            18,794Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            255
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            255Other
      comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            4
            
            
            
            4Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            259Treasury
      stock purchase(7,061
      shares)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (27
            )
            
            
            -
            
            
            
            (27
            )Cash
      dividends declared($0.02
      per share)
            
            
            -
            
            
            
            -
            
            
            
            (46
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (46
            )ESOP
      shares committed to bereleased
      (2,333 shares)
            
            
            -
            
            
            
            (13
            )
            
            
            -
            
            
            
            23
            
            
            
            -
            
            
            
            -
            
            
            
            10Balance
      - June 30, 2009
            
            $
            24
            
            
            $
            10,099
            
            
            $
            9,996
            
            
            $
            (817
            )
            
            $
            (311
            )
            
            $
            (1
            )
            
            $
            18,990Balance
      - December 31, 2009
            
            $
            24
            
            
            $
            10,088
            
            
            $
            10,285
            
            
            $
            (793
            )
            
            $
            (311
            )
            
            $
            (4
            )
            
            $
            19,289Comprehensive
      income:Net
      income
            
            
            -
            
            
            
            -
            
            
            
            243
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            243Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            2Total
      Comprehensive Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            245Cash
      dividends declared($0.02
      per share)
            
            
            -
            
            
            
            -
            
            
            
            (41
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (41
            )ESOP
      shares committed to bereleased
      (2,333 shares)
            
            
            -
            
            
            
            (10
            )
            
            
            -
            
            
            
            23
            
            
            
            -
            
            
            
            -
            
            
            
            13Balance
      - June 30, 2010
            
            $
            24
            
            
            $
            10,078
            
            
            $
            10,487
            
            
            $
            (770
            )
            
            $
            (311
            )
            
            $
            (2
            )
            
            $
            19,506








See
notes to consolidated financial statements


4
 Index


Hometown Bancorp,
Inc.


Consolidated
Statements of Cash Flows


(Unaudited)





Six
      Months Ended June 30,2010
            
            
            2009(In
      Thousands)Cash
      Flows from Operating ActivitiesNet
      income
            
            $
            243
            
            
            $
            255Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization expense
            
            
            129
            
            
            
            137Provision
      for loan losses
            
            
            388
            
            
            
            318Amortization
      of mortgage servicing rights
            
            
            69
            
            
            
            97Net
      accretion of securities premiums and discounts
            
            
            (2
            )
            
            
            (2
            )Net
      gain on sale of loans
            
            
            (145
            )
            
            
            (384
            )Loans
      originated for sale
            
            
            (7,071
            )
            
            
            (28,581
            )Proceeds
      from sale of loans
            
            
            7,098
            
            
            
            27,343ESOP
      expense
            
            
            13
            
            
            
            10Valuation
      write-down of other real estate owned
            
            
            58
            
            
            
            -Increase
      in accrued interest receivable and other assets
            
            
            (145
            )
            
            
            (165
            )Decrease
      in accrued interest payable and other liabilities
            
            
            (81
            )
            
            
            (384
            )Net
      Cash Provided (Used) by Operating Activities
            
            
            554
            
            
            
            (1,356
            )Cash
      Flows from Investing ActivitiesPurchases
      of certificates of deposit
            
            
            (25
            )
            
            
            -Activity
      in available for sale securities:Purchases
            
            
            (1,000
            )
            
            
            -Activity
      in held to maturity securities:Purchases
            
            
            (750
            )
            
            
            (750
            )Maturities,
      calls and principal repayments
            
            
            854
            
            
            
            894Net
      (increase) decrease in loans receivable
            
            
            (2,318
            )
            
            
            2,511Net
      (increase) decrease in restricted investment in bank stock
            
            
            (8
            )
            
            
            69Purchases
      of bank premises and equipment
            
            
            (23
            )
            
            
            (196
            )Net
      Cash Provided (Used) by Investing Activities
            
            
            (3,270
            )
            
            
            2,528Cash
      Flows from Financing ActivitiesNet
      increase in deposits
            
            
            1,276
            
            
            
            6,597Net
      (decrease) increase in Federal Home Loan Bank advances
            
            
            (1,000
            )
            
            
            4,375Increase
      in advances from borrowers for taxes and insurance
            
            
            240
            
            
            
            219Dividends
      paid
            
            
            (41
            )
            
            
            (46
            )Treasury
      stock purchased
            
            
            -
            
            
            
            (27
            )Net
      Cash Provided by Financing Activities
            
            
            475
            
            
            
            2,368Net
      Increase (Decrease) in Cash and Cash Equivalents
            
            
            (2,241
            )
            
            
            3,540Cash
      and Cash Equivalents - Beginning
            
            
            8,112
            
            
            
            3,203Cash
      and Cash Equivalents - Ending
            
            $
            5,871
            
            
            $
            6,743Supplementary
      Cash Flows InformationInterest
      paid
            
            $
            621
            
            
            $
            1,217Income
      taxes paid
            
            $
            216
            
            
            $
            586Supplemental
      Schedule of Noncash Investing ActivitiesLoans
      transferred to foreclosed real estate
            
            $
            642
            
            
            $
            949Debenture
      collateral acquired in partial settlement of loan
            
            $
            287
            
            
            $
            -






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 six months ended June 30, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2010.





The
unaudited consolidated financial statements should be read in conjunction with
the Company’s audited consolidated financial statements for the years ended
December 31, 2009 and 2008, included in its annual report on Form
10-K.





The
unaudited consolidated financial statements at June 30, 2010 and for the three
and six months ended June 30, 2010 and 2009 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





In June
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”). At June 30, 2010, 56.3% of the Company’s
outstanding common stock, or 1,309,275 shares, were owned by Hometown Bancorp
MHC, the Company’s Mutual Holding Company.





Note
3 – Directors’ Retirement Plan





The Bank
provides 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 six
months ended June 30, 2010 and 2009 is as follows (in thousands):








2010
            
            
            2009Service
      cost
            
            $
            28
            
            
            $
            24Interest
      cost
            
            
            4
            
            
            
            4Amortization
      of past service liability
            
            
            2
            
            
            
            2Net
      periodic pension expense
            
            $
            34
            
            
            $
            30





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.  However, certain changes in assets and liabilities, such as
unrealized gains and losses on available for sale securities and gains and
losses and past service liabilities for pension plans, are reported as a
separate component of equity on the consolidated balance sheets such items,
along with net income, are components of comprehensive income.




6
 Index




The
components of other comprehensive income (loss) and related tax effects for the
three and six months ended June 30, 2010 and 2009 are as follows:




Three
      Months Ended June 30,
              
              
              Six
      Months Ended June 30,2010
              
              
              2009
              
              
              2010
              
              
              2009(In
      Thousands)Unrealized
      holding gain (loss) on securities available for sale
              
              $
              (1
              )
              
              $
              5
              
              
              $
              1
              
              
              $
              2Reclassification
      adjustment for Directors’ retirement plan pension gainsand
      past service liability recognized in pension expense
              
              
              1
              
              
              
              1
              
              
              
              2
              
              
              
              3Other
      comprehensive income before tax
              
              
              -
              
              
              
              6
              
              
              
              3
              
              
              
              5Income
      tax effect
              
              
              -
              
              
              
              (2
              )
              
              
              (1
              )
              
              
              (1
              )Net
      of Tax Amount
              
              $
              -
              
              
              $
              4
              
              
              $
              2
              
              
              $
              4





At June 30,
2010 and 2009, the components of accumulated other comprehensive loss are as
follows:





2010
            
            
            2009(In
      Thousands)Unrealized
      gain on securities available for sale (net of tax effect2010
      $0; 2009 $1)
            
            $
            -
            
            
            $
            3Net
      losses and past service liability for the Directors’
      retirementplan
      (net of tax effect 2010 ($2); 2009 ($3))
            
            
            (2
            )
            
            
            (4
            )$
            (2
            )
            
            $
            (1
            )





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





The Bank
has an ESOP which acquired 93,315 shares of the Company’s common stock in the
2007 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 Company committed to release 2,333
shares to the ESOP during the six months ended June 30, 2010 and 2009,
respectively. The Company recognized $13,000 and $10,000 of compensation expense
related to this plan for the six months ended June 30, 2010 and 2009,
respectively. Unallocated ESOP shares are not “outstanding” for purposes of
earnings per share calculations.





Note
6 – Net Income Per Share





Basic net
income per common share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. The
Company has a simple capital structure as it has not granted any restricted
stock awards or stock options and, during the six months ended June 30, 2010 and
2009, had no potentially dilutive common stock equivalents. Unallocated shares
held by the ESOP are not included in the weighted-average number of common
shares outstanding for purposes of calculating earnings per common share until
they are committed to be released.


7
 Index


Note
7 – Dividends





On April
26, 2010, the Board of Directors declared a quarterly cash dividend of $0.02 per
share of Hometown Bancorp, Inc. common stock. The dividend reflects an annual
cash dividend rate of $0.08 per share. The dividend was payable to stockholders
of record as of May 7, 2010, and was paid on May 21, 2010. Hometown Bancorp MHC
which holds approximately 56.3% of the Company’s total outstanding shares waived
receipt of the dividend on its shares.





Note
8 – 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
9 - Recent Accounting Pronouncements





ASU
2010-06





The FASB
has issued ASU 2010-06, Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements. This ASU requires some new disclosures and clarifies
some existing disclosure requirements about fair value measurement as set forth
in Codification Subtopic 820-10. The FASB’s objective is to improve these
disclosures and, thus, increase the transparency in financial reporting.
Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now
require:





·
            A
      reporting entity to disclose separately the amounts of significant
      transfers in and out of Level 1 and Level 2 fair value measurements and
      describe the reasons for the transfers;
and


·
            In
      the reconciliation for fair value measurements using significant
      unobservable inputs, a reporting entity should present separately
      information about purchases, sales, issuances, and
      settlements.





In
addition, ASU 2010-06 clarifies the requirements of the following existing
disclosures:





·
            For
      purposes of reporting fair value measurement for each class of assets and
      liabilities, a reporting entity needs to use judgment in determining the
      appropriate classes of assets and liabilities;
  and


·
            A
      reporting entity should provide disclosures about the valuation techniques
      and inputs used to measure fair value for both recurring and nonrecurring
      fair value measurements.





ASU
2010-06 is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Early
adoption is permitted. For the portions adopted, this update did not have a
significant impact to the consolidated financial statements. The Company does
not expect that the update that is not effective will have any impact on its
consolidated financial statements. There were no transfers in and out of Level 1
and Level 2 during the six months ended June 30, 2010.





ASU
2010-20




ASU
2010-20, Receivables (Topic
310): Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses, will help investors assess the credit risk
of a company’s receivables portfolio and the adequacy of its allowance for
credit losses held against the portfolios by expanding credit risk
disclosures.




8
 Index




This ASU
requires more information about the credit quality of financing receivables in
the disclosures to financial statements, such as aging information and credit
quality indicators.  Both new and existing disclosures must be
disaggregated by portfolio segment or class.  The disaggregation of
information is based on how a company develops its allowance for credit losses
and how it manages its credit exposure.




The
amendments in this Update apply to all public and nonpublic entities with
financing receivables.  Financing receivables include loans and trade
accounts receivable.  However, short-term trade accounts receivable,
receivables measured at fair value or lower of cost or fair value, and debt
securities are exempt from these disclosure amendments.




The
effective date of ASU 2010-20 differs for public and nonpublic
companies.  For public companies, the amendments that require
disclosures as of the end of a reporting period are effective for periods ending on or after December
15, 2010.  The amendments that require disclosures about activity that
occurs during a reporting period are effective for periods beginning on or after
December 15, 2010.




Note
10 – Securities





The
amortized cost of securities and their approximate fair values are summarized as
follows:




Amortized
      Cost
            
            
            Gross
                Unrealized
                Gains
            
            
            Gross
                Unrealized
                Losses
            
            
            Fair
                Value(In
      Thousands)Available
      for Sale:June
      30, 2010:U.S.
      Government agencies
            
            $
            1,000
            
            
            $
            1
            
            
            $
            -
            
            
            $
            1,001Held
      to Maturity:June
      30, 2010:U.S.
      Government agencies
            
            $
            750
            
            
            $
            2
            
            
            $
            -
            
            
            $
            752Mortgage-backed
      securities
            
            
            438
            
            
            
            22
            
            
            
            -
            
            
            
            460$
            1,188
            
            
            $
            24
            
            
            $
            -
            
            
            $
            1,212December
      31, 2009:U.S.
      Government agencies
            
            $
            750
            
            
            $
            2
            
            
            $
            -
            
            
            $
            752Mortgage-backed
      securities
            
            
            540
            
            
            
            31
            
            
            
            -
            
            
            
            571$
            1,290
            
            
            $
            33
            
            
            $
            -
            
            
            $
            1,323





The
amortized cost and fair value of securities as of June 30, 2010, by contractual
maturity, are shown below.  Expected maturities may differ from
contractual maturities because the borrowers may have the right to prepay
obligations with or without any penalties.




Available
      for Sale
            
            
            Held
      to MaturityAmortized
      Cost
            
            
            Fair
                Value
            
            
            Amortized
                Cost
            
            
            Fair
                Value(In
      Thousands)
            
            
            (In
      Thousands)Due
      in one year or less
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Due
      after one year through five years
            
            
            1,000
            
            
            
            1,001
            
            
            
            750
            
            
            
            752Due
      after five years through ten years
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Due
      after ten years
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Mortgage-backed
      securities
            
            
            -
            
            
            
            -
            
            
            
            438
            
            
            
            460$
            1,000
            
            
            $
            1,001
            
            
            $
            1,188
            
            
            $
            1,212





9
 Index





At June
30, 2010 and December 31, 2009, the Company had no securities in an unrealized
loss position.





There
were no sales of investments for the six months ended June 30, 2010 and 2009. At
December 31, 2009, securities with a carrying value of $100,000, were pledged to
secure public deposits and for other purposes required or permitted by law. No
securities were pledged at June 30, 2010.




Note
11 – Mortgage Servicing Rights





At June
30, 2010 and December 31, 2009, one-to-four family residential mortgage loans
serviced for others amounted to approximately $87.4 million and $86.7 million,
respectively.  Advances from borrowers for taxes and insurance related
to loans serviced for others amounted to approximately $1.7 million and $1.3
million, respectively, at June 30, 2010 and December 31, 2009.  These
loans and related advances are not included in the accompanying consolidated
balance sheets. Mortgage servicing rights balances are included in accrued
interest receivable and other assets on the consolidated balance
sheets.




The
following summarizes activity pertaining to mortgage servicing rights for the
six months ended June 30, 2010 and 2009:




Six
      Months
                Ended
      June 30, 2010
            
            
            Six
      Months
                Ended
      June 30, 2009(In
      Thousands)Balance,
      beginning
            
            $
            397
            
            
            $
            310Capitalized
      during the period
            
            
            75
            
            
            
            157Amortization
            
            
            (69
            )
            
            
            (97
            )Balance,
      ending
            
            $
            403
            
            
            $
            370





Note
12 – Fair Value Measurements and Fair Values of Financial
Instruments





ASC 820
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 ASC 820 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
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at June 30, 2010 are
as follows:


10
 Index





Description
            
            Carrying
      Value
            
            
            (Level
      1)
                Quoted
      Prices in Active Markets for Identical Assets
            
            
            (Level
      2)
                Significant
                Other
                Observable
                Inputs
            
            
            (Level
      3)
                Significant
                Unobservable
                Inputs(In
      Thousands)U.S.
      Government agencies
            
            $
            1,001
            
            
            $
            -
            
            
            $
            1,001
            
            
            $
            -Forward
      sales contract
            
            $
            23
            
            
            $
            -
            
            
            $
            23
            
            
            $
            -





For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2009
are as follows:




Description
            
            Carrying
      Value
            
            
            (Level
      1)
                Quoted
      Prices in Active Markets for Identical Assets
            
            
            (Level
      2)
                Significant
                Other
                Observable
                Inputs
            
            
            (Level
      3)
                Significant
                Unobservable
                Inputs(In
      Thousands)Forward
      sales contract
            
            $
            6
            
            
            $
            -
            
            
            $
            6
            
            
            $
            -





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.





The
Company enters into forward sales contracts to sell certain residential real
estate loans. Such commitments are considered to be derivative financial
instruments and, therefore, are carried at estimated fair value in the other
assets or other liability section of the consolidated balance sheet. The fair
value of these forward sales contracts is primarily measured by obtaining
pricing from certain government-sponsored entities. The pricing is derived from
market observable inputs that can generally be verified and do not typically
involve significant judgment by the Company and therefore, are classified as
Level 2 in the fair value hierarchy.





For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at June 30, 2010 are
as follows:




Description
            
            Carry
      Value
            
            
            (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
            
            $
            1,646
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,646Other
      real estate owned
            
            $
            806
            
            
            $
            -
            
            
            $
            -
            
            
            $
            806Debenture
            
            $
            287
            
            
            $
            -
            
            
            $
            287
            
            
            $
            -


11
 Index


For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2009
are as follows:




Description
            
            Carry
      Value
            
            
            (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
            
            $
            1,695
            
            
            $
            -
            
            
            $
            -
            
            
            $
            1,695







Fair
value of impaired loans 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 ASC 310-10. At June 30, 2010, impaired loans, which are
measured for impairment using the fair value of the collateral for collateral
dependent loans, had a carrying amount of $1.6 million, net of a valuation
allowance of $674,000. At December 31, 2009, impaired loans, which are measured
for impairment using the fair value of the collateral for collateral dependent
loans, had a carrying amount of $1.7 million, net of a valuation allowance of
$633,000.




Fair
value of other real estate owned 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. At June 30, 2010, other real estate owned, which are measured for
impairment using the fair value of the collateral less cost to sell for
collateral dependent loans, had a carrying amount of $806,000, net of a
valuation write-down of $58,000, which was recorded in other real estate owned
expense.




The
Company received a debenture which was collateral for a commercial business loan
that was charged-off during the three months ended June 30, 2010. Fair value for
the debenture is determined using a discounted cash flow valuation approach.
This approach consists of projected cash flows under interest-rate scenarios and
discounting these cash flows using risk-adjusted rates. The debenture is
recorded in other assets at June 30, 2010.




The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities.  Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful.  The following methods and
assumptions were used to estimate the fair values of the Company’s financial
instruments at June 30, 2010 and December 31, 2009:




Cash
and Cash Equivalents




The
carrying amounts reported in the consolidated balance sheet for these
instruments approximate the fair value.




Certificates
of Deposit




Thecarrying amounts
reported in the consolidated balance sheet for certificates of deposit
approximate the fair value.




12
 Index


Securities




Fair
values of available for sale and held to maturity 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, which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted market
prices for the specific securities but rather by relying on the securities’
relationship to other benchmark quoted prices.




Loans
Held for Sale




Fair
values for loans held for sale are based on existing commitments from investors
or prevailing market prices.




Loans
Receivable




For
variable-rate loans that reprice frequently and which entail no significant
changes in credit risk, fair values are based on carrying values.  The
fair value of fixed-rate loans are estimated using discounted cash flow analyses
at interest rates currently offered in the market for loans with similar terms
to borrowers of similar credit quality.




Impaired
Loans




Impaired
loans are those that are accounted for under ASC 310-10 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.




Restricted
Investments in Bank Stock




The
carrying amount of Federal Home Loan Bank and Atlantic Central Bankers Bank
stock approximates fair value.




Accrued
Interest Receivable and Payable




The
carrying amount of accrued interest receivable and payable approximates fair
value.




Mortgage
Servicing Rights




The
Company accounts for mortgage servicing rights (“MSR’s”) at amortized cost. The
Company performs a valuation of fair value to determine if there is any
impairment. Fair value for MSR’s is determined using a static discounted cash
flow valuation approach. This approach consists of projecting servicing cash
flows under static interest-rate scenarios and discounting these cash flows
using risk-adjusted rates. The model assumptions used in the valuation of MSR’s
include mortgage prepayment speeds and discount rates. The fair value of MSR’s
is primarily affected by changes in prepayments that result from shifts in
mortgage interest rates.




Debenture




The
Company records the debenture initially at fair value, then subsequently
accounts for this at the lower of the carrying amount or fair value. Fair value
for the debenture is determined using a discounted cash flow valuation approach.
This approach consists of projected cash flows under interest-rate scenarios and
discounting these cash flows using risk-adjusted rates.





Deposits




Fair
values for demand deposits, savings accounts and certain money market deposits
are, by definition, equal to the amount payable on demand at the reporting
date.  Fair values of fixed-maturity




13
 Index


certificates
of deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered in the market on similar instruments with
similar maturities.




Federal
Home Loan Bank Advances




The
carrying amount of Federal Home Loan Bank Advances approximates fair
value.




Off-Balance
Sheet Financial Instruments




Fair
values of commitments to extend credit and letters of credit are estimated using
the fees currently charged to enter into similar agreements, taking into account
market interest rates, the remaining terms, and present credit worthiness of the
counterparties.  At June 30, 2010 and December 31, 2009, the fair
value of these instruments was not material.




The
estimated fair values of the Company’s financial instruments at June 30, 2010
and December 31, 2009 were as follows:




June
      30,
              December
      31,2010
              
              
              2009Carrying
      Amount
              
              
              Fair
                  Value
              
              
              Carrying
      Amount
              
              
              Fair
                  Value(In
      Thousands)Financial
      assets:Cash
      and cash equivalents
              
              $
              5,871
              
              
              $
              5,871
              
              
              $
              8,112
              
              
              $
              8,112Certificates
      of deposit
              
              
              25
              
              
              
              25
              
              
              
              -
              
              
              
              -Securities
      available for sale
              
              
              1,001
              
              
              
              1,001
              
              
              
              -
              
              
              
              -Securities
      held to maturity
              
              
              1,188
              
              
              
              1,212
              
              
              
              1,290
              
              
              
              1,323Loans
      held for sale
              
              
              1,293
              
              
              
              1,293
              
              
              
              1,175
              
              
              
              1,175Loans
      receivable, net
              
              
              137,794
              
              
              
              144,038
              
              
              
              136,793
              
              
              
              141,703Restricted
      investments in bank stock
              
              
              499
              
              
              
              499
              
              
              
              491
              
              
              
              491Accrued
      interest receivable
              
              
              639
              
              
              
              639
              
              
              
              613
              
              
              
              613Mortgage
      servicing rights
              
              
              403
              
              
              
              579
              
              
              
              397
              
              
              
              646Debenture
              
              
              287
              
              
              
              287
              
              
              
              -
              
              
              
              -Financial
      liabilities:Non-interest
      bearing demand accounts
              
              
              19,893
              
              
              
              19,893
              
              
              
              19,770
              
              
              
              19,770NOW
      accounts
              
              
              8,168
              
              
              
              8,168
              
              
              
              7,395
              
              
              
              7,395Money
      market accounts
              
              
              11,252
              
              
              
              11,252
              
              
              
              10,526
              
              
              
              10,526Savings
      accounts
              
              
              18,221
              
              
              
              18,221
              
              
              
              15,868
              
              
              
              15,868Certificates
      of deposit
              
              
              75,490
              
              
              
              75,977
              
              
              
              78,189
              
              
              
              78,790Federal
      Home Loan Bank advances
              
              
              2,000
              
              
              
              2,000
              
              
              
              3,000
              
              
              
              3,000Accrued
      interest payable
              
              
              29
              
              
              
              29
              
              
              
              33
              
              
              
              33Off-balance
      sheet financial instruments:Commitments
      to extend credit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Letters
      of credit
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -








Note
13 – Subsequent Events





On July
23, 2010, the Board of Directors declared a quarterly cash dividend of $0.02 per
share of Hometown Bancorp, Inc. common stock. The dividend will be payable to
stockholders of record as of August 6, 2010, and will be paid on or about August
20, 2010. Hometown Bancorp MHC, which holds approximately 56.3% of the Company’s
total outstanding stock, will waive receipt of the dividend on its
shares.


14
 Index


New
Federal Legislation





Congress
has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection
Act which will significantly change the current bank regulatory structure and
affect the lending, investment, trading and operating activities of financial
institutions and their holding companies.  The Dodd-Frank Act will
eliminate our current primary federal regulator, the Office of Thrift
Supervision, and will require the Bank to be regulated by the Office of the
Comptroller of the Currency (the primary federal regulator for national
banks).  The Dodd-Frank Act also authorizes the Board of Governors of
the Federal Reserve System to supervise and regulate all savings and loan
holding companies like the Company, in addition to bank holding companies which
it currently regulates.  As a result, the Federal Reserve Board’s
current regulations applicable to bank holding companies, including holding
company capital requirements, will apply to savings and loan holding companies
like the Company.  These capital requirements are substantially
similar to the capital requirements currently applicable to the
Bank.  The Dodd-Frank Act also requires the Federal Reserve Board to
set minimum capital levels for bank holding companies that are as stringent as
those required for the insured depository subsidiaries, and the components of
Tier 1 capital would be restricted to capital instruments that are currently
considered to be Tier 1 capital for insured depository
institutions.  Bank holding companies with assets of less than $500
million are exempt from these capital requirements.  Under the
Dodd-Frank Act, the proceeds of trust preferred securities are excluded from
Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank
or savings and loan holding companies with less than $15 billion of
assets.  The legislation also establishes a floor for capital of
insured depository institutions that cannot be lower than the standards in
effect today, and directs the federal banking regulators to implement new
leverage and capital requirements within 18 months that take into account
off-balance sheet activities and other risks, including risks relating to
securitized products and derivatives.




The
Dodd-Frank Act also creates a new Consumer Financial Protection Bureau with
broad powers to supervise and enforce consumer protection laws.  The
Consumer Financial Protection Bureau has broad rule-making authority for a wide
range of consumer protection laws that apply to all banks and savings
institutions such as the Bank, including the authority to prohibit “unfair,
deceptive or abusive” acts and practices.  The Consumer Financial
Protection Bureau has examination and enforcement authority over all banks and
savings institutions with more than $10 billion in assets.  Banks and
savings institutions with $10 billion or less in assets will be examined by
their applicable bank regulators.  The new legislation also weakens
the federal preemption available for national banks and federal savings
associations, and gives state attorneys general the ability to enforce
applicable federal consumer protection laws.




The
legislation also broadens the base for Federal Deposit Insurance Corporation
insurance assessments.  Assessments will now be based on the average
consolidated total assets less tangible equity capital of a financial
institution.  The Dodd-Frank Act also permanently increases the
maximum amount of deposit insurance for banks, savings institutions and credit
unions to $250,000 per depositor, retroactive to January 1, 2009, and
non-interest bearing transaction accounts have unlimited deposit insurance
through December 31, 2013.  Lastly, the Dodd-Frank Act will increase
stockholder influence over boards of directors by requiring companies to give
stockholders a non-binding vote on executive compensation and so-called “golden
parachute” payments, and authorizing the Securities and Exchange Commission to
promulgate rules that would allow stockholders to nominate their own candidates
using a company’s proxy materials.  The legislation also directs the
Federal Reserve Board to promulgate rules prohibiting excessive compensation
paid to bank holding company executives, regardless of whether the company is
publicly traded or not.




The
Company has evaluated subsequent events through the date that the consolidated
financial statements were issued.


15
 Index


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.





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




16
 Index


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, construction and land 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 are
non-performing.





General





Walden
Federal operates from six offices in Orange County, New York. 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.





Balance
Sheet Analysis





Overview.Total assets grew
$652,000, or 0.4%, to $156.9 million at June 30, 2010 from $156.3 million at
December 31, 2009. The increase was due primarily to an increase in loans
receivable, net of $1.0 million, an increase of $899,000 in investment
securities and an increase of $584,000 in other real estate owned, offset by a
decrease in cash and cash equivalents of $2.2 million, from December 31, 2009 to
June 30, 2010.





Total
stockholders’ equity increased $217,000 during the six months ended June 30,
2010 to $19.5 million due primarily to net income of $243,000, partially offset
by dividends declared of approximately $41,000.





Comparison
of Financial Condition at June 30, 2010 and December 31, 2009





Loans.  At
June 30, 2010, total loans, net, were $137.8 million, or 87.8% of total assets
as compared with $136.8 million, or 87.5% of total assets at December 31,
2009.  In the six months ended June 30, 2010, the loan portfolio grew
$1.0 million. The primary reasons for the growth in loans during 2010 were
increases of $4.4 million in residential mortgages and increases of $690,000 in
commercial real estate loans, offset by decreases of $2.6 million in
construction mortgages and $2.0 million in commercial business
loans.





Nonperforming
Assets.  The following table provides information with respect
to our non-performing assets at the dates indicated.  There were no
accruing loans past due 90 days or more as of June 30, 2010 or December 31,
2009.


17
 Index





(Dollars
      in thousands)
            
            June
      30,
              2010
            
            
            December
      31,
              2009Nonaccrual
      loans:One-
      to -four family residential real estate
            
            $
            2,681
            
            
            $
            2,600Construction
            
            
            599
            
            
            
            599Multi-family
      and commercial real estate
            
            
            78
            
            
            
            360Land
            
            
            2,062
            
            
            
            2,004Commercial
            
            
            —
            
            
            
            —Consumer
            
            
            —
            
            
            
            —Total
            
            
            5,420
            
            
            
            5,563Other
      real estate owned
            
            
            2,019
            
            
            
            1,435Other
      nonperforming assets
            
            
            —
            
            
            
            —Total
      nonperforming assets
            
            
            7,439
            
            
            
            6,998Troubled
      debt restructurings
            
            
            1,076
            
            
            
            1,076Troubled
      debt restructurings andtotal
      nonperforming assets
            
            $
            8,515
            
            
            $
            8,074Total
      nonperforming loans to total loans
            
            
            3.88
            %
            
            
            4.01
            %Total
      nonperforming loans to total assets
            
            
            3.45
            
            
            
            3.56Total
      nonperforming assets and troubleddebt
      restructurings to total assets
            
            
            5.43
            
            
            
            5.17





Nonperforming
loans totaled $5.4 million, or 3.9%, of total loans at June 30, 2010 compared to
$5.6 million, or 4.0%, of total loans at December 31, 2009. Nonperforming loans
at June 30, 2010 were comprised primarily of $2.7 million in one- to -four
family residential loans, $2.1 million of land loans (which included $1.7
million of loans extended to two residential subdivisions) and two loans to
builders for construction of unsold homes totaling $599,000.





Securities.The
investment securities portfolio was $2.2 million, or 1.4% of total assets, at
June 30, 2010 compared to $1.3 million, or 0.8% of total assets, at December 31,
2009.  Our investment portfolio consists primarily of U.S. Government
agency securities and GNMA and FHLMC mortgage-backed securities. The increase in
investment securities was the result of a purchase of a $1.0 million U.S.
Government agency bond during the first half of 2010, which was partially offset
by a decrease of $104,000 due to principal repayments on the mortgage-backed
securities during the same time period.





Other real estate
owned.Other real estate owned totaled $2.0 million at June 30, 2010
compared to $1.4 million at December 31, 2009. Other real estate owned consisted
of four residential properties, one residential building lot and three
commercial buildings at June 30, 2010. During the six months ended June 30,
2010, we foreclosed on a commercial building with a carrying value of $360,000
and two one- to -four family residential properties with a carrying value of
$283,000.





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 six months ended June 30, 2010, deposits increased $1.3 million, or 1.0% to
$133.0 million at June 30, 2010. The increase in deposits consisted primarily of
an increase in savings accounts of $2.4 million and an increase in money market
and interest checking accounts of approximately $1.5 million. This increase was
offset in part by declines in certificates of deposit which decreased by $2.7
million.




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. We had borrowings at June 30, 2010 and
December 31, 2009 of $2.0 million and $3.0 million, respectively.





Stockholders’
Equity.Total stockholders’ equity increased $217,000 from
$19.3 million at December 31, 2009 to $19.5 million at June 30, 2010. Equity
increased primarily due to net income of $243,000 for the


18
 Index


six
months ended June 30, 2010, partially offset by dividends declared of
approximately $41,000 during the first six months of 2010.





Results
of Operations for the Three Months Ended June 30, 2010 and 2009





Financial
Highlights.Net income decreased $50,000, to $12,000 for the three months
ended June 30, 2010 compared to $62,000 for the same period in the prior year.
The decrease in the second quarter net income was primarily due to an increase
in the Company’s provision for loan losses and a decrease in mortgage banking
income as a result of decreased originations of residential mortgage loans sold
into the secondary market, partially offset by an increase in net interest
income, and a decrease in non-interest expense.





Net Interest
Income.Net interest income increased by $110,000, or 7.1%, to
$1.7 million for the three months ended June 30, 2010 compared to $1.6 million
for the prior year period, primarily as a result of a reduction in interest
expense on deposits partially offset by a decrease in interest income on loans
and securities.




Interest
income on loans decreased $115,000, or 5.6%, to $1.9 million during the three
months ended June 30, 2010 as the average yield on the loan portfolio decreased
32 basis points to 5.59% for the three months ended June 30, 2010, and the
average balance of the loan portfolio decreased $69,000, to $138.7 million. The
decrease in the average yield on loans was mostly the result of the decreases in
market interest rates over the last year on new originations. The decrease in
the average balance of the loan portfolio was due primarily to a decrease in
construction mortgages and commercial business loans, offset by an increase in
one- to four- family residential real estate loans.





Interest
income on investment securities decreased $6,000 for the three months ended June
30, 2010 to $12,000 compared to the prior year period, as the average balance of
the securities portfolio decreased during the three months ended June 30, 2010
to $2.0 million compared to $2.3 million in the prior year period. The average
yield on investment securities decreased 74 basis points to 2.35% for the three
months ended June 30, 2010.





Interest
expense on deposits decreased from $528,000 for the three months ended June 30,
2009, to $292,000 for the three months ended June 30, 2010, a decrease of
$236,000, or 44.7%. The primary reason for the decrease was maturing
certificates of deposit repricing to lower interest rates. Decreases in market
interest rates since 2007, combined with the shift in the deposit mix, decreased
the average cost of deposits to 1.04%, for the three months ended June 30, 2010,
compared to 1.89% for the three months ended June 30, 2009. The decrease in
rates on deposits was offset by an increase in the average balance of
interest-bearing deposits during the three months ended June 30, 2010 of
$907,000, to $112.4 million, compared with $111.5 million in the prior year
period.  The increase in the average balance of deposits was due
primarily to an increase in average balances of savings and interest-bearing
demand deposit accounts of $2.8 million, offset by a decrease in the average
balances of certificates of deposit of $2.4 million.




Interest
expense on borrowings increased to $5,000 for the three months ended June 30,
2010 compared to $2,000 for the prior year period. The average balance of
borrowings during the three months ended June 30, 2010 increased to $2.6
million, compared with $1.1 million in the prior year period. The average cost
of borrowings increased 1 basis point to 0.77%, for the three months ended June
30, 2010, compared to 0.76% for the three months ended June 30,
2009.





For the
three months ended June 30, 2010, our net interest margin increased 35 basis
points to 4.68% from 4.33% for the prior year period. The interest rate spread
increased by 54 basis points to 4.48% for the three months ended June 30, 2010
from 3.94% for the prior year period.  The increase both in our
interest rate spread and in our net interest margin for the quarter was
primarily due to low short-term interest rates which resulted in the downward
repricing of many of the Company’s interest-bearing 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 June 30, 2010 and 2009.


19
 Index





Three Months Ended June 30,2010
            
            
            2009(Dollars
      in thousands)
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              CostAssets:Interest-earning
      assets:Loans
            
            $
            138,657
            
            
            $
            1,936
            
            
            
            5.59
            %
            
            $
            138,726
            
            
            $
            2,051
            
            
            
            5.91
            %Investment
      securities
            
            
            2,043
            
            
            
            12
            
            
            
            2.35
            
            
            
            2,332
            
            
            
            18
            
            
            
            3.09Other
      interest-earning assets
            
            
            1,061
            
            
            
            6
            
            
            
            2.26
            
            
            
            1,778
            
            
            
            8
            
            
            
            1.80Total
      interest-earning assets
            
            
            141,761
            
            
            
            1,954
            
            
            
            5.51
            
            
            
            142,836
            
            
            
            2,077
            
            
            
            5.82Non-interest-earning
      assets
            
            
            13,235
            
            
            
            
            
            
            
            
            
            
            
            9,383Total
      assets
            
            $
            154,996
            
            
            
            
            
            
            
            
            
            
            $
            152,219Liabilities
      and stockholders’ equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            7,881
            
            
            
            4
            
            
            
            0.20
            
            
            $
            6,938
            
            
            
            4
            
            
            
            0.23Money
      market accounts
            
            
            10,910
            
            
            
            19
            
            
            
            0.70
            
            
            
            10,441
            
            
            
            25
            
            
            
            0.96Savings
      accounts
            
            
            17,694
            
            
            
            19
            
            
            
            0.43
            
            
            
            15,809
            
            
            
            24
            
            
            
            0.61Certificates
      of deposit
            
            
            75,919
            
            
            
            250
            
            
            
            1.32
            
            
            
            78,309
            
            
            
            475
            
            
            
            2.43Borrowings
            
            
            2,605
            
            
            
            5
            
            
            
            0.77
            
            
            
            1,051
            
            
            
            2
            
            
            
            0.76Total
      interest-bearing liabilities
            
            
            115,009
            
            
            
            297
            
            
            
            1.03
            
            
            
            112,548
            
            
            
            530
            
            
            
            1.88Non-interest-bearing
      demand deposits
            
            
            18,358
            
            
            
            
            
            
            
            
            
            
            
            18,802Other
      non-interest-bearing liabilities
            
            
            1,930
            
            
            
            
            
            
            
            
            
            
            
            1,744Total
      liabilities
            
            
            135,297
            
            
            
            
            
            
            
            
            
            
            
            133,094Stockholders’
      equity
            
            
            19,699
            
            
            
            
            
            
            
            
            
            
            
            19,125Total
      liabilities and stockholders’ equity
            
            $
            154,996
            
            
            
            
            
            
            
            
            
            
            $
            152,219Net
      interest income
            
            
            
            
            
            $
            1,657
            
            
            
            
            
            
            
            
            
            
            $
            1,547Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            4.48
            
            
            
            
            
            
            
            
            
            
            
            3.94Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            4.68
            
            
            
            
            
            
            
            
            
            
            
            4.33Average
      interest-earning assets toaverage
      interest-bearing liabilities
            
            
            123.26
            %
            
            
            
            
            
            
            
            
            
            
            126.91
            %





Provision for
Loan Losses.  The provision for loan losses for the quarter
ended June 30, 2010 was $338,000, an increase of $180,000 as compared to the
quarter ended June 30, 2009. The increase was primarily a result of a $312,000
charge-off of a commercial business loan during the second quarter of 2010.
There were net charge-offs of approximately $350,000 during the second quarter
of 2010 compared to net charge-offs of $35,000 during the prior year
period.





Non-Interest
Income.  Non-interest income was $405,000 for the quarter ended
June 30, 2010 compared to $610,000 for the quarter ended June 30, 2009. The
primary reason for the decrease in non-interest income for the quarter ended
June 30, 2010, was mortgage banking income, net, which decreased by $169,000.
This was a result of decreased volume of loans sold and unfunded loans committed
to be sold during the second quarter of 2010. Banking fees and service charges
decreased by $22,000 as a result of customer preference for service charge free
accounts and the competitive banking environment for core
deposits.





Non-Interest
Expenses.  Non-interest expense decreased by $194,000 and was
$1.7 million for the quarter ended June 30, 2010, compared to $1.9 million for
the quarter ended June 30, 2009. Non-interest expense decreased primarily due to
decreases in FDIC deposit insurance premiums of $141,000, as a result of the
special FDIC assessment paid in 2009. Decreases in most other major expense
categories were achieved as part of cost containment actions, such as salaries
and employee benefits expense which decreased by $58,000. These decreases were
partially offset by increases in other real estate owned expense of $57,000, and
data processing expense of $11,000.


20
 Index


Income Tax
Expense.Income
tax expense was $9,000 for the three months ended June 30, 2010 as compared to
$40,000 for the three months ended June 30, 2009. Lower levels of pre-tax income
resulted in a decrease in income tax expense for the three months ended June 30,
2010. The effective tax rate was 42.9% for the three months ended June 30, 2010
and 39.2% for the three months ended June 30, 2009.





Results
of Operations for the Six Months Ended June 30, 2010 and 2009





Financial
Highlights.Net income decreased $12,000, or 4.7%, to $243,000 for the
six months ended June 30, 2010 compared to $255,000 for the same period in the
prior year. The primary reason for the decrease in earnings for the six months
ended June 30, 2010 was an increase in the Company’s provision for loan losses
and a decrease in mortgage banking income as a result of decreased originations
of residential mortgage loans sold into the secondary market, partially offset
by an increase in net interest income, and a decrease in non-interest
expense.





Net Interest
Income.Net interest income increased by $227,000, or 7.3%, to
$3.3 million for the six months ended June 30, 2010 compared to $3.1 million for
the prior year period, primarily as a result of a reduction in interest expense
on deposits partially offset by a decrease in interest income on loans and
securities.




Interest
income on loans decreased $256,000, or 6.1%, to $3.9 million during the six
months ended June 30, 2010 as the average yield on the loan portfolio decreased
33 basis points to 5.68% for the six months ended June 30, 2010, and the average
balance of the loan portfolio decreased $980,000, to $137.9 million. The
decrease in the average yield on loans was mostly the result of the decreases in
market interest rates over the last year on new originations. The decrease in
the average balance of the loan portfolio was due primarily to a decrease in
construction mortgages and commercial business loans, offset by an increase in
one- to four-family residential real estate loans.





Interest
income on investment securities decreased $14,000 for the six months ended June
30, 2010 to $25,000 compared to the prior year period, as the average balance of
the securities portfolio decreased during the six months ended June 30, 2010 to
$2.1 million compared to $2.4 million in the prior year period. The average
yield on investment securities decreased 80 basis points to 2.44% for the six
months ended June 30, 2010.





Interest
expense on deposits decreased from $1.1 million for the six months ended June
30, 2009, to $606,000 for the six months ended June 30, 2010, a decrease of
$485,000, or 44.5%. The primary reason for the decrease was maturing
certificates of deposit repricing to lower interest rates. Decreases in market
interest rates since 2007, combined with the shift in the deposit mix, decreased
the average cost of deposits to 1.08%, for the six months ended June 30, 2010,
compared to 1.99% for the six months ended June 30, 2009. The decrease in rates
on deposits was offset by an increase in the average balance of interest-bearing
deposits during the six months ended June 30, 2010 of $2.8 million, or 2.6% to
$112.3 million, compared with $109.5 million in the prior year period. The
increase in the average balance of deposits was due primarily to an increase in
average balances of savings and interest-bearing demand deposit accounts of $3.1
million, offset by a decrease in the average balances of money market accounts
of $162,000 and certificates of deposit of $117,000.




Interest
expense on borrowings decreased to $11,000 for the six months ended June 30,
2010 compared to $20,000 for the prior year period. The average balance of
borrowings during the six months ended June 30, 2010 decreased to $2.8 million,
compared with $3.5 million in the prior year period. The average cost of
borrowings decreased 36 basis points to 0.79%, for the six months ended June 30,
2010, compared to 1.15% for the six months ended June 30, 2009.





For the
six months ended June 30, 2010, our net interest margin increased 37 basis
points to 4.72% from 4.35% for the prior year period. The interest rate spread
increased by 60 basis points to 4.53% for the six months ended June 30, 2010
from 3.93% for the prior year period.  The increase both in our
interest rate spread


21
 Index


and in
our net interest margin for the first six months of 2010 was primarily due to
low short-term interest rates which resulted in the downward repricing of many
of the Company’s interest-bearing liabilities.





The
following table summarizes average balances and average yields and costs of
interest-earning assets and interest-bearing liabilities for the six months
ended June 30, 2010 and 2009.





Six Months Ended June 30,2010
            
            
            2009(Dollars
      in thousands)
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
              and
              Dividends
            
            
            Yield/
              CostAssets:Interest-earning
      assets:Loans
            
            $
            137,927
            
            
            $
            3,917
            
            
            
            5.68
            %
            
            $
            138,907
            
            
            $
            4,173
            
            
            
            6.01
            %Investment
      securities
            
            
            2,051
            
            
            
            25
            
            
            
            2.44
            
            
            
            2,404
            
            
            
            39
            
            
            
            3.24Other
      interest-earning assets
            
            
            1,393
            
            
            
            14
            
            
            
            2.01
            
            
            
            1,841
            
            
            
            11
            
            
            
            1.20Total
      interest-earning assets
            
            
            141,371
            
            
            
            3,956
            
            
            
            5.60
            
            
            
            143,152
            
            
            
            4,223
            
            
            
            5.90Non-interest-earning
      assets
            
            
            14,528
            
            
            
            
            
            
            
            
            
            
            
            8,581Total
      assets
            
            $
            155,899
            
            
            
            
            
            
            
            
            
            
            $
            151,733Liabilities
      and stockholders’ equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
            
            $
            7,726
            
            
            
            8
            
            
            
            0.21
            
            
            $
            6,764
            
            
            
            8
            
            
            
            0.24Money
      market accounts
            
            
            10,830
            
            
            
            40
            
            
            
            0.74
            
            
            
            10,992
            
            
            
            56
            
            
            
            1.02Savings
      accounts
            
            
            17,186
            
            
            
            44
            
            
            
            0.51
            
            
            
            15,054
            
            
            
            44
            
            
            
            0.58Certificates
      of deposit
            
            
            76,607
            
            
            
            514
            
            
            
            1.34
            
            
            
            76,724
            
            
            
            983
            
            
            
            2.56Borrowings
            
            
            2,801
            
            
            
            11
            
            
            
            0.79
            
            
            
            3,487
            
            
            
            20
            
            
            
            1.15Total
      interest-bearing liabilities
            
            
            115,150
            
            
            
            617
            
            
            
            1.07
            
            
            
            113,021
            
            
            
            1,111
            
            
            
            1.97Non-interest-bearing
      demand deposits
            
            
            19,209
            
            
            
            
            
            
            
            
            
            
            
            17,802Other
      non-interest-bearing liabilities
            
            
            1,922
            
            
            
            
            
            
            
            
            
            
            
            1,859Total
      liabilities
            
            
            136,281
            
            
            
            
            
            
            
            
            
            
            
            132,682Stockholders’
      equity
            
            
            19,618
            
            
            
            
            
            
            
            
            
            
            
            19,051Total
      liabilities and stockholders’ equity
            
            $
            155,899
            
            
            
            
            
            
            
            
            
            
            $
            151,733Net
      interest income
            
            
            
            
            
            $
            3,339
            
            
            
            
            
            
            
            
            
            
            $
            3,112Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            4.53
            
            
            
            
            
            
            
            
            
            
            
            3.93Net
      interest margin
            
            
            
            
            
            
            
            
            
            
            4.72
            
            
            
            
            
            
            
            
            
            
            
            4.35Average
      interest-earning assets toaverage
      interest-bearing liabilities
            
            
            122.77
            %
            
            
            
            
            
            
            
            
            
            
            126.66
            %





Provision for
Loan Losses.  The provision for loan losses for the six months
ended June 30, 2010 was $388,000, an increase of $70,000 as compared to the
provision for loan losses for the prior year period. The allowance for loan
losses totaled $2.0 million at June 30, 2010, or 1.40% of total loans, as
compared to $1.9 million, or 1.38% of total loans as of December 31,
2009.  The increase in the provision for loan losses during the six
months ended June 30, 2010 was the result of a charge-off of a commercial
business loan and management’s consideration for continued economic weakness
during 2010 necessitating a higher level of allowance. There were net
charge-offs of approximately $349,000 during the first six months of 2010
compared to net charge-offs of $72,000 during the prior year
period.





Non-Interest
Income.  Non-interest income was $817,000 for the six months
ended June 30, 2010 compared to $1.2 million for the six months ended June 30,
2009. The primary reason for the decrease in non-interest income for the six
months ended June 30, 2010, was mortgage banking income, net, which decreased by
$294,000. This was a result of decreased volume of loans sold and unfunded loans
committed to be sold during the first half of 2010. Banking fees and service
charges decreased by $17,000 as a result of customer preference for service
charge free accounts and the competitive banking environment for core deposits.
Other non-interest income decreased by $37,000, primarily due to a loss of
rental income of $13,000 compared to the


22
 Index


six
months ended June 30, 2009, and the Company recorded a loss in its investment in
a title company of $9,000 in the six months ended June 30, 2010 compared to a
gain of $12,000 in the prior year period.




Non-Interest
Expenses.  Non-interest expense decreased by $167,000 and was
$3.4 million for the six months ended June 30, 2010, compared to $3.5 million
for the six months ended June 30, 2009. Non-interest expense decreased primarily
due to decreases in FDIC deposit insurance premiums of $109,000, as a result of
the special FDIC assessment paid in 2009. Decreases in most other major expense
categories were achieved as part of cost containment actions, such as salaries
and employee benefits expense which decreased by $66,000. These decreases were
partially offset by increases in other real estate owned expense of $101,000,
and data processing expense of $26,000.





Income Tax
Expense.Income
tax expense was $154,000 for the six months ended June 30, 2010 as compared to
$162,000 for the six months ended June 30, 2009. Lower levels of pre-tax income
resulted in a decrease in income tax expense. The effective tax rate was 38.8%
for the six months ended June 30, 2010 and June 30, 2009,
respectively.




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 June 30, 2010, cash and cash equivalents
totaled $5.9 million.  In addition, at June 30, 2010, we had
arrangements to borrow up to $25.2 million from the Federal Home Loan Bank of
New York.  On June 30, 2010, we had short-term advances outstanding of
$2.0 million with the Federal Home Loan Bank. As of June 30, 2010, we have an
unused $2.0 million federal funds line from Atlantic Central Bankers
Bank.





A
significant use of our liquidity is the funding of loan
originations.  At June 30, 2010, we had $15.2 million in loan
commitments outstanding, which primarily consisted of $1.5 million in unadvanced
portions of construction loans, $3.0 million in commitments to fund one- to
four-family residential real estate loans, $1.1 million in commercial business
loans, $1.8 million in unused home equity lines of credit and $6.1 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 June 30, 2011 totaled $70.9 million, or 94.0% 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 June 30, 2010.  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.


23
 Index


Capital
Management.We are 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 sheet assets and off-balance sheet items to broad
risk categories.  At June 30, 2010, the Bank exceeded all of our
regulatory capital requirements and is considered “well capitalized” under
regulatory guidelines.





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 consolidated 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
six months ended June 30, 2010, we did not engage in any off-balance sheet
transactions reasonably likely to have a material effect on our consolidated
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 4T.  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.





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.


24
 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 consolidated financial condition and results of
operations.





Item1A.
            Risk
      Factors





Not
applicable because the Company is a smaller reporting company.





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





None





Item 3.
            Defaults
      upon Senior Securities





Not
Applicable.





Item4.
            Removed
      and Reserved





Item5.
            Other
      Information





None.





Item 6.
            Exhibits




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
    Officer




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




32.0
            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).




25
 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:
      August 16, 2010
            
            By:
            /s/ Thomas F. GibneyThomas
      F. GibneyPresident
      and Chief Executive Officer(principal
      executive officer)Dated:
      August 16, 2010
            
            By:
            /s/ Stephen W. DederickStephen
      W. DederickSenior
      Vice President andChief
      Financial Officer(principal
      financial and accounting officer)