UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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





For
the fiscal year ended December 31, 2008





OR





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





For
the transition period from _________________________ to
_____________





Commission
File Number: 000-52674





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)
                (Zip
      Code)





Registrant’s
Telephone Number, Including Area Code:  845-778-2171





Securities
registered pursuant to Section 12(b) of the Act:


None.





Securities
registered pursuant to Section 12(g) of the Act:  Common Stock, par
value $0.01 per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  £   No  T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes  £   No  T





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  T   No  £





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  T





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  £
                Accelerated
      filer                    £Non-accelerated
      filer    £
                Smaller
      reporting company  T


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


Yes  £   No  T





The
aggregate market value of the voting and non-voting common equity held by the
registrant’s nonaffiliates as of June 30, 2008 was approximately $5.8
million.





The
number of shares outstanding of the registrant’s common stock as of March 20,
2009 was 2,326,939.





DOCUMENTS
INCORPORATED BY REFERENCE:





1.
Portions of the 2008 Annual Report to Stockholders are incorporated by reference
in Part II of this Form 10-K.





2.
Portions of the Proxy Statement for the 2009 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form10-K.













INDEX











PagePART
      IItem
      1.
                          Business
                          K-   3Item
      1A.
                          Risk Factors
                          K-
      27Item
      1B.
                          Unresolved Staff Comments
                          K-
      28Item
      2.
                          Properties
                          K-
      29Item
      3.
                          Legal Proceedings
                          K-
      29Item
      4.
                          Submission of Matters to a Vote of Security
      Holders
                          K-
      29PART
      IIItem
      5.
                          Market for Registrant’s Common Equity, Related Stockholder
      Matters, and Issuer Purchases of Equity Securities
                          K-
      30Item
      6.
                          Selected Financial Data
                          K-
      31Item
      7.
                          Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                          K-
      31Item
      7A.
                          Quantitative and Qualitative Disclosures about Market
      Risk
                          K-
      31Item
      8.
                          Financial Statements and Supplementary Data
                          K-
      31Item
      9.
                          Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                          K-
      31Item
      9A.
                          Controls and Procedures
                          K-
      31Item
      9B.
                          Other Information
                          K-
      32PART
      IIIItem
      10.
                          Directors, Executive Officers, and Corporate
      Governance
                          K-
      33Item
      11.
                          Executive Compensation
                          K-
      34Item
      12.
                          Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                          K-
      34Item
      13.
                          Certain Relationships and Related Transactions, and Director
      Independence
                          K-
      35Item
      14.
                          Principal Accountant Fees and Services
                          K-
      35PART
      IVItem
      15.
                          Exhibits and Financial Statement Schedules
                          K-
      35SIGNATURES





Index





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





Management’s
ability to predict results or the effect of future plans or strategies is
inherently uncertain. Factors which could affect actual results include the
following: interest rate trends; the general economic climate in the market area
in which Hometown Bancorp, Inc. operates, as well as nationwide; Hometown
Bancorp, Inc.’s ability to control costs and expenses; competitive products and
pricing; loan delinquency rates and changes in federal and state legislation and
regulation. These factors should be considered in evaluating the forward-looking
statements and undue reliance should not be placed on such statements. Hometown
Bancorp, Inc. assumes no obligation to update any forward-looking
statements.





PART
I





ITEM1.
            BUSINESS





General





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





On June
28, 2007, the Company completed its minority stock offering of 45% of the
aggregate total voting stock of the Company. In connection with the minority
offering, 2,380,500 shares of common stock were issued, of which 1,071,225
shares were sold to the Bank’s eligible account holders and the employee stock
ownership plan (the “ESOP”), resulting in net proceeds of approximately $9.1
million. As of December 31, 2008, 56.3% of the Company’s outstanding common
stock, or 1,309,275 shares, was owned by Hometown Bancorp MHC, a federally
chartered mutual holding company. Costs of approximately $717,000 were incurred
in connection with the stock offering and were deducted from the gross offering
proceeds.





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





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





K -
3
 Index





Market
Area





We are
headquartered in Walden, New York.  Our main office (12 Main Street)
functions out of three locations within Walden.  In addition to our
main office, we operate five full-service branch offices in Montgomery,
Otisville, Newburgh and Monroe, New York.  Each of our branch offices
are located in Orange County, New York, situated approximately 70 miles
northwest from New York City.  We generate deposits through our six
offices and conduct lending activities throughout Orange, lower Sullivan and
lower Ulster Counties, New York. Continued economic weakness combined with
uncertainty of an economic recovery has resulted in a continued housing market
downturn and rising unemployment in our market area. These factors have resulted
in an increase in problem assets and foreclosures in our market
area.





Competition





We face
significant competition for the attraction of deposits and origination of
loans.  Our most direct competition for deposits has historically come
from the many financial institutions and credit unions operating in our market
area and, to a lesser extent, from other financial service companies such as
brokerage firms and insurance companies.  Several large holding
companies operate banks in our market area, including Bank of America, JP Morgan
Chase, Keycorp and Citizens Financial Group, Inc.  These institutions
are significantly larger than us and, therefore, have significantly greater
resources.  We also face competition for investors’ funds from money
market funds, mutual funds and other corporate and government
securities.  At June 30, 2008, which is the most recent date for which
data is available from the Federal Deposit Insurance Corporation, we held 2.26%
of the deposits in Orange County, New York.





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





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





Lending
Activities





Loan
Portfolio Analysis





The
following table sets forth the composition of our loan portfolio, by type of
loan at the dates indicated, excluding loans held for sale of $106,000 and
$528,000 at December 31, 2008 and 2007, respectively.





K -
4
 Index




December 31,2008
                                                        
                                                        
                                                        2007(Dollars in thousands)
                                                        
                                                        Amount
                                                        
                                                        
                                                        Percent
                                                        
                                                        
                                                        Amount
                                                        
                                                        
                                                        PercentReal
      estate loans:One-
      to four-family residential
                                                        
                                                        $
                                                        65,565
                                                        
                                                        
                                                        
                                                        47.1
                                                        %
                                                        
                                                        $
                                                        49,558
                                                        
                                                        
                                                        
                                                        40.7
                                                        %Construction(1)
                                                        
                                                        
                                                        9,162
                                                        
                                                        
                                                        
                                                        6.6
                                                        
                                                        
                                                        
                                                        10,990
                                                        
                                                        
                                                        
                                                        9.0Multi-family
      and commercial real estate
                                                        
                                                        
                                                        24,971
                                                        
                                                        
                                                        
                                                        17.9
                                                        
                                                        
                                                        
                                                        22,316
                                                        
                                                        
                                                        
                                                        18.4Land
                                                        
                                                        
                                                        13,632
                                                        
                                                        
                                                        
                                                        9.8
                                                        
                                                        
                                                        
                                                        10,309
                                                        
                                                        
                                                        
                                                        8.5Total
      real estate loans
                                                        
                                                        
                                                        113,330
                                                        
                                                        
                                                        
                                                        81.4
                                                        
                                                        
                                                        
                                                        93,173
                                                        
                                                        
                                                        
                                                        76.6Commercial
      loans
                                                        
                                                        
                                                        12,763
                                                        
                                                        
                                                        
                                                        9.2
                                                        
                                                        
                                                        
                                                        15,479
                                                        
                                                        
                                                        
                                                        12.7Consumer
      loans:Home
      equity
                                                        
                                                        
                                                        12,434
                                                        
                                                        
                                                        
                                                        8.9
                                                        
                                                        
                                                        
                                                        12,538
                                                        
                                                        
                                                        
                                                        10.3Other
                                                        
                                                        
                                                        625
                                                        
                                                        
                                                        
                                                        0.5
                                                        
                                                        
                                                        
                                                        525
                                                        
                                                        
                                                        
                                                        0.4Total
      consumer loans
                                                        
                                                        
                                                        13,059
                                                        
                                                        
                                                        
                                                        9.4
                                                        
                                                        
                                                        
                                                        13,063
                                                        
                                                        
                                                        
                                                        10.7Total
      loans
                                                        
                                                        
                                                        139,152
                                                        
                                                        
                                                        
                                                        100.0
                                                        %
                                                        
                                                        
                                                        121,715
                                                        
                                                        
                                                        
                                                        100.0
                                                        %Net
      deferred loan costs
                                                        
                                                        
                                                        63
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        54Allowance
      for losses
                                                        
                                                        
                                                        (1,347
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (787
                                                        )Loans, net
                                                        
                                                        $
                                                        137,868
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        120,982


__________________


(1)
            Amount
      does not include the unadvanced portions of construction
      loans.  At December 31, 2008 and 2007, the additional unadvanced
      portions of construction loans were $3.5 million and $3.6 million,
      respectively.





The
following table sets forth certain information at December 31, 2008 regarding
the dollar amount of loan principal repayments becoming due during the periods
indicated.  The table does not include any estimate of prepayments
which significantly shorten the average life of all loans and may cause our
actual repayment experience to differ from that shown below.  Demand
loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less.  The amounts shown below exclude
applicable unadvanced portions of construction loans, net deferred loan costs
and the allowance for loan losses.  The table also sets forth the
scheduled repayments of fixed and adjustable-rate loans at December 31, 2008
that are contractually due after December 31, 2009.





Contractual
Maturities and Interest Rate Sensitivity





December 31, 2008 (Dollars in
      thousands)
                            
                            Real Estate Loans
                            
                            
                            Commercial Loans
                            
                            
                            Consumer Loans
                            
                            
                            Total LoansAmounts
      due in:One
      year or less
                            
                            $
                            21,306
                            
                            
                            $
                            9,156
                            
                            
                            $
                            1,798
                            
                            
                            $
                            32,260More
      than one to five years
                            
                            
                            10,442
                            
                            
                            
                            2,143
                            
                            
                            
                            1,212
                            
                            
                            
                            13,797More
      than five years
                            
                            
                            81,582
                            
                            
                            
                            1,464
                            
                            
                            
                            10,049
                            
                            
                            
                            93,095Total
                            
                            $
                            113,330
                            
                            
                            $
                            12,763
                            
                            
                            $
                            13,059
                            
                            
                            $
                            139,152Interest
      rate terms on  amounts due after one year:Fixed-rate
      loans
                            
                            $
                            15,161
                            
                            
                            $
                            3,144
                            
                            
                            $
                            6,978
                            
                            
                            $
                            25,283Adjustable-rate
      loans
                            
                            
                            76,863
                            
                            
                            
                            463
                            
                            
                            
                            4,283
                            
                            
                            
                            81,609Total
                            
                            $
                            92,024
                            
                            
                            $
                            3,607
                            
                            
                            $
                            11,261
                            
                            
                            $
                            106,892





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





K -
5
 Index





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





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





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





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





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





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





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





K -
6
 Index





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





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





At
December 31, 2008 our largest multi-family loan was $1.1 million and was secured
by apartment buildings and our largest commercial real estate loan was $1.3
million and was secured by a mixed use auto body and repair shop and office
building. The $1.3 million represents Walden Federal’s 75% participation share
of a $1.7 million loan originated by Walden Federal. Both of these loans were
performing in accordance with their terms at December 31, 2008.





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





At
December 31, 2008 our largest construction loan was $679,000 and was secured by
a one family residential home. This loan was performing according to its terms
at December 31, 2008.





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





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





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





K -
7
 Index





At
December 31, 2008 our largest commercial loan was $769,000, which was primarily
secured by business assets. This loan was performing according to its terms at
December 31, 2008.





Land
Loans.We also
originate loans secured by developed and undeveloped land to individuals and
builders.   Loans to individual borrowers who either own or are
purchasing building lots are underwritten in accordance with our consumer loan
guidelines discussed below.  These loans typically carry fixed-rates
and are written on a 15- year amortization basis but with a short-term balloon
maturity (typically five years).  Loans to builders and developers are
underwritten using our commercial loan guidelines and are dependent upon the
collateral value, borrower financial strength and other loan specific
data.  Generally, land loans to builders and developers are written
for up to a two-year term on an interest-only basis, with the rate tied to the
Prime Rate as published by The
Wall Street Journal on an adjustable rate basis or on a fixed-rate basis
in accordance with commercial loan pricing.  Loan amounts generally do
not exceed 65% of the lesser of the appraised value or the purchase
price.  Our land loans are not made on a speculative basis, but rather
for the development of either residential or commercial real
estate.





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





At
December 31, 2008 our largest land loan was a $1.4 million letter of credit and
was secured by a residential land development loan. This loan was performing
according to its terms at December 31, 2008.





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





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





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





Loan
Underwriting Risks.





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





Multi-Family and
Commercial Real Estate Loans.Loans secured by commercial
and multi-family real estate generally have larger balances and involve a
greater degree of risk than one- to four-family residential mortgage
loans.  Of primary concern in commercial and multi-family real estate
lending is the borrower’s creditworthiness and the feasibility and cash flow
potential of the project.  Payments on loans secured by income
properties often depend on successful operation and management of the
properties.  As a result, repayment of such loans may be subject to a
greater extent than residential real estate loans, to adverse conditions in the
real estate market or the economy.  To monitor cash flows on income
producing properties,





K -
8
 Index





we
require borrowers and loan guarantors, if any, to provide annual financial
statements on commercial and multi-family real estate loans.  In
reaching a decision on whether to make a commercial or multi-family real estate
loan, we consider and review a global cash flow analysis of the borrower and
consider the net operating income of the property, the borrower’s expertise,
credit history and profitability and the value of the underlying
property.  We have generally required that the properties securing
these real estate loans have debt service coverage ratios (the ratio of earnings
before debt service to debt service) of at least 1.10x.  An
environmental phase one report is obtained when the possibility exists that
hazardous materials may have existed on the site, or the site may have been
impacted by adjoining properties that handled hazardous materials.





Construction
Loans.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, occupied real estate. Risk of
loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction and the estimated
cost (including interest) of construction.  During the construction
phase, a number of factors could result in delays and cost overruns. If the
estimate of construction costs proves to be inaccurate, we may be required to
advance funds beyond the amount originally committed to permit completion of the
building or be confronted, at or before the maturity of the loan, with a
building having a value which is insufficient to assure full
repayment.  If we are forced to foreclose on a building before or at
completion due to a default, there can be no assurance that we will be able to
recover all of the unpaid balance of, and accrued interest on, the loan as well
as related foreclosure and holding costs.





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





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





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





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





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





K -
9
 Index





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





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





Summary
of Loan Activity





Year Ended
December 31,(Dollars in thousands)
                      
                      2008
                      
                      
                      2007Total
      loans at beginning of period
                      
                      $
                      122,243
                      
                      
                      $
                      98,448Originations:Real
      estate loans (1)
                      
                      
                      62,631
                      
                      
                      
                      67,291Commercial
      loans
                      
                      
                      8,217
                      
                      
                      
                      8,635Consumer
      loans, net activity
                      
                      
                      (4
                      )
                      
                      
                      1,099Total
      loans originated
                      
                      
                      70,844
                      
                      
                      
                      77,025Purchases
      of loan participations (2)
                      
                      
                      107
                      
                      
                      
                      613Less:Principal
      payments
                      
                      
                      39,589
                      
                      
                      
                      25,985Loan
      sales
                      
                      
                      14,347
                      
                      
                      
                      27,858Transfers
      to foreclosed real estate
                      
                      
                      —
                      
                      
                      
                      —Total loans at end of period
      (3)
                      
                      $
                      139,258
                      
                      
                      $
                      122,243


_____________________


(1)
            Includes
      $106,000 and $528,000 in real estate loans held-for-sale which are not
      reflected in our loan portfolio for the years ended December 31, 2008 and
      2007, respectively.


(2)
            From
      time to time, we purchase loan participations from local financial
      institutions to supplement our loan portfolio.  We purchased a
      total of two construction loan participations during 2006, which advances
      were made in 2008 and 2007 for completed construction
      stages.  The loans were underwritten by Walden Federal in
      accordance with its underwriting
standards.


(3)
            Excludes
      net deferred loan costs, the allowance for loan losses and unadvanced
      portions of construction loans.





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





Loans-to-One
Borrower Limit and Loan Category Concentration.A federal savings bank
generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and surplus. An additional
amount my be loaned, equal to 10% of unimpaired capital and surplus, if the loan
is secured by readily marketable collateral, which generally does not include
real estate. At December 31, 2008, our regulatory limit on loans-to-one borrower
was $2.2 million. At that date, our largest lending relationship consisted of
seven loans totaling $2.1 million attributed to one individual, including loans
to various corporate entities as well as direct loans. These loans were
performing in accordance with their original terms at December 31,
2008.





K -
10
 Index





Pursuant
to a risk management policy adopted by our board of directors, and in an effort
to closely monitor the origination and portfolio balances of higher risk real
estate loans and commercial business loans, Walden Federal has established a
goal to limit its combined balance of higher risk real estate loans plus
commercial business loans to a maximum of 450% of Tier 1 capital, with the
commercial business loans component not exceeding 100% of Tier 1
capital.  At December 31, 2008, the combined balance of our higher
risk real estate loans and commercial business loans was 351.7% of Tier 1
capital, with the commercial business loan component at 85.3% of Tier 1
capital.  We will continue to closely monitor the origination and
portfolio balances of these types of loans and may adjust these ratios after
consideration of all relevant factors, including consultations with the Office
of Thrift Supervision, our primary federal bank regulator.





Loan
Commitments.  We issue
commitments for fixed- and adjustable-rate mortgage loans conditioned upon the
occurrence of certain events.  Commitments to originate mortgage loans
are legally binding agreements to lend to our customers.  Generally,
our loan commitments expire after 60 days. See Note 13 in the Consolidated
Financial Statements.





Risk
Management





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





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





When a
borrower fails to make a required loan payment, we take a number of steps to
have the borrower cure the delinquency and restore the loan to current status,
including contacting the borrower by letter and phone at regular
intervals.  Generally, when a real estate loan becomes 90 days past
due, we institute foreclosure proceedings.  If a foreclosure action is
instituted and the loan is not brought current, paid in full or refinanced
before the foreclosure sale, the real property securing the loan generally goes
to foreclosure sale.  On non-real estate loans, we attempt to
repossess any other collateral that secures the loan if collection efforts have
failed.  Management informs the board of directors monthly of the
amount of loans delinquent more than 30 days.  Management provides
detailed information to the board of directors on loans 60 or more days past due
and all loans in foreclosure and repossessed property that we own.





Loans
that we sell are generally sold without recourse and therefore, there is minimal
risk that we would have to repurchase a previously sold loan due to early
default.  However, if it is determined that there were inadequacies or
exceptions in the underwriting process, we could be required to repurchase the
loan.  In the past ten years, we have not been required to repurchase
any loans sold to Freddie Mac.





Analysis of Nonperforming and
Classified Assets.  We consider repossessed assets and loans
that are 90 days or more past due to be nonperforming assets.  The
accrual of interest is generally discontinued when the contractual payment of
principal or interest has become 90 days past due or management has serious
doubts about further collectibility of principal or interest, even though the
loan is currently performing.  A loan may remain on accrual status if
it is in the process of collection and is either guaranteed or well
secured.  When a loan is placed on nonaccrual status, unpaid interest
is reversed against interest income.  Interest received on nonaccrual
loans generally is either applied against principal or reported as interest
income,





K -
11
 Index





according
to management’s judgment as to the collectibility of
principal.  Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual
terms for a reasonable period of time, and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.





Real
estate that we acquire as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until it is sold.  When
property is acquired, it is initially recorded at fair value at the date of
foreclosure less estimated disposal costs. Losses are charged to the allowance
for loan losses upon foreclosure. Holding costs and declines in fair value after
acquisition of the property result in charges against income. We had no
foreclosed real estate at December 31, 2008.





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





Nonperforming
Assets





December 31,(Dollars in thousands)
                      
                      2008
                      
                      
                      2007Nonaccrual
      loans:One-
      to four-family residential real estate
                      
                      $
                      2,384
                      
                      
                      $
                      86Construction
                      
                      
                      959
                      
                      
                      
                      —Multi-family
      and commercial real estate
                      
                      
                      360
                      
                      
                      
                      —Land
                      
                      
                      935
                      
                      
                      
                      16Commercial
                      
                      
                      318
                      
                      
                      
                      —Consumer
                      
                      
                      18
                      
                      
                      
                      22Total
      nonaccrual loans
                      
                      
                      4,974
                      
                      
                      
                      124Foreclosed
      real estate
                      
                      
                      —
                      
                      
                      
                      —Other
      nonperforming assets
                      
                      
                      —
                      
                      
                      
                      —Total
      nonperforming assets
                      
                      
                      4,974
                      
                      
                      
                      124Troubled
      debt restructurings
                      
                      
                      285
                      
                      
                      
                      —Total
      nonperforming assets and troubled debt restructurings
                      
                      $
                      5,259
                      
                      
                      $
                      124Total
      nonperforming loans to total loans
                      
                      
                      3.57
                      %
                      
                      
                      0.10
                      %Total
      nonperforming loans to total assets
                      
                      
                      3.31
                      
                      
                      
                      0.09Total nonperforming assets and troubled debt
      restructurings to total assets
                      
                      
                      3.50
                      
                      
                      
                      0.09





For the
year ended December 31, 2008, gross interest income that would have been
recorded had our non-accruing loans been current in accordance with their
original terms was approximately $208,000 as compared to approximately $8,000 at
December 31, 2007.





Increases
in nonperforming loans are a direct result of the continued housing market
downturn and rising unemployment. Nonperforming loans have increased by $4.8
million in the past year. Nonperforming one- to four-family residential loans
have increased by $2.3 million. Included in this increase is $1.2 million of
owner occupied residential loans and $1.1 million of single family builder spec
homes (one of these loans totaling $533,000 was paid off in January 2009). There
are loans extended to a residential subdivision totaling $1.2 million of which
$297,000, $544,000 and $318,000 are included in the construction loan, land loan
and commercial loan categories, respectively.





Federal
regulations require us to review and classify our assets on a regular
basis.  In addition, the Office of Thrift Supervision has the
authority to identify problem assets and, if appropriate, require them to be
classified.  There are three classifications for problem
assets:  substandard, doubtful and loss.  “Substandard
assets” must have one or more defined weaknesses and are characterized by the
distinct possibility that we will sustain some loss if the deficiencies are not
corrected.  “Doubtful assets” have the weaknesses of substandard
assets with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a





K -
12
 Index





high
possibility of loss.  An asset classified “loss” is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted.  The regulations also provide for a
“special mention” category, described as assets which do not currently expose us
to a sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving our close
attention.  When we classify an asset as substandard or doubtful we
evaluate the need to establish a specific allowance for loan
losses.  If we classify an asset as loss, we charge off an amount
equal to 100% of the portion of the asset classified as loss.





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





Classified
Assets





At
      December 31,(Dollars in thousands)
                      
                      2008
                      
                      
                      2007Substandard
      assets
                      
                      $
                      4,052
                      
                      
                      $
                      63Doubtful
      assets
                      
                      
                      37
                      
                      
                      
                      —Loss
      assets
                      
                      
                      —
                      
                      
                      
                      —Total classified assets
                      
                      $
                      4,089
                      
                      
                      $
                      63





The
reason for the increases in classified assets is discussed above in the
nonperforming assets section.





Special
mention loans have increased to $3.2 million as of December 31, 2008 from
$283,000 at December 31, 2007. The increase in special mention loans was a
result of the same economic factors discussed above and management’s assessment
of potential weaknesses in individual loans that deserve our close
attention.





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





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





Loan
Delinquencies





December 31,2008
                            
                            
                            2007(Dollars in thousands)
                            
                            30-59 Days Past Due
                            
                            
                            60-89 Days Past Due
                            
                            
                            30-59 Days Past Due
                            
                            
                            60-89 Days Past DueOne-
      to four-family residential real estate
                            
                            $
                            315
                            
                            
                            $
                            117
                            
                            
                            $
                            333
                            
                            
                            $
                            79Construction
                            
                            
                            435
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Commercial
      and multi-family real estate
                            
                            
                            340
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Land
                            
                            
                            914
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Commercial
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —Consumer
                            
                            
                            2
                            
                            
                            
                            —
                            
                            
                            
                            1
                            
                            
                            
                            1Total
                            
                            $
                            2,006
                            
                            
                            $
                            117
                            
                            
                            $
                            334
                            
                            
                            $
                            80





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





K -
13
 Index





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





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





We
establish a general allowance for loans that are not classified to recognize the
inherent losses associated with lending activities.  This general
valuation allowance is determined by segregating the loans by loan category and
assigning allowance percentages to each category.  The allowance
percentages have been derived using percentages commonly applied under the
regulatory framework for Walden Federal and other similarly-sized
institutions.  The percentages may be adjusted for significant factors
that, in management’s judgment, affect the collectibility of the portfolio as of
the evaluation date.  These significant factors may include changes in
lending policies and procedures, changes in existing general economic and
business conditions affecting our primary lending areas, credit quality trends,
collateral value, loan volumes and concentrations, seasoning of the loan
portfolio, recent loss experience in particular segments of the portfolio,
duration of the current business cycle and bank regulatory examination
results.  The applied loss factors are reevaluated quarterly to ensure
their relevance in the current economic environment.





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





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





At
December 31, 2008, our allowance for loan losses represented 0.97% of total
loans. The allowance for loan losses increased by 71.2% from December 31, 2007
to December 31, 2008, increased by the provision for loan losses of $579,000 and
reduced by net charge-offs of $19,000.  The decision to increase the
allowance reflected management’s consideration of decreases in the real estate
values in our market area and increases in our non-performing loans. Other
factors affecting the allowance calculation are national and local economic
trends and conditions, industry conditions and changes in credit concentrations.
Factors such as quality of lending management and staff and lending standards
remained reasonably stable during this period.





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





K -
14
 Index





Allocation
of Allowance of Loan Losses





December
      31,2008
                            
                            
                            2007(Dollars in thousands)
                            
                            Amount
                            
                            
                            % of Loans in Category to Total
      Loans
                            
                            
                            Amount
                            
                            
                            % of Loans in Category to Total
      LoansOne-
      to four-family residential real estate
                            
                            $
                            161
                            
                            
                            
                            47.1
                            %
                            
                            $
                            99
                            
                            
                            
                            40.7
                            %Construction
                            
                            
                            100
                            
                            
                            
                            6.6
                            
                            
                            
                            120
                            
                            
                            
                            9.0Multi-family
      and commercial real estate
                            
                            
                            210
                            
                            
                            
                            17.9
                            
                            
                            
                            157
                            
                            
                            
                            18.4Land
                            
                            
                            599
                            
                            
                            
                            9.8
                            
                            
                            
                            155
                            
                            
                            
                            8.5Commercial
                            
                            
                            162
                            
                            
                            
                            9.2
                            
                            
                            
                            174
                            
                            
                            
                            12.7Consumer
                            
                            
                            115
                            
                            
                            
                            9.4
                            
                            
                            
                            82
                            
                            
                            
                            10.7Total allowance for loan
    losses
                            
                            $
                            1,347
                            
                            
                            
                            100.0
                            %
                            
                            $
                            787
                            
                            
                            
                            100.0
                            %





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





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





K -
15
 Index





Analysis of Loan Loss
Experience.





Year
      Ended December 31,(Dollars in thousands)
                      
                      2008
                      
                      
                      2007Allowance
      at beginning of period
                      
                      $
                      787
                      
                      
                      $
                      623Provision
      for loan losses
                      
                      
                      579
                      
                      
                      
                      185Charge
      offs:One-
      to four-family residential real estate loans
                      
                      
                      —
                      
                      
                      
                      —Construction
                      
                      
                      —
                      
                      
                      
                      —Commercial
      and multi-family real estate loans
                      
                      
                      —
                      
                      
                      
                      —Land
                      
                      
                      —
                      
                      
                      
                      —Commercial
      loans
                      
                      
                      —
                      
                      
                      
                      —Consumer
      loans
                      
                      
                      23
                      
                      
                      
                      25Total
      charge-offs
                      
                      
                      23
                      
                      
                      
                      25Recoveries:One-
      to four-family residential real estate loans
                      
                      
                      —
                      
                      
                      
                      —Construction
                      
                      
                      —
                      
                      
                      
                      —Commercial
      and multi-family real estate loans
                      
                      
                      —
                      
                      
                      
                      —Land
                      
                      
                      —
                      
                      
                      
                      —Commercial
      loans
                      
                      
                      —
                      
                      
                      
                      —Consumer
      loans
                      
                      
                      4
                      
                      
                      
                      4Total
      recoveries
                      
                      
                      4
                      
                      
                      
                      4Net
      charge-offs
                      
                      
                      19
                      
                      
                      
                      21Allowance
      at end of period
                      
                      $
                      1,347
                      
                      
                      $
                      787Allowance
      to nonperforming loans
                      
                      
                      27.1
                      %
                      
                      
                      634.7
                      %Allowance
      to total loans outstanding at the end of the period
                      
                      
                      0.97
                      
                      
                      
                      0.64Net charge-offs to average loans outstanding
      during the period
                      
                      
                      0.01
                      
                      
                      
                      0.02





Investment
Activities





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





At
December 31, 2008, our investment portfolio totaled $2.5 million, or 1.7% of
total assets, and consisted primarily of U.S. agency securities and
mortgage-backed securities.





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





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





K -
16
 Index





portfolios
is conducted to determine if the fair value of any security has declined below
its carrying value and whether such decline is other-than-temporary. If such
decline is deemed to be other-than-temporary, the security is written down to a
new cost basis and the resulting loss is charged against earnings. At December
31, 2008, we had no securities classified as trading.





The
following table sets forth the amortized cost and fair values of our securities
portfolio at the dates indicated (excludes FHLB stock).





Investment
Securities





December
      31,2008
                            
                            
                            2007(Dollars in thousands)
                            
                            Amortized Cost
                            
                            
                            Fair Value
                            
                            
                            Amortized Cost
                            
                            
                            Fair ValueSecurities
      available for sale:U.S.
      Government agency securities
                            
                            $
                            1,000
                            
                            
                            $
                            1,002
                            
                            
                            $
                            1,000
                            
                            
                            $
                            1,003Total
      available for sale
                            
                            
                            1,000
                            
                            
                            
                            1,002
                            
                            
                            
                            1,000
                            
                            
                            
                            1,003Securities
      held to maturity:U.S.
      Government agency securities
                            
                            
                            750
                            
                            
                            
                            756
                            
                            
                            
                            500
                            
                            
                            
                            502Mortgage-backed
      securities
                            
                            
                            759
                            
                            
                            
                            774
                            
                            
                            
                            1,274
                            
                            
                            
                            1,274Total
      held to maturity
                            
                            
                            1,509
                            
                            
                            
                            1,530
                            
                            
                            
                            1,774
                            
                            
                            
                            1,776Total
                            
                            $
                            2,509
                            
                            
                            $
                            2,532
                            
                            
                            $
                            2,774
                            
                            
                            $
                            2,779





The
following table sets forth the stated maturities and weighted average yields of
investment securities at December 31, 2008.  Certain mortgage-backed
securities have adjustable interest rates and will reprice annually within the
various maturity ranges.  These repricing schedules are not reflected
in the table below.  Approximately $88,000 of the mortgage-backed
securities listed have adjustable interest rates.





Investment
Maturities Schedule





One Year or Less
                                            
                                            
                                            More than One Year to Five
      Years
                                            
                                            
                                            More than Five Years to Ten
      Years
                                            
                                            
                                            More than Ten Years
                                            
                                            
                                            TotalDecember 31, 2008
                                              (Dollars in thousands)
                                            
                                            Carrying Value
                                            
                                            
                                            Weighted Average Yield
                                            
                                            
                                            Carrying Value
                                            
                                            
                                            Weighted Average Yield
                                            
                                            
                                            Carrying Value
                                            
                                            
                                            Weighted Average Yield
                                            
                                            
                                            Carrying Value
                                            
                                            
                                            Weighted Average Yield
                                            
                                            
                                            Carrying Value
                                            
                                            
                                            Weighted Average YieldSecurities
      available-for-sale:U.S.
      Government agency securities
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            1,002
                                            
                                            
                                            
                                            1.63
                                            %
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            1,002
                                            
                                            
                                            
                                            1.63
                                            %Total
      available for sale
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,002
                                            
                                            
                                            
                                            1.63
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,002
                                            
                                            
                                            
                                            1.63Securities
      held to maturity:U.S.
      Government agency securities
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            750
                                            
                                            
                                            
                                            4.00
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            750
                                            
                                            
                                            
                                            4.00Mortgage-backed
      securities
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            671
                                            
                                            
                                            
                                            5.07
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            88
                                            
                                            
                                            
                                            4.50
                                            %
                                            
                                            
                                            759
                                            
                                            
                                            
                                            5.00Total
      held to maturity
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            1,421
                                            
                                            
                                            
                                            4.51
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            88
                                            
                                            
                                            
                                            4.50
                                            
                                            
                                            
                                            1,509
                                            
                                            
                                            
                                            4.50Total
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            2,423
                                            
                                            
                                            
                                            3.32
                                            %
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            $
                                            88
                                            
                                            
                                            
                                            4.50
                                            %
                                            
                                            $
                                            2,511
                                            
                                            
                                            
                                            3.36
                                            %





K -
17
 Index





Deposit
Activities and Other Sources of Funds





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





Deposit
Accounts.Substantially all of our depositors are residents of the State of New
York.  Deposits are attracted from within our market area through
advertising and the offering of a broad selection of deposit instruments,
including noninterest-bearing demand deposits (such as checking accounts),
interest-bearing demand accounts (such as NOW and money market accounts),
savings accounts and certificates of deposit.  In addition to accounts
for individuals, we also offer commercial checking accounts designed for the
businesses operating in our market area.  We do not have any brokered
deposits. Municipal deposits comprise a portion of our total
deposits.  The New York State Banking Department has designated the
Town of Mount Hope, including the Village of Otisville, as a Banking Development
District.  The objective of the program is to encourage the
establishment of bank branches in geographic locations where there is a
demonstrated need for banking services.  The New York State Office of
the Comptroller is authorized to deposit funds with our Otisville
branch.  Additionally, Walden Federal can accept public funds from the
Town of Mount Hope and the Village of Otisville.  At December 31,
2008, $10.0 million, or 8.0% of our total deposits consisted of one municipal
deposit from the New York State Office of the Comptroller.  We have
applied to the New York State Banking Department to renew this $10.0 million
certificate of deposit for one additional year and we expect this certificate of
deposit to remain with us past April 2009. At December 31, 2008, we had a total
of $76.0 million in certificates of deposit, of which $74.4 million had
remaining maturities of one year or less. Based on historical experience, we
believe we will retain a large portion of these accounts upon
maturity.





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





Deposits





December
      31,2008
                            
                            
                            2007(Dollars in thousands)
                            
                            Amount
                            
                            
                            Percent
                            
                            
                            Amount
                            
                            
                            PercentNoninterest-bearing
      demand deposits
                            
                            $
                            16,947
                            
                            
                            
                            13.6
                            %
                            
                            $
                            17,441
                            
                            
                            
                            15.6
                            %Interest-bearing
      demand deposits
                            
                            
                            6,644
                            
                            
                            
                            5.3
                            
                            
                            
                            6,446
                            
                            
                            
                            5.7Money
      market accounts
                            
                            
                            11,579
                            
                            
                            
                            9.3
                            
                            
                            
                            11,170
                            
                            
                            
                            10.0Savings
      accounts
                            
                            
                            13,561
                            
                            
                            
                            10.9
                            
                            
                            
                            13,645
                            
                            
                            
                            12.2Certificates
      of deposit
                            
                            
                            76,008
                            
                            
                            
                            60.9
                            
                            
                            
                            63,359
                            
                            
                            
                            56.5Total
                            
                            $
                            124,739
                            
                            
                            
                            100.0
                            %
                            
                            $
                            112,061
                            
                            
                            
                            100.0
                            %





Time
Deposit Maturities of $100,000 or more





December 31, 2008 (Dollars in
      thousands)
                      
                      Certificates of DepositMaturity
      PeriodThree
      months or less
                      
                      $
                      8,720Over
      three through six months
                      
                      
                      12,865Over
      six through twelve months
                      
                      
                      7,653Over
      twelve months
                      
                      
                      305Total
                      
                      $
                      29,543





Borrowings.We have the ability to
utilize advances from the Federal Home Loan Bank of New York to supplement our
investable funds.  The Federal Home Loan Bank functions as a central
reserve bank providing credit for member financial institutions.  As a
member, we are required to own capital stock in the





K -
18
 Index





Federal
Home Loan Bank and are authorized to apply for advances on the security of such
stock and certain of our mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met.  Advances are
made under several different programs, each having its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of an institution’s net worth or
on the Federal Home Loan Bank’s assessment of the institution’s
creditworthiness. The Bank has a maximum borrowing capacity with the
Federal Home Loan Bank of approximately $45.1 million, including line of credit
facilities, of which $10.0 million was used to secure a municipal letter of
credit and $4.4 million was outstanding under FHLB advances at
December 31, 2008.





We had
Federal Home Loan Bank short-term advances at December 31, 2008 of $2.5 million.
As of December 31, 2008, we had the ability to borrow $26.9 million under our
line of credit facilities with the Federal Home Loan Bank of which $1.9 million
was outstanding.





Borrowings





Year
      Ended December 31,(Dollars in thousands)
                      
                      2008
                      
                      
                      2007Maximum
      amount outstanding at any month end during the period:FHLB
      advances
                      
                      $
                      5,550
                      
                      
                      $
                      6,325Average
      amount outstanding during the period:FHLB
      advances
                      
                      $
                      2,437
                      
                      
                      $
                      1,638Weighted
      average interest rate during the period:FHLB
      advances
                      
                      
                      2.38
                      %
                      
                      
                      5.43
                      %Balance
      outstanding at end of period:FHLB
      advances
                      
                      $
                      4,375
                      
                      
                      
                      —Weighted
      average interest rate at end of period:FHLB advances
                      
                      
                      1.42
                      %
                      
                      
                      0.00
                      %





Personnel





At
December 31, 2008, we had 58 full-time employees and four part-time employees,
none of whom is represented by a collective bargaining unit.





Subsidiaries





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





REGULATION
AND SUPERVISION





General





Walden
Federal is subject to extensive regulation, examination and supervision by the
Office of Thrift Supervision, as its primary federal regulator, and the Federal
Deposit Insurance Corporation, as the insurer of its deposits.  Walden
Federal is a member of the Federal Home Loan Bank System and its deposit
accounts are insured up to applicable limits by the Deposit Insurance Fund
managed by the Federal Deposit Insurance Corporation.  Walden Federal
must file reports with the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation concerning its activities and financial condition in
addition to obtaining regulatory approvals before entering into certain
transactions such as mergers with, or acquisitions of, other
financial





K -
19
 Index





institutions.  There
are periodic examinations by the Office of Thrift Supervision and, under certain
circumstances, the Federal Deposit Insurance Corporation to evaluate Walden
Federal’s safety and soundness and compliance with various regulatory
requirements.  This regulatory structure is intended primarily for the
protection of the insurance fund and depositors.  The regulatory
structure also gives the regulatory authorities extensive discretion in
connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory
purposes.  Any change in such policies, whether by the Office of
Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could
have a material adverse impact on Hometown Bancorp, Hometown Bancorp MHC and
Walden Federal and their operations.  Hometown Bancorp and Hometown
Bancorp MHC, as savings and loan holding companies, are required to file certain
reports with, are subject to examination by, and otherwise must comply with the
rules and regulations of the Office of Thrift Supervision.





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





Regulation
of Federal Savings Associations





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





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





The
Office of Thrift Supervision also has authority to establish individual minimum
capital requirements in appropriate cases upon a determination that an
institution’s capital level is or may become inadequate in light of the
particular circumstances.  At December 31, 2008, Walden Federal met
each of these capital requirements.





Prompt Corrective
Regulatory Action. The Office of Thrift
Supervision is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution’s





K -
20
 Index





degree of
undercapitalization.  Generally, a savings institution that has a
ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier
1 (core) capital to risk-weighted assets of less than 4% or a ratio of core
capital to total assets of less than 4% (3% or less for institutions with the
highest examination rating) is considered to be “undercapitalized.”  A
savings institution that has a total risk-based capital ratio less than 6%, a
Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is
considered to be “significantly undercapitalized” and a savings institution that
has a tangible capital to assets ratio equal to or less than 2% is deemed to be
“critically undercapitalized.”  Subject to a narrow exception, the
Office of Thrift Supervision is required to appoint a receiver or conservator
within specified time frames for an institution that is “critically
undercapitalized.”  An institution must file a capital restoration
plan with the Office of Thrift Supervision within 45 days of the date it
receives notice that it is “undercapitalized,” “significantly undercapitalized”
or “critically undercapitalized.”  Compliance with the plan must be
guaranteed by any parent holding company in the amount of the lesser of 5% of
the savings association’s total assets when it was deemed undercapitalized or
the amount necessary to achieve compliance with applicable capital
regulations.  In addition, numerous mandatory supervisory actions
become immediately applicable to an undercapitalized institution, including, but
not limited to, increased monitoring by regulators and restrictions on growth,
capital distributions and expansion.  “Significantly undercapitalized”
and “critically undercapitalized” institutions are subject to more extensive
mandatory regulatory actions.  The Office of Thrift Supervision could
also take any one of a number of discretionary supervisory actions, including
the issuance of a capital directive and the replacement of senior executive
officers and directors.  At December 31, 2008, Walden Federal was
well-capitalized.





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





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





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





K -
21
 Index





“qualified
thrift investments.”  A savings institution that fails the qualified
thrift lender test is subject to certain operating restrictions and may be
required to convert to a bank charter.  As of December 31, 2008,
Walden Federal met the qualified thrift lender test.





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





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





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





Insurance
of Deposit Accounts.Deposit
accounts at Walden Federal are insured by the Federal Deposit Insurance
Corporation, generally up to a maximum of $100,000 for each separately insured
depositor and up to a maximum of $250,000 for self-directed retirement accounts.
However, the Federal Deposit Insurance Corporation increased the deposit
insurance available on all deposit accounts to $250,000, effective until
December 31, 2009.  In addition, certain noninterest-bearing
transaction accounts maintained with financial institutions participating in the
Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program
are fully insured regardless of the dollar amount until December 31,
2009.  Walden Federal has opted not to participate in the Federal
Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program. See “Temporary Liquidity Guarantee
Program” for more information.





The
Federal Deposit Insurance Corporation imposes an assessment against all
depository institutions for deposit insurance. This assessment is based on the
risk category of the institution and, prior to 2009, ranged from five to 43
basis points of the institution’s deposits. On December 22, 2008, the Federal
Deposit Insurance Corporation published a final rule that raises the current
deposit insurance assessment rates uniformly for all institutions by 7 basis
points (to a range from 12 to 50 basis points) effective for the first quarter
of 2009.  On February 27, 2009, the Federal Deposit Insurance
Corporation issued a final rule that would also alter the way the Federal
Deposit Insurance Corporation calculates federal deposit insurance assessment
rates beginning in the second quarter of 2009 and thereafter.





K -
22
 Index





Under the
rule, the Federal Deposit Insurance Corporation would first establish an
institution’s initial base assessment rate.  This initial base
assessment rate would range, depending on the risk category of the institution,
from 12 to 45 basis points.  The Federal Deposit Insurance Corporation
would then adjust the initial base assessment (higher or lower) to obtain the
total base assessment rate.  The adjustments to the initial base
assessment rate would be based upon an institution’s levels of unsecured debt,
secured liabilities, and brokered deposits.  The total base assessment
rate would range from 7 to 77.5 basis points of the institution’s deposits.
Additionally, the Federal Deposit Insurance Corporation issued an interim rule
that would impose a special assessment on June 30, 2009, which would be
collected on September 30, 2009. The impact of this special 20 basis point
assessment based on deposits at December 31, 2008 would be approximately
$255,000. Future special assessments could also be assessed.





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





In
addition to the Federal Deposit Insurance Corporation assessments, the Financing
Corporation (“FICO”) is authorized to impose and collect, with the approval of
the Federal Deposit Insurance Corporation, assessments for anticipated payments,
issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. The
bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter
ended December 31, 2008, the annualized FICO assessment was equal to 1.10 basis
points for each $100 in domestic deposits maintained at an
institution.





Temporary
Liquidity Guarantee Program.  On October 14, 2008, the Federal
Deposit Insurance Corporation announced a new program – the Temporary Liquidity
Guarantee Program.  This program has two components. One guarantees
newly issued senior unsecured debt of a participating organization, up to
certain limits established for each institution, issued between October 14, 2008
and June 30, 2009. The Federal Deposit Insurance Corporation will pay the unpaid
principal and interest on a Federal Deposit Insurance Corporation-guaranteed
debt instrument upon the uncured failure of the participating entity to make a
timely payment of principal or interest in accordance with the terms of the
instrument.  The guarantee will remain in effect until June 30, 2012.
In return for the Federal Deposit Insurance Corporation’s guarantee,
participating institutions will pay the Federal Deposit Insurance Corporation a
fee based on the amount and maturity of the debt.  Walden Federal
opted not to participate in this component of the Temporary Liquidity Guarantee
Program.





The other
component of the program provides full federal deposit insurance coverage for
non-interest bearing transaction deposit accounts, regardless of dollar amount,
until December 31, 2009. An annualized 10 basis point assessment on balances in
noninterest-bearing transaction accounts that exceed the existing deposit
insurance limit of $250,000 will be assessed on a quarterly basis to insured
depository institutions that have not opted out of this component of the
Temporary Liquidity Guarantee Program.  Walden Federal opted not to
participate in this component of the Temporary Liquidity Guarantee
Program.





U.S. Treasury’s
Troubled Asset Relief Program Capital Purchase Program.The Emergency
Economic Stabilization Act of 2008 was enacted in October 2008 and provides the
U.S. Secretary of the Treasury with broad authority to implement certain actions
to help restore stability and liquidity to U.S. markets. One of the provisions
resulting from the legislation is the Troubled Asset Relief Program, Capital
Purchase Program (“CPP”), which provides direct equity investment in perpetual
preferred stock by the U.S. Treasury Department in qualified financial
institutions. The program is voluntary and requires an institution to comply
with a number of restrictions and provisions, including limits on executive
compensation, stock redemptions and declaration of dividends.  The CPP
provides for a minimum investment of one percent of total risk-





K -
23
 Index





weighted
assets and a maximum investment equal to the lesser of three percent of total
risk-weighted assets or $25 billion. Participation in the program is not
automatic and is subject to approval by the U.S. Treasury
Department.  Hometown Bancorp will not participate in the
CPP.





In
addition, the current economic crisis has generated new federal legislation,
including the American Recovery and Reinvestment Act of 2009 (“ARRA”), which has
created new corporate governance reporting obligations, as well as compensation
and financial restrictions, on banks and financial services companies receiving
federal assistance pursuant to this statute and the TARP Capital Purchase
Program.  There can be no assurance that some of these restrictions
may be applied more broadly in the future to financial institutions that are not
receiving federal assistance.  Moreover, it is likely that additional
legislation will be enacted in the future affecting the regulation of financial
institutions and their holding companies.





Federal Home Loan
Bank System.  Walden Federal is a member of the Federal Home
Loan Bank System, which consists of 12 regional Federal Home Loan
Banks.  The Federal Home Loan Bank provides a central credit facility
primarily for member institutions.  Walden Federal, as a member of the
Federal Home Loan Bank of New York, is required to acquire and hold shares of
capital stock in that Federal Home Loan Bank.  Walden Federal was in
compliance with this requirement with an investment in Federal Home Loan Bank
stock at December 31, 2008 of $395,000.





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





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





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





Holding
Company Regulation





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





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





K -
24
 Index





permitted
for financial holding companies.  Financial holding companies may
engage in a broad array of financial service activities including insurance and
securities.





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





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





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





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





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





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





K -
25
 Index





Bancorp
MHC own the same percentage of common stock in the new holding company as they
owned in Hometown Bancorp immediately before conversion.  The total
number of shares held by stockholders other than Hometown Bancorp MHC after a
conversion transaction would be increased by any purchases by such stockholders
in the stock offering conducted as part of the conversion
transaction.





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





FEDERAL
AND STATE TAXATION





Federal
Income Taxation





General.We
report our income on a fiscal year basis using the accrual method of
accounting.  The federal income tax laws apply to us in the same
manner as to other corporations with some exceptions, including particularly our
reserve for bad debts discussed below.  The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to us.  Our
federal income tax returns have been either audited or closed under the statute
of limitations through tax year 2005.  For its 2008 fiscal year,
Walden Federal’s maximum federal income tax rate was 34%.





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





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





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





K -
26
 Index





liquidation.  Dividends
paid out of Walden Federal’s current or accumulated earnings and profits will
not be so included in Walden Federal’s taxable income.





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





State
Taxation





New York
Taxation.  Hometown Bancorp reports income on a calendar year
basis to New York State.  New York State franchise tax on corporations
is imposed in an amount equal to the greater of (a) 7.1%  of “entire
net income” allocable to New York State, (b) 3% of “alternative entire net
income” allocable to New York State, or (c) 0.01% of the average value of assets
allocable to New York State plus nominal minimum tax of $250 per
company.  Entire net income is based on federal taxable income,
subject to certain modifications.  Alternative entire net income is
equal to entire net income without certain modifications.





Bad Debt
Reserves.  Deferred tax liabilities have not been recognized
with respect to the New York State base-year reserve of approximately $4.8
million at December 31, 2008, since Walden Federal does not expect that these
amounts will become taxable in the foreseeable future.





ITEM
      1A.
            RISK
      FACTORS





The
current economic downturn coupled with turmoil and uncertainty in the financial
markets may adversely impact Hometown Bancorp and its ability to successfully
execute its business plan.





The
current economic downturn may adversely impact the financial condition of the
households and businesses comprising Hometown Bancorp’s loan customers. Such a
deteriorating financial condition could arise from loss of employment or
business revenue exacerbated by a reduction in the value of real estate
collateralizing Hometown Bancorp’s customers’ loans. As a consequence, Hometown
Bancorp may experience an increase in nonperforming loans which will negatively
impact earnings through reduced collections of interest income coupled with
possible increases in the provision for loan losses, charge-offs and foreclosure
costs. Hometown Bancorp’s ability to originate new loans in accordance with its
business plan goals and objectives may also be diminished as a result of these
same factors.





Moreover,
the general level of uncertainty in the marketplace – particularly concerning
counterparty risk – has greatly diminished the sources of funding readily
available to many large financial institutions. Consequently, such institutions
are placing greater emphasis on their retail deposit channel to attract funding
thereby placing upward pressure on retail deposit rates in the marketplace. As a
result, despite the recent reduction in overall market interest rates, Hometown
Bancorp’s cost of deposits may remain stable or increase while its yield on
earning assets is reduced. This condition would reduce Hometown Bancorp’s net
interest rate spread and margin and its earnings in future periods.





Hometown
Bancorp’s expenses will increase as a result of increases in Federal Deposit
Insurance Corporation insurance premiums.





The FDIC
imposes an assessment against financial institutions for deposit insurance. This
assessment is based on the risk category of the institution and currently ranges
from 5 to 43 basis points of the institution’s deposits. On December 22, 2008,
the FDIC published a final rule raising the current deposit insurance assessment
rates uniformly for all institutions by seven basis points (to a range from 12
to 50 basis





K -
27
 Index





points)
for the first quarter of 2009. On February 27, 2009, the FDIC also issued a
final rule that revises the way the FDIC calculates federal deposit insurance
assessment rates beginning in the second quarter of 2009.  Under the
new rule, the FDIC will first establish an institution’s initial base assessment
rate.  This initial base assessment rate will range, depending on the
risk category of the institution, from 12 to 45 basis points.  The
FDIC will then adjust the initial base assessment (higher or lower) to obtain
the total base assessment rate.  The adjustments to the initial base
assessment rate will be based upon an institution’s levels of unsecured debt,
secured liabilities, and brokered deposits.  The total base assessment
rate will range from 7 to 77.5 basis points of the institution’s deposits.
Additionally, the FDIC issued an interim rule that would impose a special
assessment on June 30, 2009, which would be collected on September 30, 2009. The
interim rule also allows for additional special assessments.





A
downturn in the local economy or local real estate values could hurt Hometown
Bancorp’s profits.





Almost
all of Hometown Bancorp’s real estate loans are secured by real estate in
upstate New York.  As a result of this concentration, a downturn in
the local economy could cause significant increases in non-performing loans,
which would hurt Hometown Bancorp’s profits.  Additionally, a decrease
in asset quality could require additions to Hometown Bancorp’s allowance for
loan losses through increased provisions for loan losses, which would hurt
Hometown Bancorp’s profits.  Until 2007, there had been significant
increases in real estate values in Hometown Bancorp’s market area.  As
a result of these rising home prices, Hometown Bancorp’s loans were well
collateralized.  During 2007, however, the real estate market in
Orange County began to slow, and during 2008, real estate values in Orange
County declined.  Further declines in real estate values could cause
some of Hometown Bancorp’s mortgage loans to become inadequately collateralized,
which would expose Hometown Bancorp to a greater risk of loss.





ITEM
      1B.
            UNRESOLVED
      STAFF COMMENTS





None.





K -
28
 Index





ITEM
      2.
            PROPERTIES





We
conduct our business through our main office and five branch offices. The
following table sets forth certain information relating to these facilities at
December 31, 2008.





Location
                                              
                                              Owned/ Leased
                                              
                                              Date of Lease Expiration (including lease
      extensions)
                                              
                                              Net Book Value of Property or Leasehold
      Improvements at December 31, 2008(In
      thousands)Main
      Office:12
      Main Street
                                                Walden,
      New York 12586
                                              
                                              Owned
                                              
                                              N/A
                                              
                                              $
      1,151Branches:(Montgomery)
                                                201
      Ward Street, Suite L
                                                Montgomery,
      New York 12549
                                              
                                              Leased
                                              
                                              10/01/2011
                                              
                                              4(Monroe
      Wal-Mart)
                                                288
      Larkin Drive
                                                Monroe,
      New York 10950
                                              
                                              Leased
                                              
                                              10/31/2015
                                              
                                              93(Otisville)
                                                2
      Sanatorium Avenue, Suite 2
                                                Otisville,
      New York 10963
                                              
                                              Leased
                                              
                                              11/01/2014
                                              
                                              67(Monroe
      ShopRite)
                                                785
      Route 17M
                                                Monroe,
      New York 10950
                                              
                                              Leased
                                              
                                              06/01/2021
                                              
                                              114(Newburgh)
                                                211
      South Plank Road
                                                Newburgh,
      New York 12550
                                              
                                              Owned
                                              
                                              N/A
                                              
                                              1,742Other
      Properties:(Loan
      Center)
                                                74
      W. Main Street
                                                Walden,
      New York 12586
                                              
                                              Owned
                                              
                                              N/A
                                              
                                              504(Loan
      Annex)
                                                8
      Main Street
                                                Walden,
      New York 12586
                                              
                                              Owned
                                              
                                              N/A
                                              
                                              76





As of
December 31, 2008, the total net book value of Walden Federal’s offices was $3.8
million.





ITEM
      3.
            LEGAL
      PROCEEDINGS





Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens, condemnation proceedings on properties in which we hold security
interests, claims involving the making and servicing of real property loans and
other issues incident to our business. At December 31, 2008, we were not a party
to any pending legal proceedings that we believe would have a material adverse
effect on our financial condition, results of operations or cash
flows.





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





None.





K -
29
 Index





PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Market,
Holder and Dividend Information





The
Company’s common stock is listed on the OTC Bulletin Board under the trading
symbol “HTWC.OB” The Company completed its initial public offering on June 28,
2007 and commenced trading on June 29, 2007. The following table sets forth the
high and low bid prices of the common stock for the 2008 and 2007 fiscal years,
as reported on the OTC Bulletin Board. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.





For the Year EndedDecember 31, 20084thQuarter
                
                
                3rdQuarter
                
                
                2ndQuarter
                
                
                1st QuarterHigh
                
                $
                6.81
                
                
                $
                7.25
                
                
                $
                7.50
                
                
                $
                7.60Low
                
                
                3.55
                
                
                
                6.75
                
                
                
                5.89
                
                
                $
                6.90





For the Year EndedDecember 31, 20074thQuarter
                
                
                3rdQuarter
                
                
                2ndQuarter
                
                
                1st QuarterHigh
                
                $
                8.20
                
                
                $
                10.05
                
                
                $
                10.00
                
                
                
                N/ALow
                
                
                7.40
                
                
                
                7.55
                
                
                
                10.00
                
                
                
                N/A





As of
December 31, 2008, there were approximately 307 holders of record of the
Company’s common stock, excluding the number of persons or entities holding
stock in street name through various brokerage firms.





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





As of
December 31, 2008, Hometown Bancorp satisfied all prescribed capital
requirements.  Future dividend payments will depend on the Company’s
profitability, approval by its Board of Directors and prevailing OTS
regulations.





On July
28, 2008, the Board of Directors of the Company announced a stock repurchase
program pursuant to which the Company intends to purchase up to 5% of its
outstanding shares (excluding shares held by Hometown Bancorp, MHC, the
Company’s mutual holding company), or up to 53,561 shares for a period up to 12
months.





The table
below sets forth the information with respect to purchases made by or on behalf
of Hometown Bancorp, Inc. or any ‘affiliated purchaser’ (as defined in Rule
240.10b-18(a)(3)) of common stock during the quarter ended December 31,
2008:





K -
30
 Index




Total Number of Shares
      Purchased
                          
                          
                          Average Price Paid Per
Share
                          
                          
                          Total Number of Shares Purchased as Part of
      Publicly Announced Plans or Programs
                          
                          
                          Maximum Number of Shares That May Yet Be Purchased
      Under the Plans or ProgramsOctober 1 through October
31
                          
                          
                          10,000
                          
                          
                          $
                          6.84
                          
                          
                          
                          21,500
                          
                          
                          
                          32,061November 1 through November
    30
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          21,500
                          
                          
                          
                          32,061December 1 through December
    31
                          
                          
                          25,000
                          
                          
                          $
                          5.41
                          
                          
                          
                          46,500
                          
                          
                          
                          7,061





On March
10, 2009, we announced that we completed the stock repurchase of 53,561 shares
of the program announced on July 28, 2008.





ITEM
      6.
            SELECTED
      FINANCIAL DATA





The
Selected Financial and Other Data in the Company’s 2008 Annual Report to
Stockholders filed as Exhibit 13 to this Form 10-K are incorporated herein by
reference.





ITEM
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of the Company’s 2008 Annual Report to Stockholders filed as
Exhibit 13 to this Form 10-K is incorporated herein by reference.





ITEM
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





The
“Interest Rate Risk Management” section of the Company’s 2008 Annual Report to
Stockholders filed as Exhibit 13 to this Form 10-K is incorporated herein by
reference.





ITEM
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The
Financial Statements in the Company’s 2008 Annual Report to Stockholders filed
as Exhibit 13 to this Form 10-K are incorporated herein by
reference.





ITEM9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM
      9A(T).
            CONTROLS
      AND PROCEDURES





(a)
Hometown Bancorp’s management, including Hometown Bancorp’s principal executive
officer and principal financial officer, have evaluated the effectiveness of
Hometown Bancorp’s “disclosure controls and procedures,” as such term is defined
in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Based upon their evaluation, the principal
executive officer and principal financial officer concluded that, as of the end
of the period covered by this report, Hometown Bancorp’s disclosure controls and
procedures were effective for the purpose of ensuring that the information
required to be disclosed in the reports that Hometown Bancorp files or submits
under the Exchange Act with the Securities and Exchange Commission (the “SEC”)
(1) is recorded, processed, summarized and reported





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31
 Index





within
the time periods specified in the SEC’s rules and forms, and (2) is accumulated
and communicated to Hometown Bancorp’s management, including its principal
executive and principal financial officers, as appropriate to allow timely
decisions regarding required disclosure.





(b) The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The internal control process
has been designed under our supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company’s financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of
America.





Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2008, utilizing the framework
established in Internal
Control — Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment,
management has determined that the Company’s internal control over financial
reporting as of December 31, 2008 is effective.





Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America; (2) receipts and
expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company’s assets that could have a material effect on the Company’s
financial statements.





All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this annual report.





(c) 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.





ITEM
      9B.
            OTHER
      INFORMATION





None.





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 Index





PART
III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE





DIRECTORS





For
information concerning the directors of Hometown Bancorp, the information
contained under the section captioned “Proposal 1 – Election of
Directors” in Hometown Bancorp’s Proxy Statement for the 2008 Annual
Meeting of Stockholders the (“Proxy Statement”) is incorporated by
reference.





EXECUTIVE
OFFICERS OF THE REGISTRANT





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





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





Below is
information regarding the executive officers.  Each officer has held
his or her current position for at least the last five years, unless otherwise
stated.  Ages presented are as of December 31, 2008.





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





Stephen W. Dederick has been
Vice President and Chief Financial Officer of Walden Federal since
2004.  Prior to joining Walden Federal, Mr. Dederick served as Vice
President and Chief Financial Officer of Community Bank of Orange, NA from April
2002 until March 2004.  Mr. Dederick served as Senior Vice President
at Berkshire Bank from March 2001 until January 2002.  Mr. Dederick
served as Senior Vice President and Chief Financial Officer of Goshen Savings
Bank from 1997 until its acquisition in 2001.  Mr. Dederick has served
as Vice President and Chief Financial Officer of Hometown Bancorp MHC and
Hometown Bancorp since their formation.  Mr. Dederick joined Walden
Federal in 2004.  Age 52.





Judith B. Weyant has been
Senior Vice President and Chief Operating Officer of Walden Federal since
1992.  Ms. Weyant has served as Senior Vice President and Chief
Operating Officer of Hometown Bancorp MHC and Hometown Bancorp since their
formation and as Corporate Secretary of Walden Federal, Hometown Bancorp MHC and
Hometown Bancorp since January 2007.  Ms. Weyant joined Walden Federal
in 1984.  Age 56.





L. Bruce Lott has been Senior
Vice President and Chief Lending Officer of Walden Federal since
2004.  Mr. Lott served as Vice President and Senior Loan Officer of
Walden Federal since 2000 and joined Walden Federal in 1995.  Mr. Lott
has also served as Senior Vice President of Hometown Bancorp MHC and Hometown
Bancorp since their formation.  Age 55.





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 Index





COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT





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





DISCLOSURE
OF AUDIT COMMITTEE FINANCIAL EXPERT





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





DISCLOSURE
OF CODE OF ETHICS AND BUSINESS CONDUCT





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





ITEM
      11.
            EXECUTIVE
      COMPENSATION





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





ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MAN­AGEMENT AND RELATED
      STOCKHOLDER MATTERS





(a)
            Security
      Ownership of Certain Beneficial
Owners





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





(b)
            Security
      Ownership of Management





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





(c)
            Changes
      in Control





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





(d)
            Equity
      Compensation Plan Information





Plan
                Number of securities to be issued upon exercise of
      outstanding options and rights
                Weighted average exercise price
      (1)
                Number of securities remaining available for
      issuance under planEquity compensation plans approved by
      stockholders
                -
                $-
                163,301Equity compensation plans not approved by
      stockholders
                -
                -
                -Total
                -
                $-
                163,301





(1) No
shares have been issued. Closing price as of December 31, 2008 was
$4.30.





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 Index





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Certain
Relationships and Related Transactions





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





Director
Independence





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





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





The
information relating to the principal accountant fees and expenses is
incorporated herein by reference to the section captioned “Proposal 2 –
Ratification of Independent Registered Public Accounting Firm” in the Proxy
Statement for the 2009 Annual Meeting of Stockholders.





PART
IV





ITEM
      15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





3.1
              Charter
      of Hometown Bancorp, Inc.(1)


3.2
              Bylaws
      of Hometown Bancorp, Inc.(2)


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


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


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


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


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


10.5
            Walden
      Federal Savings and Loan Association Directors’ Retirement
      Plan


10.6
              Walden
      Federal Savings and Loan Association Employee Stock Ownership
      Plan


10.7
              Hometown
      Bancorp, Inc. 2008 Equity Incentive Plan (3)


13.0
              2008
      Annual Report to Stockholders


21.0
              Subsidiaries
      of the Registrant (1)


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


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


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





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


(2)
            Incorporated
      herein by reference to the Exhibit to Hometown Bancorp, Inc.’s Form 8-K
      filed on July 25, 2008.


(3)
            Incorporated
      herein by reference to Appendix A of Hometown Bancorp, Inc.’s Definitive
      Proxy Statement for its 2008 Annual Meeting of Stockholders filed on April
      7, 2008.





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 Index





SIGNATURES





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





Hometown
      Bancorp, Inc.Date:
      March 31, 2009
              /s/ Thomas F. GibneyBy:
      Thomas F. GibneyPresident
      and Chief Executive Officer





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





Name
                
                Title
                
                Date/s/ Thomas F. Gibney
                
                President,
      Chief Executive
                
                March
      31, 2009Thomas
      F. Gibney
                
                Officer
      and Director(principal
      executive officer)/s/ Stephen W. Dederick
                
                Chief
      Financial Officer and
                
                March
      31, 2009Stephen
      W. Dederick
                
                Vice
      President(principal
      accounting and financial officer)/s/ Joseph B. Horan, III
                
                Director
                
                March
      31, 2009Joseph
      B. Horan, III/s/ Steven E. Howell
                
                Director
                
                March
      31, 2009Steven
      E. Howell/s/ Gerald N. Jacobowitz
                
                Director
                
                March
      31, 2009Gerald
      N. Jacobowitz/s/ Graham S. Jamison
                
                Director
                
                March
      31, 2009Graham
      S. Jamison/s/ Stephen E. Sabine
                
                Director
                
                March
      31, 2009Stephen
      E. Sabine/s/ Kenneth R. Schliphack
                
                Director
                
                March
      31, 2009Kenneth
      R. Schliphack/s/ Curt J. Schoeberl, Sr.
                
                Director
                
                March
      31, 2009Curt
      J. Schoeberl, Sr.






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