Exhibit
13











Logo 1











2008
ANNUAL REPORT










PRESIDENT’S
LETTER





Dear
Stockholders and Customers:





It is my
privilege to present the 2008 Annual Report for Hometown Bancorp,
Inc.  On behalf of the Directors and Officers of the Company and all
of those associated with its subsidiary, Walden Federal, I wish to welcome you
as a shareholder of Hometown Bancorp and deliver our second Annual
Report.





2008
proved to be a very challenging year due to the financial turmoil and economic
events of the year.  I know that it is not necessary for me to comment
on or describe those events, however, in some fashion or another they have had
an impact on our results for the year just ended.  Nonetheless, we are
pleased that we were able to avoid the types of losses that so many banks
experienced during the year and report to you that Hometown Bancorp performed
profitably, and continued to grow and build for the future.





The year
2008 was a year of significant growth for Hometown Bancorp, Inc.  In
the face of tough competition, I am pleased to report that total assets grew by
$17.7 million to a record $150.4 million – a 13.3% increase over the previous
year.  Deposit account balances also increased by $12.7 million to
$124.7 million – an 11.3% increase over the previous year.





We again
experienced vigorous lending activity.  Our loan portfolio grew from
$121.7 million at year end 2007 to $139.1 million at year end 2008, excluding
loans originated for sale. Total loan production for residential mortgage loans,
for both portfolio and loans sold in the secondary market (including
construction loans) totaled $37.0 million and represented the most residential
mortgage loans closed in any of the prior four years.  All of this
surprisingly was within our goals and objectives for the year.





Hometown
Bancorp, Inc. reported net income for the year ended 2008 of $565,000 compared
to $850,000 for the year ended 2007.  The primary reason for the
decrease in net income was an increase in the Company’s provision for loan
losses.  Our allowance for loan losses was increased to $1.3 million,
up from $787,000 as of year-end last year.  This increase was
partially the result of management’s consideration of decreases in real estate
values and increases in our non-accrual loans.  As a result, our
allowance for loan losses as a percentage of total gross loans increased from
0.64% at year end 2007 to 0.97% at year end 2008. As we evaluate the performance
of our loan portfolio (which consists primarily of real estate secured loans),
the markets in which we lend and the overall economy, we expect non-performing
assets to rise as we weather the storm of current economic
conditions.  This can be expected to result in increases to our
provision for loan losses as we move forward.





For 2009
to date our business remains strong and we are experiencing increased levels of
activity in all areas of our operation. We are well aware that our stock price
began 2008 trading at $7.51 and ended the year at $4.30.  We strongly
believe that like many other financial institutions our stock price has been
affected by factors outside our control, including the current market and
economic conditions, and that it fails to reflect our many
accomplishments.





During
2008 we determined that our stock price was at a level we deemed attractive
compared to its book value.  As a result we repurchased 46,500 shares
investing $284,000 at an average price of $6.11.  We cannot predict
where economic events of the coming year will take us, but rest assured as
shareholders of Hometown Bancorp, Inc. we will do everything possible to protect
your investment and position our company to take advantage of
opportunities.  Additionally, our


1


employees
continue to be motivated by the fact that they too are shareholders and have a
significant personal investment in our company’s success.





Challenges
in the business community present opportunities for community banks, such as
Walden Federal, to forge new relationships as well as strengthen existing ones.
As a result, in addition to our efforts to enhance retail banking products and
services, we continue our dedication to serving our business customers. In 2008
we introduced several new products for our commercial/business customers
including Remote Deposit Capture and the Walden Federal Business Debit
card.  As of year-end we have a number of projects currently in
testing that we plan to release in the near future. Two of these projects are
“Command Business Online Banking” for our business customers and
e-Statements.  Additionally, we will enhance our online banking system
so that those customers that use this service can sign up for FREE email/text
message alerts.





In 2008
we received approval to offer FHA loan products.  We anticipate
offering these products during the first half of 2009.  Additionally
in 2008, Walden Federal was accepted as a participating lender in the New York
State Energy Smart Loan Fund Program with NYSERDA.  This program
allows Walden Federal to lend at a lower interest rate to residential and
commercial borrowers who wish to build or improve in an energy efficient
manner.  We plan to launch this product in the early part of
2009.  We also look to explore online mortgage applications via the
Web in 2009.





Walden
Federal continues to own and to service an extended residential mortgage
portfolio.  In response to the struggles of many borrowers who have
suffered employment loss, as well as significant equity impairment in their
homes, a number of initiatives are being put into place at the current
time.  We have always been supportive of our borrowers and will
continue to work with them to navigate through these difficult economic
times.  Additionally, we are continually monitoring all programs being
initiated through various agencies and will be proactive in connecting our
borrowers to these programs as details of availability and criteria are made
available.





Walden
Federal is subject to various regulatory capital requirements by the federal
banking agencies and we continue to maintain a strong capital position well in
excess of regulatory requirements and are considered well-capitalized at
December 31, 2008.  We did not apply for capital assistance under the
Treasury Department’s Capital Purchase Program; an element of the Troubled
Assets Relief Program (“TARP”) intended to provide banks with additional
capital.  This decision was based upon our analysis of our balance
sheet and our belief that we are well positioned to continue lending to
individuals and businesses in our market.  Capital management shall
continue to occupy the time and energies of the Board and
management.





While
capital remains very important, so is steady growth.  In that regard,
we have continued to pursue growth opportunities with a long-term focus on
expanding at a controlled pace.  After an extensive analysis of our
space needs at our existing facilities, Walden Federal purchased the building in
Newburgh that houses our sixth and newest branch.  It is our intention
to move our commercial loan department into this building during the second
quarter of 2009.  Construction and the build out of this area will
begin shortly.   We believe that the proximity to our Newburgh
branch location will serve us well and provide us new opportunities for
growth.  In 2008, we created a new position for a Business Development
Officer.  The person with that responsibility will also work out of
this facility.


2


In 2008
we were proud to continue our focus on community involvement.  We have
always dedicated funds, time and resources to making a difference in our
communities, and we always will.  Our sponsorship of local teams,
charity events, town festivals and other endeavors makes us a respected partner
of the community and a good corporate citizen.  Most of our employees
live in the communities we serve and we have a vested interest in making our
communities a better place to live.  We are privileged to have so many
outstanding people at all levels of the organization take part in so many
activities.





During
the year the Board of Directors of Hometown Bancorp, Inc. appointed
Steven E. Howell to the Board of Directors.  Mr. Howell
is a Certified Public Accountant in the states of New York and New Jersey and a
DABFA - Diplomat of the American Board of Forensic Accountants.  He is
a specialist in corporate accounting, offering expertise in the manufacturing
niche, corporate tax planning, projection and budget implementation, succession
planning, banking, and investment relationship building. Steve's financial
experience and leadership will help position your company for the
future.





We enter
2009 with a commitment to build on our strengths, on focusing on the retention
of existing customers and also by developing new business.  With a
goal of moderate growth in our future, we will differentiate our bank by
delivering a broad range of products and services backed by knowledge and
experience.  We will support these efforts with a disciplined approach
to expense control and efficiency gains.  We remain confident that our
focus will ultimately generate what our shareholders want - sustainable,
long-term value.





As
we enter our 90th year of
service, we are proud that Walden Federal has become a symbol of trust, honesty
and integrity to so many people. We are truly honored to have such a
distinction.  I promise you to continue to operate your bank in this
manner.





We are
proud of our performance in 2008 - a year that was challenging for the entire
banking industry.  No doubt, 2009 will be a challenging
year.  Although the environment in which we operate is still
uncertain, we see many opportunities for our bank to build value for our
shareholders, customers and the communities we serve.  With our plan
for the future, the commitment of an experienced management team, a high quality
work force and a dedicated Board of Directors we are up for the
challenge.





Thank you
for your confidence, your support and your investment in our
company.











Thomas F. Gibney


President
and Chief Executive Officer


3


Selected
Financial and Other Data





The
summary financial information presented below is derived, in part, from our
audited consolidated financial statements.  The following is only a
summary and you should read it in conjunction with the audited consolidated
financial statements and notes beginning on page 17.  The information
at December 31, 2008 and 2007 and for the years ended December 31,
2008 and 2007 is derived in part from the audited consolidated financial
statements that appear in this Annual Report.





At or for the Year EndedDecember 31,(Dollars in thousands)
                            
                            2008
                            
                            
                            2007Financial
      Condition Data:Total
      assets
                            
                            $
                            150,369
                            
                            
                            $
                            132,690Investment
      securities
                            
                            
                            2,511
                            
                            
                            
                            2,777Loans
      receivable, net (1)
                            
                            
                            137,974
                            
                            
                            
                            121,510Deposits
                            
                            
                            124,739
                            
                            
                            
                            112,061Borrowings
                            
                            
                            4,375
                            
                            
                            
                            -Total
      stockholders’ equity
                            
                            
                            18,794
                            
                            
                            
                            18,480Operating
      Data:Interest
      income
                            
                            $
                            8,726
                            
                            
                            $
                            8,915Interest
      expense
                            
                            
                            2,499
                            
                            
                            
                            3,112Net
      interest income
                            
                            
                            6,227
                            
                            
                            
                            5,803Provision
      for loan losses
                            
                            
                            579
                            
                            
                            
                            185Net
      interest income after provision for loan losses
                            
                            
                            5,648
                            
                            
                            
                            5,618Noninterest
      income
                            
                            
                            1,745
                            
                            
                            
                            1,729Noninterest
      expenses
                            
                            
                            6,492
                            
                            
                            
                            5,917Income
      before taxes
                            
                            
                            901
                            
                            
                            
                            1,430Income
      tax expense
                            
                            
                            336
                            
                            
                            
                            580Net income
                            
                            $
                            565
                            
                            
                            $
                            850





(1)
Includes held for sale loans of $106,000 and $528,000 at December 31, 2008 and
2007, respectively.


4




At or for the Year EndedDecember 31,2008
                        
                        
                        2007Performance
      Ratios:Return
      on average assets
                        
                        
                        0.40
                        %
                        
                        
                        0.67
                        %Return
      on average equity
                        
                        
                        2.99
                        
                        
                        
                        6.24Interest
      rate spread (1)
                        
                        
                        4.09
                        
                        
                        
                        4.02Net
      interest margin (2)
                        
                        
                        4.66
                        
                        
                        
                        4.75Noninterest
      income to average assets
                        
                        
                        1.25
                        
                        
                        
                        1.35Noninterest
      expense to average assets
                        
                        
                        4.64
                        
                        
                        
                        4.63Efficiency
      ratio (3)
                        
                        
                        81.44
                        
                        
                        
                        78.56Average
      interest-earning assets to average interest-bearing
      liabilities
                        
                        
                        130.47
                        
                        
                        
                        128.79Average
      equity to average assets
                        
                        
                        13.49
                        
                        
                        
                        10.67Capital
      Ratios (4):Tangible
      capital
                        
                        
                        9.97
                        
                        
                        
                        10.80Core
      capital
                        
                        
                        9.97
                        
                        
                        
                        10.80Total
      risk-based capital
                        
                        
                        14.40
                        
                        
                        
                        15.14Asset
      Quality Ratios:Allowance
      for loan losses as a percent of total loans
                        
                        
                        0.97
                        
                        
                        
                        0.64Allowance
      for loan losses as a percent of nonperforming loans
                        
                        
                        27.10
                        
                        
                        
                        634.68Net
      charge-offs to average outstanding loans during the period
                        
                        
                        0.01
                        
                        
                        
                        0.02Nonperforming
      loans as a percent of total loans
                        
                        
                        3.57
                        
                        
                        
                        0.10Nonperforming
      loans as a percent of total assets
                        
                        
                        3.31
                        
                        
                        
                        0.09Nonperforming
      assets and troubled debt restructurings as a percent of total
      assets
                        
                        
                        3.50
                        
                        
                        
                        0.09Other
      Data:Number
      of:Deposit
      accounts
                        
                        
                        12,434
                        
                        
                        
                        12,404Offices
                        
                        
                        6
                        
                        
                        
                        6


____________________________________


(1)
            Represents
      the difference between the weighted average yield on average
      interest-earning assets and the weighted average cost of average
      interest-bearing liabilities.


(2)
            Represents
      net interest income as a percent of average interest-earning
      assets.


(3)
            Represents
      noninterest expense divided by the sum of net interest income and
      noninterest income.


(4)
            Capital
      ratios are for Walden Federal Savings and Loan
  Association.


5


MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





Management’s
discussion and analysis of financial condition and results of operations is
intended to assist in understanding our financial condition and results of
operations.  You should read this discussion in conjunction with the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements included in this Annual Report.





Overview





Our
principal business is to acquire deposits from individuals and businesses in the
communities surrounding our offices and to use these deposits to fund
loans.  We focus on providing our products and services to two
segments of customers:  individuals and small businesses.





Income.Our primary
source of pre-tax income is net interest income.  Net interest income
is the difference between interest income, which is the income that we earn on
our loans and investments, and interest expense, which is the interest that we
pay on our deposits and borrowings.  Changes in levels of interest
rates affect our net interest income.  During most of 2008 and the
latter part of 2007, short-term interest rates (which influence the rates we
earn on adjustable rate loans and we pay on deposits) have decreased. Our
spread between the interest we earn on loans and investments and the interest we
pay on deposits has positively affected our net interest income, due to the
decline in rates paid on interest-bearing deposits that exceeded the rate
decline in interest-earning assets.





A
secondary source of income is noninterest income, which is revenue that we
receive from providing products and services.  The majority of our
noninterest income generally comes from service charges and fees on deposit
accounts and loans and mortgage-banking income.





Provisionfor 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.  When additional allowances are
necessary, a provision for loan losses is charged to earnings.





Expenses.  The
noninterest expenses we incur in operating our business consists of salaries and
employee benefit expenses, occupancy and equipment expenses, data processing
expenses and other miscellaneous expenses, such as office supplies, telephone,
postage, advertising and professional services.





Our
largest noninterest expense is salaries and employee benefits, which consist
primarily of salaries and wages paid to our employees, payroll taxes, and
expenses for health insurance, retirement plans and other employee
benefits.  Our salaries and employee benefits expense has increased in
recent periods as a result of the addition of staff for our newer branches in
Newburgh and Monroe.  As a result of our initial public offering, our
noninterest expenses have increased as a result of operating as a public
company.  These additional expenses consist primarily of legal and
accounting fees and expenses of shareholder communications.


6


Occupancy
and equipment expenses, which are the fixed and variable costs of buildings and
equipment, consist primarily of branch lease expense, depreciation charges,
furniture and equipment expenses, maintenance, real estate taxes and costs of
utilities.  Our occupancy expenses have increased in recent periods
because of the expansion of our branch network.





Critical
Accounting Policies





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





The
allowance for loan losses is the amount estimated by management as necessary to
cover losses inherent in the loan portfolio at the balance sheet
date.  The allowance is established through the provision for loan
losses, which is charged to income.  Determining the amount of the
allowance for loan losses necessarily involves a high degree of
judgment.  Among the material estimates required to establish the
allowance are:  loss exposure at default; the amount and timing of
future cash flows on impaired loans; value of collateral; and determination of
loss factors to be applied to the various elements of the
portfolio.  All of these estimates are susceptible to significant
change.  Management reviews the level of the allowance at least
quarterly and establishes the provision for loan losses based upon an evaluation
of the portfolio, past loss experience, current economic conditions and other
factors related to the collectibility of the loan portfolio.  Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation.  In addition, the Office of Thrift Supervision, as an
integral part of its examination process, periodically reviews our allowance for
loan losses.  Such agency may require us to recognize adjustments to
the allowance based on its judgments about information available to it at the
time of its examination.  A large loss could deplete the allowance and
require increased provisions to replenish the allowance, which would adversely
affect earnings.  See Note 1 of the notes to the consolidated
financial statements in this Annual Report for the Company’s significant
accounting policies.





Operating/Business
Strategy





Our
strategy is to operate a well-capitalized and profitable community bank
dedicated to providing quality customer service backed by knowledge and
experience.  Our strategy historically has been to emphasize one-to
four-family residential lending.  While we have continued to focus on
residential lending, we have broadened the range of our products and services to
enhance profitability consistent with safety and soundness. We now offer a full
range of business products, as well as commercial real estate, builder/developer
loans and construction lending.  We have also introduced additional
products and services, such as business debit cards and “remote deposit
capture.”  Additionally, we have developed a more proactive sales
culture throughout the organization.  While we cannot guarantee our
success, we plan to achieve our goals by executing our strategy of:





Continuing
to pursue opportunities to expand and diversify our lending
portfolio





Historically,
we have emphasized single family residential lending within our
markets.  While this focus remains important because of our expertise
with this type of lending, we have also emphasized the origination of
builder/developer loans and commercial real estate lending as


7


a means
of increasing both interest income and non-interest income.  We
understand that builder/developer loans and commercial real estate loans
generally expose a lender to greater credit risk than loans secured by single
family properties.  The repayment of these loans depends on the
business and financial condition of the borrower and in the case of
builder/developer loans depends on the economic viability of the project being
financed.  Because of this, we, like other banks, generally charge
higher rates of interest for these types of loans than single family residential
loans.  We will continue to invest in new systems, personnel and
infrastructure. We have focused on improving and maintaining strong asset
quality by following conservative underwriting criteria with a focus on loans
secured by real estate.





Increasing
core deposits through aggressive marketing and the offering of new deposit
products and services





The Bank
continues to emphasize the generation of core deposits as they are our primary
source of funds for investing and lending.  Core deposits, which
include all deposit account types except certificates of deposit, comprise 39.1%
of total deposits at December 31, 2008 as compared to 43.5% for the previous
year end.  As of December 31, 2008, time deposits constituted 60.9% of
total deposits as compared to 56.5% as of December 31, 2007.  The
percentage of time deposits increased during 2008.  It reflects our
determination to utilize time deposits as an alternative to borrowing as a
source of funding operations.  In addition, with the competitive
pressures in 2008, we, like many other financial institutions, have found
customers moving funds to time deposits due to generally higher
rates.  We will continue to market our core deposits through in-branch
and local mail, print and radio advertising, as well as programs that link
various accounts and services together.  We will continue to customize
existing deposit products and introduce new products to meet the needs of our
customers and the communities we serve.   Our Business
Development Officer, a newly created position in 2008, will promote and
emphasize the generation of core deposits targeting commercial customers, in
particular using our new “Command Online Business Banking”, to be released in
early 2009.





Expanding
our branch network to enable us to continue to build our lending and deposit
franchise





We
continue to review potential branch sites, as well as other physical
plant/locations to meet the overall needs of the organization.  There
can be no assurance as to whether or when we will open such offices or
locations.  The Bank opened its sixth full-service branch office in
Newburgh, Orange County, New York in 2007.  In 2008, we purchased the
building in Newburgh that houses this branch.  We expect to move our
commercial real estate/business loan division to that building during the second
quarter of 2009.  Additionally, our Business Development Officer will
work out of that office.





Remaining
a Community Oriented Institution





As a
community-oriented financial institution, we emphasize providing quality
customer service backed by knowledge and experience.  We deliver
personalized service and respond with flexibility to customer
needs.  We have been, and continue to be, committed to meeting the
financial needs of the communities in which we operate.  Our
commitment to the communities we serve has been broadened due to the expansion
of our branch locations.  We contribute to worthy community and
non-profit causes.  Our officers and employees who give their time,
talent and resources, volunteered hundreds of hours in community and fundraising
events, from walk-a-thons to town clean-up days to community
celebrations.


8


Average
Balance Sheets and Related Yields and Rates





The
following table presents information regarding average balances of assets and
liabilities, the total dollar amounts of interest income and dividends from
average interest-earning assets, the total dollar amounts of interest expense on
average interest-bearing liabilities, and the resulting annualized average
yields and costs.  The yields and costs for the years indicated are
derived by dividing income or expense by the average balances of assets or
liabilities, respectively, for the years presented.  For purposes of
this table, average balances have been calculated using daily average balances,
and nonaccrual loans are included in average balances.  Loan fees and
costs are deferred and recognized as an adjustment in interest income on
loans.  None of the income reflected in the following table is
tax-exempt income.





Average
Balance Table





Year
      Ended December 31,2008
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2007(Dollars in thousands)
                                                                                                                                                                          
                                                                                                                                                                          AverageBalance
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          InterestandDividends
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Yield/Cost
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          AverageBalance
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          InterestandDividends
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          Yield/CostAssets:Interest-earning
      assets:Loans
      receivable
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          127,838
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          8,541
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6.68
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          109,347
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          8,272
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          7.56
                                                                                                                                                                          %Investment
      securities, taxable
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,667
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          111
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.16
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          9,574
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          472
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.93Other
      interest-earning assets
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,110
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          74
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.38
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,233
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          171
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5.29Total
      interest-earning assets
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          133,615
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          8,726
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6.53
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          122,154
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          8,915
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          7.30Noninterest-earning
      assets
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          6,284
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5,545Total
      assets
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          139,899
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          127,699Liabilities
      and stockholders’ equity:Interest-bearing
      liabilities:Interest-bearing
      demand deposits
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          6,207
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          18
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          0.29
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          6,257
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          16
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          0.26Money
      market accounts
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          11,913
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          198
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1.66
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          12,488
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          291
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.33Savings
      accounts
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          14,251
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          80
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          0.56
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          13,312
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          69
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          0.52Certificates
      of deposit
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          67,603
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,145
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.17
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          60,754
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,644
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.35Subscription
      funds
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          -
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          398
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          0.75Borrowings
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,437
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          58
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.38
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,638
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          89
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          5.43Total
      interest-bearing liabilities
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          102,411
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2,499
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          2.44
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          94,847
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3,112
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          3.28Noninterest-bearing
      demand deposits
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          16,710
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          17,243Other
      noninterest-bearing liabilities
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,903
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          1,988Total
      liabilities
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          121,024
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          114,078Stockholders’
      equity
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          18,875
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          13,621Total
      liabilities and stockholders’ equity
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          139,899
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          127,699Net
      interest income
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          6,227
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          $
                                                                                                                                                                          5,803Interest
      rate spread
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.09
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.02Net
      interest margin
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.66
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          4.75Average interest-earning assets toaverage
      interest-bearing liabilities
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          130.47
                                                                                                                                                                          %
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          
                                                                                                                                                                          128.79
                                                                                                                                                                          %





Rate/Volume
Analysis.  The following
table sets forth the effects of changing rates and volumes on our net interest
income.  The rate column shows the effects attributable to changes
in


9


rate
(changes in rate multiplied by prior volume).  The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by
prior rate).  The net column represents the sum of the prior
columns.  For purposes of this table, changes attributable to changes
in both rate and volume that cannot be segregated have been allocated
proportionately based on the changes due to rate and the changes due to
volume.





Net
Interest Income – Changes Due to Rate and Volume





2008
      Compared to 2007(Dollars in thousands)
                                                                
                                                                Volume
                                                                
                                                                
                                                                Rate
                                                                
                                                                
                                                                NetInterest
      income:Loans
      receivable
                                                                
                                                                $
                                                                1,302
                                                                
                                                                
                                                                $
                                                                (1,033
                                                                )
                                                                
                                                                $
                                                                269Investment
      securities, taxable
                                                                
                                                                
                                                                (297
                                                                )
                                                                
                                                                
                                                                (64
                                                                )
                                                                
                                                                
                                                                (361
                                                                )Other
      interest earning assets
                                                                
                                                                
                                                                (6
                                                                )
                                                                
                                                                
                                                                (91
                                                                )
                                                                
                                                                
                                                                (97
                                                                )Total
      interest income
                                                                
                                                                
                                                                999
                                                                
                                                                
                                                                
                                                                (1,188
                                                                )
                                                                
                                                                
                                                                (189
                                                                )Interest
      expense:Deposits
                                                                
                                                                
                                                                266
                                                                
                                                                
                                                                
                                                                (845
                                                                )
                                                                
                                                                
                                                                (579
                                                                )Subscription
      funds
                                                                
                                                                
                                                                (3
                                                                )
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (3
                                                                )Borrowings
                                                                
                                                                
                                                                32
                                                                
                                                                
                                                                
                                                                (63
                                                                )
                                                                
                                                                
                                                                (31
                                                                )Total
      interest expense
                                                                
                                                                
                                                                295
                                                                
                                                                
                                                                
                                                                (908
                                                                )
                                                                
                                                                
                                                                (613
                                                                )Increase (decrease) in net interest
      income
                                                                
                                                                $
                                                                704
                                                                
                                                                
                                                                $
                                                                (280
                                                                )
                                                                
                                                                $
                                                                424





Comparison
of Financial Condition at December 31, 2008 and 2007





Total Assets.Total assets grew $17.7 million, or 13.3%, to $150.4 million at December
31, 2008 from $132.7 million at December 31, 2007, due primarily to loan growth
which was offset in part by a reduction in cash and cash equivalents and
securities. Loans net, increased $16.5 million, or 13.5%, from $121.5 million at
December 31, 2007 to $138.0 million at December 31, 2008. Cash and cash
equivalents decreased by $810,000 to $3.2 million at December 31, 2008, while
securities decreased by $266,000 to $2.5 million at December 31,
2008.





Loans.At December 31,
2008, total loans, net, were $138.0 million, or 91.8% of total
assets.  During the year ended December 31, 2008, the loan portfolio
grew $16.5 million, or 13.5%. The growth was distributed across several
categories of the loan portfolio, particularly one- to four-family residential
real estate loans which increased by $15.6 million, land loans which increased
by $3.3 million and non-residential real estate loans which increased by
$2.9 million, offset by a decline in commercial business loans by $2.7 million
and construction loans of $1.8 million. We do not make subprime
loans.





Securities. The
investment securities portfolio was $2.5 million, or 1.7% of total assets, at
December 31, 2008 compared to $2.8 million or 2.1% of total assets at December
31, 2007. Our investment portfolio consists primarily of U.S. Government agency
securities and GNMA and FHLMC mortgage-backed securities. The decrease in
securities was primarily due to principal paydowns on the mortgage-backed
securities.





Deposits. Our primary source of
funds is retail deposit accounts, which are comprised of noninterest-bearing
demand accounts, interest-bearing demand accounts, money market accounts,
savings accounts and certificates of deposit. During the year ended December 31,
2008, deposits grew $12.7 million or 11.3% to $124.7 million from $112.1 million
at December 31, 2007. The


10


increase
in deposits was primarily due to the increase of $12.6 million in certificates
of deposit. Certificates of deposit increased primarily due to promotions to
fund loan growth and customers’ preference for higher deposit rates, offset by
decreases in non-interest bearing demand accounts of $494,000.





Borrowings.  We utilize
borrowings from the Federal Home Loan Bank of New York to supplement our source
of funds for loans and investments.  We are able to utilize borrowings
when necessary or advantageous as an alternative to deposits when a pricing
advantage exists, as a temporary source of funds to meet liquidity needs or to
manage our asset and liability position.  We had $2.4 million in
average balances of borrowings during the year ended December 31, 2008 as
compared to $1.6 million in average balances of borrowings during the year ended
December 31, 2007. Borrowings were used to fund the increase in loan growth in
excess of the deposit growth. We had borrowings of approximately $4.4 million at
December 31, 2008 and no borrowings at December 31, 2007.





Stockholders’Equity.Total
stockholders’ equity increased $314,000 from $18.5 million at December 31, 2007
to $18.8 million at December 31, 2008. Equity increased primarily due to
earnings of $565,000 for the year ended December 31, 2008, partially offset by
common stock repurchases of $284,000 during 2008.





Results
of Operations for the Years Ended December 31, 2008 and 2007





Overview.  For
the year ended December 31, 2008, we reported net income of $565,000 compared to
$850,000 for 2007. The decline in earnings was due to an increase of $394,000 in
the provision for loan losses and a $575,000 increase in non-interest expenses,
offset by a $424,000 increase in net interest income.





Net Interest
Income. Net
interest income increased $424,000, or 7.3% to $6.2 million for the year ended
December 31, 2008 from $5.8 million for the year ended December 31, 2007.
The increase in net interest income for the year ended December 31, 2008,
resulted primarily from a $3.9 million increase in the average balance of net
interest-earning assets, and by a 7 basis point increase in our net interest
rate spread in the comparable year periods. The decline in interest expense
outpaced the decline in interest income in 2008 as compared to 2007. The net
interest margin decreased 9 basis points for the comparable annual periods ended
December 31, 2008 and 2007.





Interest
income on loans increased $269,000, or 3.3%, to $8.5 million for the year ended
December 31, 2008 from $8.3 million for the year ended December 31, 2007,
as the average balance of the loan portfolio grew $18.5 million, or 16.9%, while
the average yield on the loan portfolio decreased 88 basis points to 6.68% for
2008. Loan growth was driven by an increase in one- to four-family residential
real estate loans, land and commercial real estate loans. The decrease in
the average yield was primarily the result of the Federal Reserve reducing the
federal funds rate by 5.00% since September 2007, which reduced the interest
rate on prime based adjustable rate loans.





Interest
income on investment securities decreased $361,000, or 76.5%, to $111,000 for
the year ended December 31, 2008 from $472,000 for the year ended December 31,
2007. The decline in interest income on investment securities was due to a
decrease in the average balance of investment securities of $6.9 million to $2.7
million for the year ended December 31, 2008 from $9.6 million for the year
ended December 31, 2007, as a result of a call on a $9.0
million


11


U.S.
Government agency security in September 2007. The decline was also due to a
decrease in the yield of 77 basis points to 4.16% for 2008 as compared to 4.93%
in 2007.





The shift
in the mix of interest-earning assets, combined with lower market rates,
decreased the average yield on interest earning assets to 6.53% during the year
ended December 31, 2008, compared to 7.30% for the prior year.





Interest
expense decreased 19.7% to $2.5 million for the year ended December 31, 2008
from $3.1 million for the year ended December 31, 2007. The decrease in interest
expense was primarily the result of the decrease in the average cost of deposits
from 3.25% in 2007 to 2.44% in 2008 due to the Federal Reserve’s actions to
lower market interest rates. The decrease in the average cost was partially
offset by an increase in the average balance of interest-bearing deposits during
the year ended December 31, 2008 of $7.2 million, or 7.7%, compared with
the prior year. This increase was due primarily to a $6.8 million increase in
the average balance of certificates of deposit, primarily due to customer
preference for higher interest rates, which was partially offset by a $575,000
decrease in the average balance of money market accounts.





For the
year ended December 31, 2008, our net interest margin decreased 9 basis points
to 4.66% from 4.75% for the prior year. If rates on loans continue to reprice
faster than rates on our deposits, we could continue to experience compression
of our net interest margin which could have a negative effect on our
profitability.





Provision for
Loan Losses. The provision for
loan losses increased $394,000 to $579,000 for the year ended December 31,
2008 compared to $185,000 for the year ended December 31, 2007. The
increase in the provision for loan losses during the year ended December 31,
2008 was partially the result of management’s consideration of decreases in the
real estate values in our market area and increases in our non-accrual loans.
The increase in the provision for loan losses for the year also reflected
management’s review of $1.2 million of land and construction loan participations
secured by a residential subdivision located in our market
area.  During the fourth quarter of 2008, management established a
specific loan loss allowance of $389,000 for such loans due to an updated
appraisal on the project indicating lower collateral values given current market
conditions.





Nonperforming
loans totaled $5.0 million, or 3.6% of total loans at December 31, 2008 compared
to $1.8 million, or 1.4% of total loans at September 30, 2008 and $124,000, or
0.1% of total loans at December 31, 2007. The $5.0 million in nonperforming
loans at year end were comprised of $2.4 million in one-to four-family
residential loans, (one of these loans totaling $533,000 was paid off in January
2009), $1.2 million of loans extended to the residential subdivision previously
mentioned, one loan to a builder for construction of an unsold home of $663,000
and $391,000 of land loans, primarily for a residential
subdivision.





We had
net charge-offs of $19,000 for the year ended December 31, 2008 compared to
$21,000 for the year ended December 31, 2007.





The
allowance for loan losses was $1.3 million, or 0.97% of total loans outstanding
as of December 31, 2008, as compared with $787,000, or 0.64% as of December 31,
2007.





Non-interest
Income.Non-interest income was $1.7 million for both the
years ended December 31, 2008 and 2007. Excluding the effect of a
non-recurring settlement of a litigation matter of $186,000 in 2008,
non-interest income decreased by $170,000. The litigation settlement was a
dispute over the proceeds of a sale of an other real estate owned property.
Contributing to


12


the
decrease in non-interest income for the year ended December 31, 2008, were
decreases in banking fees and service charges of $43,000 as a result of customer
preference for service charge free accounts and the competitive banking
environment. Mortgage banking income, net, decreased by $101,000 as a result of
the decrease in the volume of mortgages sold and the gains derived from such
sales. There were no losses on security sales in 2008 as compared to losses of
$2,000 on the sale of securities in 2007.





Non-interest
Income Summary





Year Ended December 31, (Dollars in
      thousands)
                          
                          2008
                          
                          
                          2007
                          
                          
                          $ Change
                          
                          
                          % ChangeBanking
      fees and service charges
                          
                          $
                          1,109
                          
                          
                          $
                          1,152
                          
                          
                          $
                          (43
                          )
                          
                          
                          (3.7
                          )%Mortgage
      banking income, net
                          
                          
                          312
                          
                          
                          
                          413
                          
                          
                          
                          (101
                          )
                          
                          
                          (24.5
                          )Realized
      losses on sale of securities
                          
                          
                          -
                          
                          
                          
                          (2
                          )
                          
                          
                          2
                          
                          
                          
                          100.0Investment
      brokerage fees
                          
                          
                          66
                          
                          
                          
                          84
                          
                          
                          
                          (18
                          )
                          
                          
                          (21.4
                          )Litigation
      settlement
                          
                          
                          186
                          
                          
                          
                          -
                          
                          
                          
                          186
                          
                          
                          
                          100.0Other
                          
                          
                          72
                          
                          
                          
                          82
                          
                          
                          
                          (10
                          )
                          
                          
                          (12.2
                          )Total
                          
                          $
                          1,745
                          
                          
                          $
                          1,729
                          
                          
                          $
                          16
                          
                          
                          
                          0.9
                          %





Non-interest
Expenses.Non-interest expenses increased $575,000, or 9.7% to
$6.5 million for the year ended December 31, 2008 compared to $5.9 million for
2007. Non-interest expenses include salary and employee benefits and all other
operating expenses which increased $198,000 for the year ended December 31,
2008, due to the Bank’s newest branch which opened in September 2007 in the Town
of Newburgh. In addition salary and medical benefits increased by $144,000 for
all staff in 2008. Expense for the FDIC deposit insurance premium increased
$36,000 in 2008. We anticipate increased FDIC deposit insurance premiums in 2009
which will increase non-interest expenses and adversely impact earnings.
Professional fees increased by $181,000 for the year ended December 31, 2008,
primarily due to expenses relating to being a public company.





Non-interest
Expenses Summary





Year Ended December 31, (Dollars in
      thousands)
                          
                          2008
                          
                          
                          2007
                          
                          
                          $ Change
                          
                          
                          % ChangeSalaries
      and employee benefits
                          
                          $
                          3,788
                          
                          
                          $
                          3,473
                          
                          
                          $
                          315
                          
                          
                          
                          9.1
                          %Advertising
      and marketing
                          
                          
                          240
                          
                          
                          
                          272
                          
                          
                          
                          (32
                          )
                          
                          
                          (11.8
                          )Telephone
      and postage
                          
                          
                          189
                          
                          
                          
                          193
                          
                          
                          
                          (4
                          )
                          
                          
                          (2.1
                          )Occupancy
      and equipment
                          
                          
                          715
                          
                          
                          
                          637
                          
                          
                          
                          78
                          
                          
                          
                          12.2Federal
      deposit insurance premiums
                          
                          
                          49
                          
                          
                          
                          13
                          
                          
                          
                          36
                          
                          
                          
                          276.9Data
      processing expenses
                          
                          
                          545
                          
                          
                          
                          504
                          
                          
                          
                          41
                          
                          
                          
                          8.1Professional
      fees
                          
                          
                          365
                          
                          
                          
                          184
                          
                          
                          
                          181
                          
                          
                          
                          98.4Printing
      and supplies
                          
                          
                          75
                          
                          
                          
                          81
                          
                          
                          
                          (6
                          )
                          
                          
                          (7.4
                          )Other
                          
                          
                          526
                          
                          
                          
                          560
                          
                          
                          
                          (34
                          )
                          
                          
                          (6.1
                          )Total
                          
                          $
                          6,492
                          
                          
                          $
                          5,917
                          
                          
                          $
                          575
                          
                          
                          
                          9.7
                          %





Income Tax
Expense. Income tax expense was $336,000 for the year ended December
31, 2008 as compared to $580,000 for the year ended December 31, 2007. Lower
levels of pre-tax income have resulted in a decrease in income tax
expense.





Interest Rate
Risk Management.  Our earnings and the market value of our
assets and liabilities are subject to fluctuations caused by changes in the
level of interest rates.  We manage the interest rate sensitivity of
our interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate
environment.  Deposit accounts


13


typically
react more quickly to changes in market interest rates than mortgage loans
because of the shorter maturities of deposits.  As a result, sharp
increases in interest rates may adversely affect our earnings while decreases in
interest rates may beneficially affect our earnings.  To reduce the
potential volatility of our earnings, we have sought to improve the match
between asset and liability maturities and rates, while maintaining an
acceptable interest rate spread.  Our strategy for managing interest
rate risk emphasizes:  originating loans with adjustable interest
rates; selling residential real estate fixed-rate loans with terms greater than
10 years ; and promoting core deposit products and short-term time
deposits.





We have
an Asset/Liability Management Committee to coordinate all aspects involving
asset/liability management.  The committee establishes and monitors
the volume, maturities, pricing and mix of assets and funding sources with the
objective of managing assets and funding sources to provide results that are
consistent with liquidity, growth, risk limits and profitability
goals.





We use an
interest rate sensitivity analysis prepared by the Office of Thrift Supervision
to review our level of interest rate risk.  This analysis measures
interest rate risk by computing changes in net portfolio value of our cash flows
from assets, liabilities and off-balance sheet items in the event of a range of
assumed changes in market interest rates.  Net portfolio value
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items.  This analysis assesses the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained 100 to
300 basis point increase or 50 to 100 basis point decrease in market interest
rates with no effect given to any steps that we might take to counter the effect
of that interest rate movement.  We measure interest rate risk by
modeling the changes in net portfolio value over a variety of interest rate
scenarios.  The following table, which is based on information that we
provide to the Office of Thrift Supervision, presents the change in our net
portfolio value at December 31, 2008 that would occur in the event of an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, with no effect given to any steps that we might take to counteract
that change.





NPV
Analysis





Net
      Portfolio Value (Dollars in thousands)
                            
                            
                            Net
      Portfolio Value as % of Portfolio Value of AssetsBasis Point (“bp”)Change in Rates
                            
                            $ Amount
                            
                            
                            $ Change
                            
                            
                            % Change
                            
                            
                            NPV Ratio
                            
                            
                            Change300
                            
                            $
                            16,381
                            
                            
                            $
                            (3,478
                            )
                            
                            
                            (17.5
                            )%
                            
                            
                            10.77
                            %
                            
                            
                            (190
                            )
      bp200
                            
                            
                            18,123
                            
                            
                            
                            (1,736
                            )
                            
                            
                            (8.7
                            )
                            
                            
                            11.76
                            
                            
                            
                            (92
                            )
      bp100
                            
                            
                            19,143
                            
                            
                            
                            (716
                            )
                            
                            
                            (3.6
                            )
                            
                            
                            12.31
                            
                            
                            
                            (37
                            )
      bp0
                            
                            
                            19,859
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            12.68
                            
                            
                            
                            —(50)
                            
                            
                            20,065
                            
                            
                            
                            206
                            
                            
                            
                            1.0
                            
                            
                            
                            12.78
                            
                            
                            
                            10
                            bp(100)
                            
                            
                            20,129
                            
                            
                            
                            270
                            
                            
                            
                            1.4
                            
                            
                            
                            12.81
                            
                            
                            
                            13
                            bp





The
Office of Thrift Supervision uses certain assumptions in assessing the interest
rate risk of savings associations.  These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market
values of certain assets under differing interest rate scenarios, among
others.  As with any method of measuring interest rate risk, certain
shortcomings are inherent in the method of analysis presented in the foregoing
table.  For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in


14


different
degrees to changes in market interest rates.  Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates.  Additionally, certain assets, such as
adjustable-rate mortgage loans, have features that restrict changes in interest
rates on a short-term basis and over the life of the asset.  Further,
in the event of a change in interest rates, expected rates of prepayments on
loans and early withdrawals from certificates could deviate significantly from
those assumed in calculating the table.





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





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





Our most
liquid assets are cash and cash equivalents.  The levels of these
assets depend on our operating, financing, lending and investing activities
during any given period.  At December 31, 2008, cash and cash
equivalents totaled $3.2 million.  In addition, at December 31, 2008,
we had line of credit arrangements to borrow up to $26.9 million from the
Federal Home Loan Bank of New York.  On December 31, 2008, we had
approximately $4.4 million of advances outstanding.





A
significant use of our liquidity is the funding of loan
originations.  At December 31, 2008, we had $20.4 million in loan
commitments outstanding, which primarily consisted of $3.6 million in unadvanced
portions of construction loans, $3.2 million in commitments to fund one- to
four-family residential real estate loans, $2.5 million in unused home equity
lines of credit, $8.1 million in unused commercial lines of credit and $1.9
million in commitments to fund commercial loans.  Historically, many
of the commitments expire without being fully drawn; therefore, the total amount
of commitments do not necessarily represent future cash
requirements.  Another significant use of our liquidity is the funding
of deposit withdrawals.  Certificates of deposit due within one year
of December 31, 2008 totaled $74.4 million, or 97.9% of certificates of
deposit.  The large percentage of certificates of deposit that mature
within one year reflects customers’ hesitancy to invest their funds for long
periods in the recent low interest rate environment.  If these
maturing deposits do not remain with us, we will be required to seek other
sources of funds, including other certificates of deposit and
borrowings.  Depending on market conditions, we may be required to pay
higher than market rates on such deposits or other borrowings.  We
believe, however, based on past experience that a significant portion of our
certificates of deposit will remain with us.  We have the ability to
attract and retain deposits by adjusting the interest rates
offered.





Capital
Management.  We are subject to various regulatory capital
requirements administered by the Office of Thrift Supervision, including a
risk-based capital measure.  The risk-based capital guidelines include
both a definition of capital and a framework for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad
risk categories.  At December 31, 2008, we exceeded all of our
regulatory capital requirements.


15


Our stock
offering increased our equity by $9.1 million in June 2007, thereby improving
our liquidity. Over time, the initial level of liquidity has been reduced
as net proceeds from the stock offering were used for general corporate
purposes, including the funding of lending activities.  Our financial
condition and results of operations have been enhanced by the capital from the
offering, resulting in increased net interest-earning assets and net interest
income.  However, the large increase in equity resulting from the
capital raised in the offering, has had an adverse impact on our return on
equity.  We may use capital management tools such as cash dividends
and common share repurchases.





Future
dividend payments will depend on our profitability, approval by its Board of
Directors and prevailing OTS regulations.  To date, we have not
declared any cash dividends. We announced on July 28, 2008, a stock
repurchase program to repurchase 53,561 shares, representing 5% of its
outstanding shares (excluding shares held by Hometown Bancorp MHC). On March 10,
2009 we completed the repurchase of all 53,561 shares.





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





For the
year ended December 31, 2008, we did not engage in any off-balance sheet
transactions reasonably likely to have a material effect on our financial
condition, results of operations or cash flows.





Impact
of Recent Accounting Pronouncements





For a
discussion of the impact of recent accounting pronouncements, see note 1 of
the notes to the consolidated financial statements included in this annual
report.





Effect
of Inflation and Changing Prices





The
consolidated financial statements and related financial data presented in this
annual report have been prepared in accordance with accounting
principles generally accepted in the United States of America, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation.  The primary impact of
inflation on our operations is reflected in increased operating
costs.  Unlike most industrial companies, virtually all the assets and
liabilities of a financial institution are monetary in nature.  As a
result, interest rates generally have a more significant impact on a financial
institution’s performance than do general levels of
inflation.  Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and
services.


16


Index
to Consolidated Financial Statements and Schedules











PageReport
      of Independent Registered Public Accounting Firm
                                      
                                      18Consolidated
      Financial StatementsConsolidated
      Balance Sheets
                                      
                                      19Consolidated
      Statements of Income
                                      
                                      20Consolidated
      Statements of Stockholders' Equity
                                      
                                      21Consolidated
      Statements of Cash Flows
                                      
                                      22Notes
      to Consolidated Financial Statements
                                      
                                      23SchedulesAll
      schedules are omitted because the required information is not applicable
      or is included in the consolidated financial statements and related
      notes.


17


Report of Independent Registered Public Accounting
Firm








To the
Board of Directors and Stockholders


Hometown
Bancorp, Inc.


Walden,
New York








We have
audited the accompanying consolidated balance sheets of Hometown Bancorp, Inc.
and subsidiary as of December 31, 2008 and 2007, and the related consolidated
statements of income, stockholders’ equity, and cash flows for the years then
ended.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting.  Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Hometown Bancorp, Inc. and
subsidiary as of December 31, 2008 and 2007, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.





Signature 1








Beard
Miller Company LLP


Syracuse,
New York


March 30,
2009


18




Hometown
Bancorp, Inc.





Consolidated
Balance Sheets






December 31,2008
                
                
                2007(Dollars
      in Thousands, Except Share Data)AssetsCash
      and due from banks
                
                $
                2,915
                
                
                $
                3,642Interest
      earning demand deposits with banks
                
                
                288
                
                
                
                371Cash
      and Cash Equivalents
                
                
                3,203
                
                
                
                4,013Securities
      available for sale
                
                
                1,002
                
                
                
                1,003Securities
      held to maturity (fair value 2008 $1,530; 2007 $1,776)
                
                
                1,509
                
                
                
                1,774Loans
      held for sale
                
                
                106
                
                
                
                528Loans
      receivable, net of allowance for loan losses (2008 $1,347; 2007
      $787)
                
                
                137,868
                
                
                
                120,982Premises
      and equipment, net
                
                
                4,087
                
                
                
                2,797Federal
      Home Loan Bank stock, at cost
                
                
                395
                
                
                
                142Accrued
      interest receivable and other assets
                
                
                2,199
                
                
                
                1,451Total Assets
                
                $
                150,369
                
                
                $
                132,690Liabilities
      and Stockholders’ EquityLiabilitiesDeposits:Noninterest
      bearing
                
                $
                16,947
                
                
                $
                17,441Interest
      bearing
                
                
                107,792
                
                
                
                94,620Total
      Deposits
                
                
                124,739
                
                
                
                112,061Federal
      Home Loan Bank advances
                
                
                4,375
                
                
                
                -Advances
      from borrowers for taxes and insurance
                
                
                708
                
                
                
                535Accrued
      interest payable
                
                
                143
                
                
                
                262Other
      liabilities
                
                
                1,610
                
                
                
                1,352Total
      Liabilities
                
                
                131,575
                
                
                
                114,210Commitments
      and Contingencies
                
                
                -
                
                
                
                -Stockholders’
      EquityPreferred
      stock, $0.01 par value; 3,000,000 shares authorized and
      unissued
                
                
                -
                
                
                
                -Common
      stock, $0.01 par value; 7,000,000 shares authorized; 2,380,500 shares
      issued
                
                
                24
                
                
                
                24Paid-in
      capital
                
                
                10,112
                
                
                
                10,129Retained
      earnings
                
                
                9,787
                
                
                
                9,222Unearned
      ESOP shares, at cost
                
                
                (840
                )
                
                
                (886
                )Treasury
      stock, at cost, 46,500 shares and none at December 31, 2008 and
      2007
                
                
                (284
                )
                
                
                -Accumulated
      other comprehensive loss
                
                
                (5
                )
                
                
                (9
                )Total
      Stockholders’ Equity
                
                
                18,794
                
                
                
                18,480Total
      Liabilities and Stockholders’ Equity
                
                $
                150,369
                
                
                $
                132,690




See notes to consolidated financial
statements.


19


Hometown
Bancorp, Inc.
 
 Consolidated Statements of
Income






Years Ended
    December 31,2008
                
                
                2007(In
      Thousands except per share data)Interest
      IncomeLoans
      receivable, including fees
                
                $
                8,541
                
                
                $
                8,272Securities,
      taxable
                
                
                111
                
                
                
                472Other
                
                
                74
                
                
                
                171Total
      Interest Income
                
                
                8,726
                
                
                
                8,915Interest
      ExpenseDeposits
                
                
                2,441
                
                
                
                3,020Stock
      subscription funds
                
                
                -
                
                
                
                3Federal
      Home Loan Bank advances
                
                
                58
                
                
                
                89Total
      Interest Expense
                
                
                2,499
                
                
                
                3,112Net
      Interest Income
                
                
                6,227
                
                
                
                5,803Provision
      for Loan Losses
                
                
                579
                
                
                
                185Net
      Interest Income after Provision for Loan Losses
                
                
                5,648
                
                
                
                5,618Non-interest
      IncomeBanking
      fees and service charges
                
                
                1,109
                
                
                
                1,152Mortgage
      banking income, net
                
                
                312
                
                
                
                413Investment
      brokerage fees
                
                
                66
                
                
                
                84Realized
      losses on sales of securities
                
                
                -
                
                
                
                (2
                )Litigation
      settlement
                
                
                186
                
                
                
                -Other
                
                
                72
                
                
                
                82Total
      Non-interest Income
                
                
                1,745
                
                
                
                1,729Non-interest
      ExpensesSalaries
      and employee benefits
                
                
                3,788
                
                
                
                3,473Occupancy
      and equipment
                
                
                715
                
                
                
                637Professional
      fees
                
                
                365
                
                
                
                184Advertising
      and marketing
                
                
                240
                
                
                
                272Data
      processing
                
                
                545
                
                
                
                504Telephone
      and postage
                
                
                189
                
                
                
                193Other
                
                
                650
                
                
                
                654Total
      Non-interest Expenses
                
                
                6,492
                
                
                
                5,917Income
      before Income Taxes
                
                
                901
                
                
                
                1,430Income
      Tax Expense
                
                
                336
                
                
                
                580Net
      Income
                
                $
                565
                
                
                $
                850Net
      Income per common share - basic
                
                $
                0.25
                
                
                $
                0.47Weighted
      average number of common shares outstanding – basic
                
                
                2,286
                
                
                
                1,812




See notes to consolidated
financial statements.


20


Hometown
Bancorp, Inc.
 
 Consolidated Statements of
Stockholders’ Equity


Years
Ended December 31, 2008 and 2007


(In
Thousands except share data)






CommonStock
                
                
                Paid-InCapital
                
                
                RetainedEarnings
                
                
                UnearnedESOPShares
                
                
                Treasury Stock
                
                
                AccumulatedOtherComprehensiveLoss
                
                
                TotalBalance
      - December 31, 2006
                
                $
                -
                
                
                $
                150
                
                
                $
                8,372
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (2
                )
                
                $
                8,520Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                850
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                850Other
      comprehensive loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (7
                )
                
                
                (7
                )Total
      Comprehensive Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                843Shares
      issued in public offering (2,380,500 shares)
                
                
                24
                
                
                
                9,984
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,008Shares
      purchased by ESOP
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (933
                )
                
                
                -
                
                
                
                -
                
                
                
                (933
                )ESOP
      shares committed to be released (4,666 shares)
                
                
                -
                
                
                
                (5
                )
                
                
                -
                
                
                
                47
                
                
                
                -
                
                
                
                -
                
                
                
                42Balance
      - December 31, 2007
                
                
                24
                
                
                
                10,129
                
                
                
                9,222
                
                
                
                (886
                )
                
                
                -
                
                
                
                (9
                )
                
                
                18,480Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                565
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                565Other
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                4
                
                
                
                4Total
      Comprehensive Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                569Treasury
      stock purchased (46,500 shares)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (284
                )
                
                
                -
                
                
                
                (284
                )ESOP
      shares committed to be released (4,666 shares)
                
                
                -
                
                
                
                (17
                )
                
                
                -
                
                
                
                46
                
                
                
                -
                
                
                
                -
                
                
                
                29Balance
      - December 31, 2008
                
                $
                24
                
                
                $
                10,112
                
                
                $
                9,787
                
                
                $
                (840
                )
                
                $
                (284
                )
                
                $
                (5
                )
                
                $
                18,794




See notes to consolidated
financial statements.


21


Hometown
Bancorp, Inc.
 
 Consolidated Statements of Cash
Flows






Years Ended
    December 31,2008
                
                
                2007(In
      Thousands)Cash
      Flows from Operating ActivitiesNet
      income
                
                $
                565
                
                
                $
                850Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                241
                
                
                
                221Provision
      for loan losses
                
                
                579
                
                
                
                185Deferred
      income tax benefit (expense)
                
                
                311
                
                
                
                (48
                )Amortization
      of mortgage servicing rights
                
                
                144
                
                
                
                157Net
      accretion of securities premiums and discounts
                
                
                -
                
                
                
                (26
                )Net
      realized loss on sales of securities
                
                
                -
                
                
                
                2Net
      gain on sale of loans
                
                
                (135
                )
                
                
                (264
                )Loans
      originated for sale
                
                
                (11,191
                )
                
                
                (17,561
                )Proceeds
      from sale of loans
                
                
                11,748
                
                
                
                18,465ESOP
      expense
                
                
                29
                
                
                
                42Increase
      in accrued interest receivable and other assets
                
                
                (892
                )
                
                
                (94
                )Increase
      (decrease) in accrued interest payable and other
    liabilities
                
                
                (167
                )
                
                
                233Net
      Cash Provided by Operating Activities
                
                
                1,232
                
                
                
                2,162Cash
      Flows from Investing ActivitiesActivity
      in available for sale securities:Purchases
                
                
                (1,000
                )
                
                
                (1,000
                )Maturities,
      calls and principal repayments
                
                
                1,000
                
                
                
                1,000Activity
      in held to maturity securities:Purchases
                
                
                (750
                )
                
                
                (9,500
                )Maturities,
      calls and principal repayments
                
                
                1,015
                
                
                
                9,795Proceeds
      from sales
                
                
                -
                
                
                
                8,997Net
      increase in loans receivable
                
                
                (17,465
                )
                
                
                (23,889
                )Purchases
      of loan participations
                
                
                -
                
                
                
                (613
                )Net
      (increase) decrease in Federal Home Loan Bank stock
                
                
                (253
                )
                
                
                91Purchases
      of bank premises and equipment
                
                
                (1,531
                )
                
                
                (491
                )Net
      Cash Used by Investing Activities
                
                
                (18,984
                )
                
                
                (15,610
                )Cash
      Flows from Financing ActivitiesNet
      increase in deposits
                
                
                12,678
                
                
                
                7,543Net
      increase (decrease) in Federal Home Loan Bank advances
                
                
                4,375
                
                
                
                (2,525
                )Increase
      in advances from borrowers for taxes and insurance
                
                
                173
                
                
                
                103Net
      proceeds from common stock offering
                
                
                -
                
                
                
                10,008Purchase
      of shares for ESOP
                
                
                -
                
                
                
                (933
                )Treasury
      stock purchased
                
                
                (284
                )
                
                
                -Net
      Cash Provided by Financing Activities
                
                
                16,942
                
                
                
                14,196Net
      Increase (Decrease) in Cash and Cash Equivalents
                
                
                (810
                )
                
                
                748Cash
      and Cash Equivalents - Beginning
                
                
                4,013
                
                
                
                3,265Cash
      and Cash Equivalents - Ending
                
                $
                3,203
                
                
                $
                4,013Supplementary
      Cash Flows InformationInterest
      paid
                
                $
                2,618
                
                
                $
                3,234Income
      taxes paid
                
                $
                570
                
                
                $
                523




See notes to consolidated
financial statements.


22


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements








Note
1 - Significant Accounting Policies





Organization
and Nature of Operations





In May
2006, Walden Federal Savings and Loan Association (the “Association”)
reorganized into the two-tier mutual holding company structure.  As
part of the reorganization, the Association formed Hometown Bancorp, Inc. (the
“Company”), a federally chartered mid-tier stock holding company, and Hometown
Bancorp, MHC (the “Mutual Holding Company”), a federally chartered mutual
holding company.  The Association became a federally chartered stock
savings association, and a wholly-owned subsidiary of the
Company.  The Company became the wholly-owned subsidiary of the Mutual
Holding Company, whose activity is not included in the accompanying consolidated
financial statements.  The Company and the Mutual Holding Company were
capitalized in the amount of $150,000 each by the Association.  The
same directors and officers who manage the Association, also manage the Company
and the Mutual Holding Company.





The
Association, the Mutual Holding Company and the Company are subject to
regulation and supervision by the Office of Thrift Supervision.





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 Association’s eligible account holders and the
employee stock ownership plan (the “ESOP”) for $10 per share, resulting in net
proceeds of approximately $9.1 million after offering expenses and
ESOP.  Currently, 56.3% of the Company’s outstanding common stock, or
1,309,275 shares, is owned by Hometown Bancorp MHC.  Costs of
approximately $717,000 were incurred in connection with the stock offering and
were deducted from the offering proceeds.





The
Association maintains its executive offices and main branch in Walden, New York,
with branches in Montgomery, Monroe, Newburgh and Otisville, New
York.  The Association is a community-oriented savings institution
whose business primarily consists of accepting deposits from customers within
its market area and investing those funds principally in mortgage loans secured
by one-to-four-family residences, multi-family and commercial properties, land
loans, commercial loans, consumer loans and mortgage-backed
securities.





The
Association has two wholly-owned subsidiaries, Ever-Green Financial Services,
Inc., which holds a 50% interest in Evergreen Title Agency, LP and Valley
Services, Inc., which leases certain premises used by the Association and holds
foreclosed real estate.





Principles
of Consolidation





The
consolidated financial statements include the accounts of the Company, the
Association and the Association’s wholly-owned subsidiaries, Ever-Green
Financial Services, Inc. and Valley Services, Inc.  All intercompany
transactions and balances have been eliminated in consolidation.





Estimates





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


23


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
1 - Significant Accounting Policies (Continued)





Concentrations
of Credit Risk





Most of
the Company’s activities are with customers located within Orange County, New
York and to a lesser extent the adjacent counties of Ulster and
Sullivan.  Note 2 discusses the types of securities that the
Association invests in.  Note 3 discusses the types of lending that
the Association engages in.   Although the Association has a
diversified loan portfolio, its debtors’ ability to honor their contracts is
influenced by the region’s economy.  The Association does not have any
significant concentrations in any one industry or customer.





Presentation
of Cash Flows





For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and interest-bearing deposits with an original
maturity of three months or less.





Securities





Management
determines the appropriate classification of debt securities at the time of
purchase.





Securities
classified as available for sale are those securities that the Association
intends to hold for an indefinite period of time but not necessarily to
maturity.  Any decision to sell a security classified as available for
sale would be based on various factors, including significant movement in
interest rates, changes in maturity mix of the Association’s assets and
liabilities, liquidity needs, regulatory capital considerations, and other
similar factors. Securities available for sale are carried at fair
value.  Unrealized gains and losses are reported in other
comprehensive income (loss), net of the related deferred tax
effect.  Realized gains or losses, determined on the basis of the cost
of the specific securities sold, are included in earnings.  Premiums
and discounts are recognized in interest income using the level yield method
which does not vary materially from the effective interest method over the terms
of the securities.





Securities
classified as held to maturity are those debt securities the Association has
both the intent and ability to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic
conditions.  These securities are carried at cost adjusted for the
amortization of premium and accretion of discount, recognized in interest income
using the level yield method which does not vary materially from the effective
interest method over the terms of the securities.





Declines
in the fair value of held to maturity and available for sale securities below
their cost that are deemed to be other-than-temporary are reflected in earnings
as realized losses.  In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Association to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value.





Federal
law requires a member institution of the Federal Home Loan Bank system to hold
restricted stock of its district Federal Home Loan Bank according to a
predetermined formula.  The restricted stock is carried at
cost.


24


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
1 - Significant Accounting Policies (Continued)





Loans
Receivable





Loans
receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at their outstanding
unpaid principal balances, net of an allowance for loan losses and any deferred
fees and costs.  Interest income is accrued on the unpaid principal
balance.  Loan origination fees and costs are deferred and recognized
as an adjustment of interest income on the related loans.  The
Association is amortizing these amounts over the expected life of the
loan.





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





The
Association has issued letters of credit on behalf of customers primarily to
secure construction or land development projects that involve public
improvements.  The letters of credit are fully secured by a note and a
mortgage placed on the related property.  The note contains provisions
that waive any interest payments provided there are no drawdowns on the letter
of credit.  Funds equal to the full amount of the letters of credit
are advanced and placed in a non-interest bearing deposit account in order to
enhance the Association’s collateral position under New York State Lien
Law.  These loans and deposits are reported gross in the consolidated
balance sheets as the Association does not intend to offset them. Interest is
not imputed on these loans and deposits as it is a customary lending and deposit
activity of the Association.





Allowance
for Loan Losses





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





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





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


25


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
1 - Significant Accounting Policies (Continued)





Allowance
for Loan Losses (Continued)





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





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





Loans
Held for Sale and Loan Servicing





Loans
held for sale represent residential mortgage loans originated for sale on a
whole-loan basis.  These loans are carried at the lower of cost or
estimated fair value, as determined on an aggregate basis.  Net
unrealized losses are recognized in a valuation allowance by charges to
operations.  Premiums and discounts and origination fees and costs on
loans held for sale are deferred and recognized as a component of the gain or
loss on sale.  Commitments to originate loans that will be held for
sale and forward commitments to sell such loans are derivative instruments which
are required to be recognized as assets or liabilities at fair
value.  Fair value is determined based solely on the effect of changes
in secondary market interest rates and yield requirements from the commitment
date to the date of the financial statements.  The fair values of
these commitments have had an immaterial effect on the Company’s financial
position and results of operations.





The
Association sells residential mortgage loans to third parties.  These
transactions are accounted for as sales based on application of the criteria set
forth in the Statement of Financial Accounting Standards (“SFAS”) No. 140,
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities.”  These criteria provide that the Association, as
transferor, must surrender control over the transferred assets (i.e., the loans
sold) in order to record a sale.  The criteria specify that (i) the
transferred assets have been isolated from the transferor (put presumptively
beyond the reach of the transferor and its creditors, even in bankruptcy or
other receivership); (ii) each transferee has the right to pledge or exchange
the assets it received; and (iii) the transferor does not maintain effective
control over the transferred assets through an agreement to repurchase the
assets or an ability to unilaterally cause the holder to return specific
assets.





Gains and
losses on sales of loans are recognized when the sales proceeds are received,
and are measured in accordance with SFAS No. 140 (including consideration of
assets obtained and liabilities incurred in the transfer, if any, such as
servicing rights and recourse obligations).  Recourse liabilities on
loan sales through December 31, 2008 are not material to the Company’s financial
position and results of operations.  Loan servicing income is reported
in mortgage banking income, net.


26




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
1 - Significant Accounting Policies (Continued)





Loans
Held for Sale and Loan Servicing (Continued)





Originated
mortgage servicing rights are recorded at their fair value when loans are sold
and are amortized in proportion to and over the period of estimated net
servicing income or loss.  The carrying value of originated mortgage
servicing rights is periodically evaluated for impairment.





Premises
and Equipment





Premises
and equipment are recorded at cost.  Depreciation is computed using
the straight-line method over the expected useful lives of the related assets,
which is generally 15 to 40 years for buildings and building improvements and 3
to 10 years for furniture, equipment, computers and
software.  Leasehold improvements are amortized over the related terms
of the leases or their useful life if shorter.





Foreclosed
Real Estate





Real
estate acquired in settlement of loans is carried at the fair value of the
property at the date of acquisition.  Write-downs from cost to fair
value less estimated selling costs which are required at the time of foreclosure
or repossession are charged to the allowance for loan
losses.  Subsequent write-downs to fair value, net of estimated
selling costs, are charged to foreclosed real estate expenses.





Transfers
of Financial Assets





Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered.  Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Association, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Association does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.





Advertising
Costs





The
Company follows the policy of charging the costs of advertising to expense as
incurred.





Income
Taxes





Deferred
taxes are provided on the liability method whereby deferred tax assets are
recognized for deductible temporary differences and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax basis.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of
enactment.  The Company and its subsidiary file a consolidated federal
income tax return.





Net
Income Per Common Share





Basic net
income per common share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. The
1,309,275 common shares issued to Hometown Bancorp MHC are assumed to be
outstanding for all periods presented, consistent with the provisions of SFAS
No.128, Earnings per
Share, pertaining to changes in capital structure. The shares issued to
the public are included in the weighted average common shares outstanding
calculation since the closing of the stock offering on June 28,
2007.


27


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements






Note
1 - Significant Accounting Policies (Continued)





Net
Income Per Common Share (Continued)





The
Company has a simple capital structure as it has not granted any restricted
stock awards or stock options and, during the years ended December 31, 2008 and
2007, had no potentially dilutive common stock equivalents. Unallocated common
shares held by the ESOP are not included in the weighted-average number of
common shares outstanding for purposes of calculating earnings per common share
until they are committed to be released.





Off-Balance
Sheet Financial Instruments





In the
ordinary course of business, the Association has entered into off-balance sheet
financial instruments consisting of commitments to extend credit and letters of
credit.  Such financial instruments are recorded in the balance sheet
when they are funded.





Segment
Reporting





The
Company does not presently have discrete financial information available that
properly allocates expenses between its community banking and investment
brokerage segments.  As a result, segment information is not presently
available.  Revenues from the investment brokerage segment are not
material to the consolidated results of operations.





Comprehensive
Income





Accounting
principles generally accepted in the United States of America require that
recognized revenue, expenses, gains, and losses be included in net
income.  Although certain changes in assets and liabilities, such as
unrealized gains and losses on available for sale securities and unrecognized
pension losses and past service liability are reported as a separate component
of the equity section of the balance sheet, such items, along with net income,
are components of comprehensive income.


28




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
1 - Significant Accounting Policies (Continued)





Comprehensive
Income (Continued)





The
components of other comprehensive income (loss) and related tax effects for the
years ended December 31, 2008 and 2007 are as follows:





2008
                
                
                2007(In
      Thousands)Unrealized
      holding gains (losses) on securities available for sale:Unrealized
      holding gains (losses) arising during the year
                
                $
                (1
                )
                
                $
                6Directors’
      retirement plan:Prior
      service cost
                
                
                -
                
                
                
                (27
                )Pension
      gains
                
                
                3
                
                
                
                5Reclassification
      adjustment for pension gains and prior service cost recognized in pension
      expense
                
                
                5
                
                
                
                5Net
      Change in Director’s retirement plan liability
                
                
                8
                
                
                
                (17
                )Other
      comprehensive income (loss) before tax
                
                
                7
                
                
                
                (11
                )Income
      tax effect
                
                
                (3
                )
                
                
                4Net
      of Tax Amount
                
                $
                4
                
                
                $
                (7
                )





At
December 31, 2008 and 2007, the components of accumulated other comprehensive
loss are as follows:





2008
                
                
                2007(In
      Thousands)Unrealized
      gains on securities available for sale (net of tax effect 2008 ($1); 2007
      ($1))
                
                $
                1
                
                
                $
                2Net
      losses and past service liability for Directors’ retirement plan (net of
      tax effect 2008 $4; 2007 $6)
                
                
                (6
                )
                
                
                (11
                )$
                (5
                )
                
                $
                (9
                )


29




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
1 - Significant Accounting Policies (Continued)





Recent
Accounting Pronouncements





SFAS
132(R)-1





In
December 2008, the Financial Accounting Standards Board (FASB) issued FSP FAS
132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan
Assets”. This FSP amends SFAS 132(R), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits”, to provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. The disclosures about plan assets required by this FSP
shall be provided for fiscal years ending after December 15, 2009. The
Company does not expect that this new pronouncement will have any impact on its
consolidated financial statements.





SFAS No.
141(R)





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


30


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements











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





Amortized Cost
                
                
                Gross Unrealized Gains
                
                
                Gross Unrealized Losses
                
                
                Fair Value(In
      Thousands)Available
      for Sale:December
      31, 2008:U.S.
      Government agencies
                
                $
                1,000
                
                
                $
                2
                
                
                $
                -
                
                
                $
                1,002December
      31, 2007:U.S.
      Government agencies
                
                $
                1,000
                
                
                $
                3
                
                
                $
                -
                
                
                $
                1,003Held
      to Maturity:December
      31, 2008:U.S.
      Government agencies
                
                $
                750
                
                
                $
                6
                
                
                $
                -
                
                
                $
                756Mortgage-backed
      securities
                
                
                759
                
                
                
                18
                
                
                
                3
                
                
                
                774$
                1,509
                
                
                $
                24
                
                
                $
                3
                
                
                $
                1,530December
      31, 2007:U.S.
      Government agencies
                
                $
                500
                
                
                $
                2
                
                
                $
                -
                
                
                $
                502Mortgage-backed
      securities
                
                
                1,274
                
                
                
                9
                
                
                
                9
                
                
                
                1,274$
                1,774
                
                
                $
                11
                
                
                $
                9
                
                
                $
                1,776





The
amortized cost and fair value of securities as of December 31, 2008, by
contractual maturity, are shown below.  Expected maturities may differ
from contractual maturities because the borrowers may have the right to prepay
obligations with or without any penalties.





Available forSale
              
              
              Held to MaturityAmortized Cost
              
              
              Fair Value
              
              
              Amortized Cost
              
              
              Fair Value(In
      Thousands)
              
              
              (In
      Thousands)Due
      in one year or less
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Due
      after one year through five years
              
              
              1,000
              
              
              
              1,002
              
              
              
              750
              
              
              
              756Due
      after five years through ten years
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Due
      after ten years
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Mortgage-backed
      securities
              
              
              -
              
              
              
              -
              
              
              
              759
              
              
              
              774$
              1,000
              
              
              $
              1,002
              
              
              $
              1,509
              
              
              $
              1,530





Gross
losses of $2,000 were realized on sales of securities in 2007. There were no
sales of investments in 2008. On March 28, 2007, we sold a $9.0 million
held-to-maturity U.S. Treasury note scheduled to mature on March
31,


31




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
2 - Securities (Continued)





2007.  The
sale transaction did not taint our held-to-maturity securities portfolio as the
sale occurred so close to the maturity of the investment security.





The
following table shows the Association’s investments’ gross unrealized losses and
fair value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, at
December 31, 2008 and 2007:





Less than 12 Months
                
                
                12 Months or More
                
                
                TotalFair Value
                
                
                Unrealized Losses
                
                
                Fair Value
                
                
                Unrealized Losses
                
                
                Fair Value
                
                
                Unrealized Losses(In
      Thousands)December
      31, 2008:Held
      to Maturity:Mortgage-backed
      securities
                
                $
                -
                
                
                $
                -
                
                
                $
                88
                
                
                $
                3
                
                
                $
                88
                
                
                $
                3$
                -
                
                
                $
                -
                
                
                $
                88
                
                
                $
                3
                
                
                $
                88
                
                
                $
                3December
      31, 2007:Held
      to Maturity:Mortgage-backed
      securities
                
                $
                118
                
                
                $
                1
                
                
                $
                369
                
                
                $
                8
                
                
                $
                487
                
                
                $
                9$
                118
                
                
                $
                1
                
                
                $
                369
                
                
                $
                8
                
                
                $
                487
                
                
                $
                9





At
December 31, 2008, the Association had one security in an unrealized loss
position for 12 months or more.  In management’s opinion, the decline
in fair value is due only to interest rate fluctuations.  As the
Association has the intent and ability to hold the investment until maturity, it
is not deemed to be other-than-temporarily impaired. The individual unrealized
loss is not significant.





At
December 31, 2008 and 2007, securities with a carrying value of $500,000
were pledged to secure public deposits and for other purposes required or
permitted by law.


32




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
3 - Loans Receivable and Allowance for Loan Losses





The
composition of loans receivable at December 31, 2008 and 2007 is as
follows:





2008
                
                
                2007(In
      Thousands)First
      mortgage loans:Residential
                
                $
                65,565
                
                
                $
                49,558Construction
                
                
                9,162
                
                
                
                10,990Multi-family
                
                
                2,515
                
                
                
                2,791Commercial
                
                
                22,456
                
                
                
                19,525Land
                
                
                13,632
                
                
                
                10,309Total
      First Mortgage Loans
                
                
                113,330
                
                
                
                93,173Other
      loans:Commercial
                
                
                12,763
                
                
                
                15,479Consumer
                
                
                466
                
                
                
                336Home
      equity loans and credit lines
                
                
                12,434
                
                
                
                12,538Loans
      on savings accounts
                
                
                159
                
                
                
                189Total
      Loans
                
                
                139,152
                
                
                
                121,715Deferred
      loan origination costs, net
                
                
                63
                
                
                
                54Allowance
      for loan losses
                
                
                (1,347
                )
                
                
                (787
                )Net
      Loans
                
                $
                137,868
                
                
                $
                120,982





The
Association grants loans to customers primarily within Orange County, New York,
and to a lesser extent, portions of the adjacent counties of Ulster and
Sullivan.  A large portion of the loan portfolio is secured by real
estate.  Although the Association has a diversified loan portfolio,
its debtors’ ability to honor their contracts is influenced by the region’s
economy.





The
following table presents changes in the allowance for loan losses for the years
ended December 31, 2008 and 2007:





2008
                
                
                2007(In
      Thousands)Balance,
      beginning
                
                $
                787
                
                
                $
                623Provision
      for loan losses
                
                
                579
                
                
                
                185Loans
      charged off
                
                
                (23
                )
                
                
                (25
                )Loan
      recoveries
                
                
                4
                
                
                
                4Balance,
      ending
                
                $
                1,347
                
                
                $
                787








The
Association had nonaccrual loans, which management expects will eventually be
paid in full, amounting to approximately $5.0 million and $124,000 at December
31, 2008 and 2007, respectively.


33


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements











Interest
not recognized on nonaccrual loans was $208,000 and $8,000 for the years ended
December 31, 2008 and 2007.  There were no loans past due 90 days or
more and still accruing interest at December 31, 2008 and 2007.





The
following is a summary of information pertaining to impaired loans at December
31:





2008
                  
                  
                  2007Impaired
      loans without a valuation allowance
                  
                  $
                  2,415
                  
                  
                  $
                  -Impaired
      loans with a valuation allowance
                  
                  
                  1,499
                  
                  
                  
                  -Total
      Impaired Loans
                  
                  $
                  3,914
                  
                  
                  $
                  -Valuation
      allowance related to impaired loans
                  
                  $
                  432
                  
                  
                  $
                  -





During
2008, no interest income was recognized on loans that were impaired. The average
balance of impaired loans with an allowance was $639,000 in 2008, compared to
none in 2007. The Association generally does not separately identify individual
residential and consumer loans for impairment.





At
December 31, 2008 and 2007, one-to-four family residential mortgage loans
serviced for others amounted to approximately $81.2 million and $83.5 million,
respectively.  Advances from borrowers for taxes and insurance related
to loans serviced for others amounted to approximately $466,000 and $443,000,
respectively, at December 31, 2008 and 2007.  These loans and related
advances are not included in the accompanying consolidated balance
sheets.





The
following summarizes activity pertaining to mortgage servicing rights for the
years ended December 31, 2008 and 2007:





2008
                  
                  
                  2007(In
      Thousands)Balance,
      beginning
                  
                  $
                  386
                  
                  
                  $
                  503Capitalized
      during the year
                  
                  
                  68
                  
                  
                  
                  40Amortization
                  
                  
                  (144
                  )
                  
                  
                  (157
                  )Balance,
      ending
                  
                  $
                  310
                  
                  
                  $
                  386


34




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
4 - Premises and Equipment





The
components of premises and equipment at December 31, 2008 and 2007 are as
follows:





2008
                  
                  
                  2007(In
      Thousands)Land
                  
                  $
                  901
                  
                  
                  $
                  551Buildings
      and leasehold improvements
                  
                  
                  3,566
                  
                  
                  
                  2,450Furniture
      and equipment
                  
                  
                  999
                  
                  
                  
                  934Automobiles
                  
                  
                  61
                  
                  
                  
                  615,527
                  
                  
                  
                  3,996Accumulated
      depreciation
                  
                  
                  1,440
                  
                  
                  
                  1,199$
                  4,087
                  
                  
                  $
                  2,797





Note
5 - Deposits





Deposits
at December 31, 2008 and 2007 consist of the following major
classifications:





2008
                  
                  
                  2007(In
      Thousands)Non-interest
      bearing demand
                  
                  $
                  16,947
                  
                  
                  $
                  17,441NOW
                  
                  
                  6,644
                  
                  
                  
                  6,446Money
      market
                  
                  
                  11,579
                  
                  
                  
                  11,170Savings
                  
                  
                  13,561
                  
                  
                  
                  13,645Certificates
      of deposit
                  
                  
                  76,008
                  
                  
                  
                  63,359$
                  124,739
                  
                  
                  $
                  112,061





A summary
of certificates of deposit by maturity at December 31, 2008 is as follows (in
thousands):





Year
      ending December 31:2009
                    
                    $
                    74,4032010
                    
                    
                    1,0412011
                    
                    
                    1422012
                    
                    
                    2632013
                    
                    
                    159$
                    76,008





The
aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $29.5 million and $24.7 million at December 31, 2008 and 2007,
respectively.  At December 31, 2008, $10.0 million of certificates of
deposit consisted of one municipal deposit from the New York State Office of the
Comptroller which is secured by a municipal letter of credit issued by the
Federal Home Loan Bank (see Note 6).


35


Hometown
Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements






Note
5 – Deposits (Continued)





A summary
of interest expense on deposits for the years ended December 31, 2008 and 2007
is as follows:





2008
                
                
                2007(In
      Thousands)NOW
      and money market demand
                
                $
                216
                
                
                $
                307Savings
                
                
                80
                
                
                
                69Certificates
      of deposit
                
                
                2,145
                
                
                
                2,644$
                2,441
                
                
                $
                3,020





Note
6 - Federal Home Loan Bank Advances





The
Association has various line of credit facilities with the Federal Home Loan
Bank, which mature on July 31, 2009, and provide for borrowings of up to $26.9
million of which approximately $1.9 million was outstanding overnight at a rate
of 0.44% as of December 31, 2008 and none was outstanding at December 31,
2007.





The
Association also had two short-term advances totaling $2.5 million outstanding
at December 31, 2008, which both are due in April 2009. The interest rate on
such advances range from 1.58% to 2.55%.





The
borrowings are secured by qualifying assets of the Association which include the
Federal Home Loan Bank stock, securities and first mortgage
loans.  The Association has a maximum borrowing capacity with the
Federal Home Loan Bank of approximately $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..





Note
7 - Legal Contingencies





Various
legal claims arise from time to time in the normal course of business, which in
the opinion of management will have no material effect on the Company’s
consolidated financial statements.





Note
8 - Restrictions on Dividends, Loans and Advances





Federal
and state banking regulations place certain restrictions on dividends paid and
loans or advances made by the Association to the Company.  The total
amount of dividends which may be paid at any date is generally limited to
retained net income of the Association for the current and preceding two
years.  Loans or advances are limited to 10% of the Association’s
capital and surplus on a secured basis.





At
December 31, 2008, the Association’s retained earnings available for the payment
of dividends was approximately $2.3 million.  Funds available for
loans or advances by the Association to the Company amounted to approximately
$1.5 million.





In
addition, dividends paid by the Association to the Company would be prohibited
if the effect thereof would cause the Association’s capital to be reduced below
minimum capital requirements.





The
Company’s ability to pay dividends is generally dependent on the Association’s
ability to pay dividends to the Company.


36




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
9 - Lease Commitments and Total Rental Expense





The
Association leases four branch locations under long-term operating
leases.  Future minimum lease payments by year and in the aggregate,
under noncancellable operating leases with initial or remaining terms of one
year or more, consisted of the following at December 31, 2008 (in
thousands):





Years
      ending December 31:2009
                  
                  $
                  932010
                  
                  
                  772011
                  
                  
                  27$
                  197





The
leases contain options to extend for periods from two to ten
years.  The cost of such rentals is not included above.  The
total rental expense for all leases for the years ended December 31, 2008 and
2007 was approximately $134,000 and $124,000, respectively.





Note
10 - Income Taxes





The
income tax provision (benefit) consists of the following for the years ended
December 31, 2008 and 2007:





2008
                
                
                2007(In
      Thousands)Federal:Current
                
                $
                558
                
                
                $
                544Deferred
                
                
                (287
                )
                
                
                (41
                )271
                
                
                
                503StateCurrent
                
                
                86
                
                
                
                84Deferred
                
                
                (21
                )
                
                
                (7
                )65
                
                
                
                77Income
      Tax Expense
                
                $
                336
                
                
                $
                580


37




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
10 - Income Taxes (Continued)





A
reconciliation of the statutory federal income tax at a rate of 34% to the
income tax expense included in the consolidated statements of income for the
years ended December 31, 2008 and 2007 is as follows:





2008
                
                
                2007Amount
                
                
                % of Pretax Income
                
                
                Amount
                
                
                % of Pretax Income(Dollars
      in Thousands)Federal
      income tax at statutory rate
                
                $
                306
                
                
                
                34.0
                %
                
                $
                486
                
                
                
                34.0
                %State
      income taxes, net of federal tax benefit
                
                
                43
                
                
                
                4.7
                
                
                
                51
                
                
                
                3.6Other
                
                
                (13
                )
                
                
                (1.4
                )
                
                
                43
                
                
                
                3.0$
                336
                
                
                
                37.3
                %
                
                $
                580
                
                
                
                40.6
                %





Items
that gave rise to significant portions of deferred taxes are as
follows:





December 31,2008
                
                
                2007(In
      Thousands)Deferred
      tax assets:Allowance
      for loan losses
                
                $
                451
                
                
                $
                261Directors’
      Retirement Plan
                
                
                46
                
                
                
                26Nonaccrual
      interest
                
                
                80
                
                
                
                8577
                
                
                
                295Deferred
      tax liabilities:Premises
      and equipment
                
                
                78
                
                
                
                101Mortgage
      servicing rights
                
                
                140
                
                
                
                154Unrealized
      gains on securities available for sale
                
                
                1
                
                
                
                1Other
                
                
                16
                
                
                
                8235
                
                
                
                264Net Deferred Tax Asset
                
                $
                342
                
                
                $
                31





As a
thrift institution, the Association is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves.  These reserves consist
primarily of a defined base-year amount for Federal and New York income tax
purposes.  Deferred tax liabilities are recognized with respect to any
portion of the base-year amount which is expected to become taxable (or
“recaptured”) in the foreseeable future.


38




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
10 - Income Taxes (Continued)





Under
current tax laws, Federal base-year reserves would be subject to recapture if
the Association pays a cash dividend in excess of earnings and profits or
liquidates.  In order for the Association to permissibly maintain a
New York State tax bad debt reserve for thrifts, certain thrift
definitional tests must be satisfied on an ongoing basis.  These
definitional tests include maintaining at least 60% of assets in thrift
qualifying assets, as defined for tax purposes, and maintaining a thrift
charter.  The Association expects that it will take no action in the
foreseeable future which would require the establishment of a tax liability
associated with these bad debt reserves.





In
accordance with SFAS No. 109, deferred tax liabilities have not been recognized
with respect to the Federal base-year reserve of approximately $500,000 at
December 31, 2008, and the New York State base-year reserve of
approximately $4.8 million at December 31, 2008, since the Association does
not expect that these amounts will become taxable in the foreseeable
future.  The unrecognized deferred tax liability with respect to the
Federal and New York State base-year reserves was approximately $170,000 and
$225,000 (net of federal benefit), respectively, at December 31,
2008.





The
Company adopted the provisions of FASB Interpretation No. 48. “Accounting for
Uncertainty in Income Taxes” (FIN 48) effective January 1, 2007. FIN 48 provides
clarification on accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109, “Accounting
for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The adoption of FIN 48 did not have
any impact on the Company’s consolidated results of operations and financial
position. The Company recognized no adjustment for unrecognized income tax
benefits for the years ended December 31, 2008 and 2007. The Company’s policy is
to recognize interest and penalties on unrecognized tax benefits in income tax
expense in the consolidated statements of income. The Company’s Federal and New
York tax returns, constituting the returns of the major taxing jurisdictions,
are subject to examination by the taxing authorities for all open years as
prescribed by applicable statute. No waivers have been executed that would
extend the period subject to examination beyond the period prescribed by
statute. As of December 31, 2008 and 2007 the Company has no uncertain tax
positions.





Note
11 - Employee Benefit Plans





401(K)





The
Association has a 401(k) savings plan, which is offered to all eligible
employees, defined as those who are at least 21 years of age that have worked
for the Association for one year and work a minimum of 1,000 hours per Plan
year.  The Plan permits tax deferred employee contributions of up to
15% of compensation and provides for employer discretionary matching and
additional contributions determined annually by the Board of
Directors.  Employer contributions are subject to the employee
completing 1,000 hours of service during the Plan year and being employed on the
last day of the Plan year.  Employer contributions vest to the
employee at the rate of 20% after completion of two years of service and 20% per
year, thereafter, becoming 100% vested upon the completion of six years of
service.





In 2008
and 2007, the Board of Directors approved matching contributions of 100% of
employee contributions up to 2% of the employee’s
compensation.  Matching contributions amounted to $42,000 and $38,000
in 2008 and 2007, respectively.  In 2008 and 2007, the Board of
Directors approved additional contributions of 5% and 8%, respectively, of
employees’ compensation.  Additional contributions were $118,000 and
$139,000, respectively, for 2008 and 2007.


39




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
11 - Employee Benefit Plans Continued)





Employee
Stock Ownership Plan (”ESOP”)





In June
2007, the Association established an ESOP which acquired 93,315 shares of the
Company’s common stock in the stock offering with funds provided by a loan from
the Company. The stock acquired by the ESOP but not yet released to participants
is shown as a reduction of stockholders’ equity in the accompanying consolidated
balance sheets. The ESOP loan will be repaid principally from the Association’s
contributions to the ESOP in annual payments through 2027 at a fixed interest
rate of 8.25%. Shares are released to participants on a straight-line basis over
the loan term and allocated based on participant compensation. The Association
recognizes compensation benefit expense as shares are committed for release at
their current market price. The difference between the market price and the cost
of shares committed to be released is recorded as an adjustment to additional
paid-in capital. Dividends on allocated shares are recorded as a reduction of
retained earnings and dividends on unallocated shares are recorded as a
reduction of debt. The Company recognized $29,000 and $42,000 of
compensation expense related to this plan for the years ended December 31, 2008
and 2007. At December 31, 2008, there were 83,983 shares not yet released having
an aggregate market value of approximately $361,000. Participant eligibility
requirements and vesting provisions for the ESOP are the same as the 401(k)
savings plan outlined above.





Directors’
Retirement Plan





Effective
March 2007, the Association adopted an unfunded directors’ retirement plan for
the benefit of non-employee directors.  Under the plan, directors who
have attained the normal retirement age of 65 receive a retirement benefit based
on their length of service upon termination. Benefits vest at the rate of 20%
per year over a five year period commencing on the date of adoption for existing
directors or the initial date of service for directors who join the Board of
Directors after the adoption date.  The plan’s funded status as of the
December 31, 2008 measurement date, activity in the plan and the amounts
recognized in the accompanying consolidated financial statements
follows:





Year EndedDecember 31, 2008
                
                
                Year EndedDecember 31, 2007(In
      Thousands)Change
      in projected benefit obligation:Projected
      benefit obligation at beginning of year
                
                $
                65
                
                
                $
                -Service
      cost
                
                
                44
                
                
                
                41Interest
      cost
                
                
                4
                
                
                
                2Gains
                
                
                (3
                )
                
                
                (5
                )Prior
      service cost
                
                
                -
                
                
                
                27Projected
      benefit obligation at end of year (funded status)
                
                $
                110
                
                
                $
                65





The
discount rate used to determine the benefit obligation at December 31, 2008 and
2007 was 6.00%.


40




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
11 - Employee Benefit Plans (Continued)





Directors’
Retirement Plan (Continued)





Amounts
recognized in accumulated other comprehensive loss were:





December 31,
      2008
                  
                  
                  December 31,
      2007(In
    Thousands)Unrecognized
      net gain
                  
                  $
                  7
                  
                  
                  $
                  5Prior
      service cost
                  
                  
                  (17
                  )
                  
                  
                  (22
                  )Pre-tax
      adjustment
                  
                  
                  (10
                  )
                  
                  
                  (17
                  )Income
      tax effect
                  
                  
                  4
                  
                  
                  
                  6$
                  (6
                  )
                  
                  $
                  (11
                  )





The
estimated cost that will be amortized from accumulated other comprehensive loss
into net periodic pension expense for the year ending December 31, 2009 is $-0-
of net gain and $5,000 of prior service cost.





Using an
actuarial measurement date of December 31, 2008 and 2007, the components of net
periodic pension expense follow (in thousands):





2008
                  
                  
                  2007Service
      cost
                  
                  $
                  44
                  
                  
                  $
                  41Interest
      cost
                  
                  
                  4
                  
                  
                  
                  2Amortization
      of past service liability
                  
                  
                  5
                  
                  
                  
                  5Net
      periodic pension expense
                  
                  $
                  53
                  
                  
                  $
                  48





Discount
rates of 6.00% and 5.75% were used to determine net periodic pension expense for
the year ended December 31, 2008 and 2007, respectively.





The
Company does not expect to contribute to the plan in 2009.





The
following table shows the expected benefit payments to be paid to participants
for the years indicated (in thousands):





Years ending December 31,2009
                    
                    $
                    -2010
                    
                    
                    -2011
                    
                    
                    -2012
                    
                    
                    382013
                    
                    
                    382014
      - 2018
                    
                    
                    187





Hometown
Bancorp, Inc. 2008 Equity Incentive Plan





In 2008,
the stockholders approved the 2008 Equity Incentive Plan (“Equity Plan”) the
purpose of which is to promote the long-term financialsuccess of Hometown
Bancorp, Inc.and Walden Federal
Savings and Loan Association, by providing a means to attract, retain and reward
individuals who can and do contribute to such success and to further align their
interestswith
those of our stockholders.  The Compensation Committee determines
which executives will receive stock awards as well as type, size and
restrictions on the awards.  Under


41




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
11 - Employee Benefit Plans (Continued)





Hometown
Bancorp, Inc. 2008 Equity Incentive Plan (Continued)





the
Equity Plan, the Compensation Committee may make grants of incentive stock
options, nonqualified stock options, stock appreciation rights or restricted
stock of up to 163,301 shares.  Grants have not yet been made under
the Equity Plan.





Note
12 - Transactions with Officers and Directors





The
Association has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with its executive officers,
directors, their immediate families, and affiliated companies (commonly referred
to as related parties), on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with persons not related to the Association.  These
persons were indebted to the Association for loans totaling approximately
$717,000 and $564,000 at December 31, 2008 and 2007,
respectively.  During 2008, approximately $229,000 of new loans and
approximately $76,000 of repayments were made.





Deposits
from related parties held by the Association at both December 31, 2008 and 2007
amounted to $1.2 million.





A
director of the Company is associated with a law firm which provides legal
services to the Association and its subsidiaries.  During 2008 and
2007, the law firm was paid approximately $265,000 and $273,000, respectively,
for legal services of which $75,000 and $44,000, respectively, is included in
professional fees in the accompanying consolidated statements of
income.  The balance was paid by customers of the Association in
connection with loan transactions.





Note
13 - Financial Instruments with Off-Balance Sheet Risk





The
Association is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its
customers.  These financial instruments include commitments to extend
credit and standby letters of credit.  Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheets.





The
Association’s exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments.  The
Association uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.





A summary
of the Association’s financial instruments with off-balance sheet risk at
December 31, 2008 and 2007 is as follows:





2008
                
                
                2007(In
      Thousands)Commitments
      to grant loans
                
                $
                8,658
                
                
                $
                10,380Unfunded
      commitments under lines of credit
                
                
                10,966
                
                
                
                9,231Letters
      of credit
                
                
                742
                
                
                
                633$
                20,366
                
                
                $
                20,244


42




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
13 - Financial Instruments with Off-Balance Sheet Risk (Continued)





Fixed
rate commitments to grant loans amounted to approximately $4.4 million at
December 31, 2008, and had interest rates that ranged from 5.00% to
18.00%.





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements.  Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee.  The
Association evaluates each customer’s credit worthiness on a case-by-case
basis.  The amount of collateral obtained, if deemed necessary by the
Association upon extension of credit, is based on management’s credit
evaluation.  Collateral held varies, but includes principally
residential or commercial real estate.





Standby
letters of credit are conditional commitments issued by the Association to
guarantee the performance of a customer to a third party and generally expire
within one year.  Those guarantees are primarily issued to
municipalities to ensure the completion of public improvements in residential
subdivisions by contractors that are customers of the
Association.  The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.  The Association holds savings accounts as collateral
supporting these commitments for which collateral is deemed
necessary.  At December 31, 2008 and 2007, such collateral amounted to
$373,000 and $575,000, respectively.  The current amount of the
liability as of December 31, 2008 and 2007 for guarantees under standby letters
of credit issued is not material.





Note
14 - Regulatory Capital Requirements





The
Association is required to maintain a cash reserve balance in vault cash or with
the Federal Reserve Bank.  The total of this reserve balance was
approximately $431,000 and $479,000 at December 31, 2008 and 2007,
respectively.





The
Association is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet the minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the consolidated financial statements.  Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Association must meet specific capital guidelines that involve
quantitative measures of its assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices.  The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk-weightings and other factors.





Quantitative
measures established by regulation to ensure capital adequacy require the
Association to maintain minimum amounts and ratios (set forth in the table
below) of tangible, core, and risk-based capital as defined in the
regulations.  Management believes, as of December 31, 2008, that the
Association met all capital adequacy requirements to which it is
subject.





As of
December 31, 2008, the most recent notification from the regulators categorized
the Association as “well capitalized” under the regulatory framework for prompt
corrective action.  To be categorized as well capitalized, the
Association must maintain minimum core, Tier 1 risk-based and total risk-based
ratios as set forth in the table below.  There are no conditions or
events since that notification that management believes have changed the
Association’s category.


43




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
14 - Regulatory Capital Requirements (Continued)





The
Association’s actual capital amounts and ratios are presented
below.





Actual
              
              
              For Capital Adequacy
      Purposes
              
              
              To be Well Capitalized Under Prompt Corrective
      Action ProvisionsAmount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio
              
              
              Amount
              
              
              Ratio(Dollars
      in Thousands)As
      of December 31, 2008:Tangible
              
              $
              14,988
              
              
              
              9.97
              %
              
              $
              32,256
              
              
              
              31.5
              %
              
              
              N/A
              
              
              
              N/ACore
      (leverage)
              
              
              14,988
              
              
              
              9.97
              
              
              
              36,015
              
              
              
              34.0
              
              
              $
              37,519
              
              
              
              3 5.0
              %Tier
      1 risk-based
              
              
              14,988
              
              
              
              13.21
              
              
              
              34,539
              
              
              
              34.0
              
              
              
              36,809
              
              
              
              3 6.0Total
      risk-based
              
              
              16,335
              
              
              
              14.40
              
              
              
              39,078
              
              
              
              38.0
              
              
              
              311,348
              
              
              
              310.0As
      of December 31, 2007:Tangible
              
              $
              14,329
              
              
              
              10.80
              %
              
              $
              >1,991
              
              
              
              >1.5
              %
              
              
              N/A
              
              
              
              N/ACore
      (leverage)
              
              
              14,329
              
              
              
              10.80
              
              
              
              >5,310
              
              
              
              >4.0
              
              
              $
              >6,638
              
              
              
              > 5.0
              %Tier
      1 risk-based
              
              
              14,329
              
              
              
              14.36
              
              
              
              >3,994
              
              
              
              >4.0
              
              
              
              >5,990
              
              
              
              > 6.0Total
      risk-based
              
              
              15,116
              
              
              
              15.14
              
              
              
              >7,987
              
              
              
              >8.0
              
              
              
              >9,984
              
              
              
              >10.0





The
following table presents a reconciliation of the Company’s consolidated equity
as determined using accounting principles generally accepted in the United
States of America (“GAAP”) and the Association’s regulatory capital amounts as
of December 31:





2008
                
                
                2007(In
      Thousands)Consolidated
      GAAP equity
                
                $
                18,794
                
                
                $
                18,480Hometown
      Bancorp, Inc.’s equity in excess of its investment in the
      Association
                
                
                (3,811
                )
                
                
                (4,160
                )Association
      GAAP equity
                
                
                14,983
                
                
                
                14,320Accumulated
      other comprehensive loss, net of income taxes
                
                
                5
                
                
                
                9Tangible
      capital, core capital and Tier I risk-based capital
                
                
                14,988
                
                
                
                14,329Allowance
      for loan losses
                
                
                1,347
                
                
                
                787Total
      risk-based capital
                
                $
                16,335
                
                
                $
                15,116


44




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
15 - Fair Value Measurements and Fair Values of Financial
Instruments





Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique.  Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates
indicated.  The estimated fair value amounts have been measured as of
December 31, 2008 and 2007 and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates.  As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.





In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value under GAAP, and expands disclosures about fair value
measurements.  SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements.  The Company adopted
SFAS 157 effective for its fiscal year beginning January 1, 2008.





In
December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”).  FSP 157-2 delays the effective date of SFAS
157 for all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods within
those fiscal years.  As such, the Company only partially adopted the
provisions of SFAS 157, and will begin to account and report for non-financial
assets and liabilities in 2009.  In October 2008, the FASB issued FASB
Staff Position 157-3,Determining the Fair Value of a Financial Asset When the Market for that Asset
is Not Active (“FSP 157-3”), to clarify the application of the provisions
of SFAS 157 in an inactive market and how an entity would determine fair value
in an inactive market.  FSP 157-3 is effective immediately and applies
to the Company’s December 31, 2008 consolidated financial
statements.  The adoption of SFAS 157 and FSP 157-3 had no impact on
the amounts reported in the consolidated financial statements.





SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value.  The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements).  The three levels of the fair value
hierarchy under SFAS 157 are as follows:





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





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





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





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





For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:


45




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
15 - Fair Value of Financial Instruments (Continued)





Description
                
                Carrying
      Value
                
                
                (Level
      1) Quoted Prices in Active Markets for Identical
    Assets
                
                
                (Level
      2) Significant Other Observable Inputs
                
                
                (Level
      3) Significant Unobservable Inputs(In
      Thousands)Securities
      available for sale
                
                $
                1,002
                
                
                $
                -
                
                
                $
                1,002
                
                
                $
                -





For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:





Description
                
                Carry
      Value
                
                
                (Level
      1) Quoted Prices in Active Markets for Identical
    Assets
                
                
                (Level
      2) Significant Other Observable Inputs
                
                
                (Level
      3) Significant Unobservable Inputs(In
      Thousands)Impaired
      loans
                
                $
                1,067
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,067





The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Bank’s assets and liabilities.  Due to a wide
range of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful.  The following methods and
assumptions were used to estimate the fair values of the Company’s financial
instruments at December 31, 2008 and 2007:





Cash
and Cash Equivalents





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





Securities





Fair
values of available for sale securities are based on quoted market prices of
comparable instruments. When necessary, the Company utilizes matrix pricing from
a third party pricing vendor to determine fair value pricing. Matrix prices,
which is a mathematical technique used widely in the industry to value debt
securities without relying exclusively on quoted market prices for the specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted prices.





Loans
Held for Sale





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


46




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
15 - Fair Value of Financial Instruments (Continued)





Loans
Receivable





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





Impaired
Loans





Impaired
loans are those that are accounted for under SFAS No. 114, Accounting by Creditors for
Impairment of a Loan,(SFAS No. 114)in which the Company
has measured impairment generally based on the fair value of the loan’s
collateral. Fair value is generally determined based upon independent third
party appraisals of the properties or other indications of value based on recent
comparable sales of similar properties, or discounted cash flows based upon
expected proceeds. These assets are included in Level 3 fair values, based upon
the lowest level of input that is significant to the fair value measurements.
The fair value consists of loan balances less their valuation allowances as
determined under SFAS No. 114.  Impaired loans, which are measured for
impairment using the fair value of the collateral for collateral dependent
loans, had a carrying amount of $1.1 million, net of a valuation allowance of
$432,000.





Federal
Home Loan Bank Stock





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





Accrued
Interest Receivable and Payable





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





Deposits





Fair
values for demand deposits, savings accounts and certain money market deposits
are, by definition, equal to the amount payable on demand at the reporting
date.  Fair values of fixed-maturity certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on similar instruments with similar
maturities.





Federal
Home Loan Bank Advances





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





Off-Balance
Sheet Financial Instruments





Fair
values of commitments to extend credit and letters of credit are estimated using
the fees currently charged to enter into similar agreements, taking into account
market interest rates, the remaining terms, and present credit worthiness of the
counterparties.  At December 31, 2008 and 2007, the fair value of
these instruments was not material.


47




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
15 - Fair Value of Financial Instruments (Continued)





The
estimated fair values of the Company’s financial instruments at December 31,
2008 and 2007 were as follows:





December 31,2008
                
                
                2007Carrying Amount
                
                
                Fair Value
                
                
                Carrying Amount
                
                
                Fair Value(In
      Thousands)Financial
      assets:Cash
      and cash equivalents
                
                $
                3,203
                
                
                $
                3,203
                
                
                $
                4,013
                
                
                $
                4,013Securities
      available for sale
                
                
                1,002
                
                
                
                1,002
                
                
                
                1,003
                
                
                
                1,003Securities
      held to maturity
                
                
                1,509
                
                
                
                1,530
                
                
                
                1,774
                
                
                
                1,776Loans
      held for sale
                
                
                106
                
                
                
                106
                
                
                
                528
                
                
                
                528Loans
      receivable, net
                
                
                137,868
                
                
                
                141,879
                
                
                
                120,982
                
                
                
                122,110Federal
      Home Loan Bank stock
                
                
                395
                
                
                
                395
                
                
                
                142
                
                
                
                142Accrued
      interest receivable
                
                
                661
                
                
                
                661
                
                
                
                645
                
                
                
                645Financial
      liabilities:Non-interest
      bearing demand accounts
                
                
                16,947
                
                
                
                16,947
                
                
                
                17,441
                
                
                
                17,441NOW
      accounts
                
                
                6,644
                
                
                
                6,644
                
                
                
                6,446
                
                
                
                6,446Money
      market accounts
                
                
                11,579
                
                
                
                11,579
                
                
                
                11,170
                
                
                
                11,170Savings
      accounts
                
                
                13,561
                
                
                
                13,561
                
                
                
                13,645
                
                
                
                13,645Certificates
      of deposit
                
                
                76,008
                
                
                
                76,754
                
                
                
                63,359
                
                
                
                63,455Federal
      Home Loan Bank advances
                
                
                4,375
                
                
                
                4,375
                
                
                
                -
                
                
                
                -Accrued
      interest payable
                
                
                143
                
                
                
                143
                
                
                
                262
                
                
                
                262Off-balance
      sheet financial instruments:Commitments
      to extend credit
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Letters
      of credit
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -


48




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
16 - Hometown Bancorp, Inc. (Parent Company Only) Financial
Information





Balance
Sheets





December 31,
                    2008
                  
                  
                  December 31,2007(In
      Thousands)AssetsCash
                  
                  $
                  2,913
                  
                  
                  $
                  3,284Loan
      receivable from ESOP
                  
                  
                  858
                  
                  
                  
                  879Investment
      in subsidiary
                  
                  
                  14,983
                  
                  
                  
                  14,320Other
      assets
                  
                  
                  40
                  
                  
                  
                  -Total
      Assets
                  
                  $
                  18,794
                  
                  
                  $
                  18,483Other
      liabilities
                  
                  $
                  -
                  
                  
                  $
                  3Stockholders’
      Equity
                  
                  
                  18,794
                  
                  
                  
                  18,480Total
      Liabilities and Stockholders’ Equity
                  
                  $
                  18,794
                  
                  
                  $
                  18,483





Statements
of Income





Year Ended
                    December 31,
                    2008
                  
                  
                  Year
      Ended December 31, 2007(In
      Thousands)Interest
      income on ESOP loan
                  
                  $
                  73
                  
                  
                  $
                  39Operating
      expenses
                  
                  
                  180
                  
                  
                  
                  30Income
      (loss) before income taxes and equity
      in     undistributed earnings of
      subsidiary
                  
                  
                  (107
                  )
                  
                  
                  9Income
      tax  benefit (expense)
                  
                  
                  42
                  
                  
                  
                  (4
                  )Income
      (loss) before equity in undistributed earnings of
    subsidiary
                  
                  
                  (65
                  )
                  
                  
                  5Equity
      in undistributed earnings of subsidiary
                  
                  
                  630
                  
                  
                  
                  845Net
      Income
                  
                  $
                  565
                  
                  
                  $
                  850


49




Hometown Bancorp, Inc.
 
 Notes to Consolidated Financial
Statements


Note
16 - Hometown Bancorp, Inc. (Parent Company Only) Financial Information
(Continued)





Statements
of Cash Flows





Year Ended
                    December 31,
                    2008
                  
                  
                  Year
      Ended December 31, 2007(In
      Thousands)Cash
      Flows from Operating ActivitiesNet
      income
                  
                  $
                  565
                  
                  
                  $
                  850Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Equity
      in undistributed earnings of subsidiary
                  
                  
                  (630
                  )
                  
                  
                  (845
                  )Decrease
      (increase) in other assets
                  
                  
                  (40
                  )
                  
                  
                  2Increase
      (decrease) in other liabilities
                  
                  
                  (3
                  )
                  
                  
                  3Net
      Cash provided by (used in) Operating Activities
                  
                  
                  (108
                  )
                  
                  
                  10Cash
      flows from Investing ActivitiesLoan
      to ESOP
                  
                  
                  -
                  
                  
                  
                  (933
                  )Repayments
      received on ESOP loan
                  
                  
                  21
                  
                  
                  
                  54Investment
      in bank subsidiary
                  
                  
                  -
                  
                  
                  
                  (6,000
                  )Net
      Cash provided by (used in) Investing Activities
                  
                  
                  21
                  
                  
                  
                  (6,879
                  )Cash
      Flows from Financing ActivitiesTreasury
      stock purchases
                  
                  
                  (284
                  )
                  
                  
                  -Net
      proceeds from common stock offering
                  
                  
                  -
                  
                  
                  
                  10,008Net
      Cash provided by (used in) Financing Activities
                  
                  
                  (284
                  )
                  
                  
                  10,008Net
      Increase (decrease) in Cash
                  
                  
                  (371
                  )
                  
                  
                  3,139Cash
      - Beginning of Period
                  
                  
                  3,284
                  
                  
                  
                  145Cash
      - End of Period
                  
                  $
                  2,913
                  
                  
                  $
                  3,284


50




Hometown
Bancorp, Inc.





STOCKHOLDER INFORMATION
                  
                  Corporate Office
                  Hometown
      Bancorp, Inc.
                  12
      Main Street
                  Walden,
      NY 12586
                  (845)
      778-2171
                  
                  Annual Meeting of Stockholders
                  The
      annual meeting of Hometown Bancorp, Inc. will be held May 13, 2009 at
      4:00pm at the Company’s office, 12 Main Street, Walden,
      NY 12586.
                  
                  Annual Report on Form 10-K
                  For
      the 2008 fiscal year, Hometown Bancorp, Inc. has filed an Annual Report on
      Form 10-K with the Securities and Exchange Commission. The Form 10-K is
      available at www.sec.gov as part of
      the SEC EDGAR database. Stockholders may also obtain a
      copy free of charge by writing to Hometown Bancorp, Inc.,12 Main Street,Walden,NY12586, Attention: Corporate
      Secretary.
                  
                  Stock Transfer Agent &
      Registrar
                  Stockholders
      wishing to change name, address or ownership of stock, or to report lost
      certificates or to consolidate accounts should contact the Company’s stock
      registrar and transfer agent directly at:
                  
                  Registrar
      & Transfer Company
                  10
      Commerce Drive
                  Cranford,
      NJ 07016-3572
                  (800)
      368-5948
                  
                  Regulatory Counsel
                  Luse Gorman Pomerenk
      & Schick, P.C.
                  5335
      Wisconsin Avenue, N.W. Suite 400
                  Washington,
      DC 20015
                  
                  Independent Auditor
                  Beard
      Miller Company LLP
                  115
      Solar Street, Suite 100
                  Syracuse,
      NY 13204
                
                Market Information for Common
      Stock
                  The
      common stock of Hometown Bancorp, Inc. trades on the Over-the-Counter
      market under the symbol “HTWC.OB.” At December 31, 2008, there were
      approximately 307 stockholders of record, not including the number of
      persons or entities holding stock in nominee or street names through
      various brokers and banks.
                  
                  Hometown
      Bancorp, Inc. common stock was issued at $10.00 per share in connection
      with the Company’s initial minority public offering completed on June 28,
      2007.
                  
                  DIRECTORSANDOFFICERS
                  Hometown
      Bancorp, Inc.
                  
                  Board of Directors
                  GrahamS.Jamison:Chairman of the Board,
      Retired dairy farmer and Supervisor for the Town of Crawford,
      NY
                  
                  ThomasF.Gibney:President & Chief
      Executive Officer, Hometown Bancorp, Inc.
                  
                  JosephB.Horan:President and funeral
      Director of Gridley Horan, Inc.
                  
                  StevenE.Howell:CPA and partner with
      Vanacore, DeBenedictus, DiGovanni & Weddell, LLP, CPAs.
                  
                  GeraldN.Jacobowitz:Senior partner in the
      law firm of Jacobowitz and Gubits, LLP
                  
                  StephenE.Sabine:Retired Division
      Manager from New York State Electric & Gas Corp.
                  
                  KennethR.Schliphack:Retired from B&C
      Fuel Oil Co. Inc.
                  
                  CurtisJ.Schoeberl,Sr.:Assessor for the Town
      of Shawangunk, NY
                  
                  Officers
                  ThomasF.Gibney:President & Chief
      Executive Officer, Hometown Bancorp, Inc.
                  
                  JudithB.Weyant:Senior Vice President
      and Chief Operating Officer and Corporate Secretary
                  
                  L.BruceLott:Senior Vice President
      and Chief Lending Officer
                  
                  StephenW.Dederick:Vice President and
      Chief Financial Officer