**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K/A**

 

**(Amendment No. 2)**

 

**FORANNUAL AND TRANSITION REPORTS**

**PURSUANTTO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 
| **x** | ** ** | **Annual  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------------|

**Forthe fiscal year ended JUNE 30, 2007**

** **

**-or-**

 
| **o** | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934.** |
|-------|------------|-----------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom               to               **

 

**Commission File Number: 0-49706**

 

**WILLOWFINANCIAL BANCORP, INC.**

(Exact Name of Registrant as Specified in itsCharter)

 

| **PENNSYLVANIA**                                                | ** ** | **80-0034942**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer  Identification No.) |

 

**170 SOUTH WARNER ROAD**

**WAYNE, PENNSYLVANIA 19087**

(Address of Principal Executive Offices)

 

Registrant’s telephone number: (includingarea code) **(610) 995-1700**

 

Securities registered pursuant to Section 12(b) ofthe Act:

 

| **Title of each class**       | ** ** | **Name of each exchange on which registered** |
|----------------------------------------------|------------|-----------------------------------------------------------------------------|
| **Common Stock (par value $0.01 per share)** |       | **The Nasdaq Stock Market, LLC**                                            |

 

Securities registered pursuant to Section 12(g) ofthe Act:  **NONE**

 

Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   YES  o NO  x

 

Indicate bycheck mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  YES  o NO  x

 

Indicate bycheck mark whether the Registrant: (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. YES  o  NO  x

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

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

 
| Large  Accelerated Filer o                     |   | Accelerated  Filer x         |
|------------------------------------------------|--------|------------------------------|
|                                           |   |                         |
| Non-Accelerated  Filer o                       |   | Smaller  reporting company o |
|                                           |   |                         |
| (Do not  check if a smaller reporting company) |   |                         |

 

Indicate bycheck mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES  o  NO  x

 

The aggregatemarket value of the voting stock held by non-affiliates of the Registrant basedon the closing price of $14.92 on December 31, 2006, the last business dayof the Registrant’s second quarter was $185,242,587 (16,640,575 sharesoutstanding less 4,224,852 shares held by affiliates at $14.92 per share).Although directors and executive officers of the Registrant and certainemployee benefit plans were assumed to be “affiliates” of the Registrant forpurposes of the calculation, the classification is not to be interpreted as anadmission of such status.

 

As of the closeof business on March 31, 2008 there were 15,699,304 shares of theRegistrant’s Common Stock outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

1.                          Portions of the Definitive Proxy Statement for the 2007 Annual Meeting ofStockholders are incorporated by reference in Part III.

 

 

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**EXPLANATORY NOTE**

 

This Amendment on Form 10-K/A amends our Annual Report on Form 10-K/Afor the fiscal year ended June 30, 2007, filed with the Securities andExchange Commission (SEC) on October 16, 2007 (Amendment No. 1) andit amends our Annual Report on Form 10-K for the year ended June 30,2007 filed with the SEC on September 28, 2007.  We are filing thisAmendment No. 2 to correct the consolidated financial statements of WillowFinancial Bancorp, Inc. (the “Company”) as of June 30, 2007 and 2006and for each of the periods in the years ended June 30, 2007 and2006.  The Company’s previously issuedfinancial statements for these and prior periods should no longer be reliedupon.

 

The Company’s management along with its independent registered publicaccounting firm, during the course of the Company’s fiscal 2007 annual reviewof financial results and application of financial controls, identifieddeficiencies that represented material weaknesses in internal controls overfinancial reporting. While a remediation plan was initiated at that time tocorrect these material weaknesses, in finalizing its’ Form 10-Q for thequarter ended September 30, 2007, management and the Company’s independentregistered public accounting firm subsequently recognized that thesedeficiencies had not been fully remediated. At that time, the material weaknesses resulted in an un-reconcileddifference of approximately $6.2 million. Management, in conjunction withthird-party advisors and an additional accounting firm retained by the Companyand the Audit Committee of the Company’s Board of Directors to assistmanagement in reconciling the Company’s financial statements, has spentsignificant time reviewing and researching the books and records of the Companyto determine the root cause of the out of balance condition. Despite exhaustiveefforts over more than five months and the incurrence of more than $2.0 millionin additional outside professional fees, the Company has been unable to fullycorrect the prior accounting entries in a manner which completely reconcilesthe out-of-balance condition. Based upon the time and expense that has beenincurred, management and the Audit Committee of the Company’s Board ofDirectors has determined the most appropriate action is to record theun-reconciled differences as a charge to earnings in the 2006 fiscal quartersended September 30, 2005 and December 31, 2005, the periods that itwas determined that the out of balance condition first arose.  As a result, management and the AuditCommittee have determined that the Company’s financial statements for thefiscal years ended June 30, 2007 and 2006 required restatement. Theadjustments include errors with an aggregate pre-tax income statement impact of$8.3 million, a goodwill impact of $497 thousand and an aggregate net reductionin retained earnings of $5.9 million as further described below:

 

·                  Errorsdiscovered as a result of improperly performed reconciliations that includedun-reconciled differences, which resulted in an aggregate reduction to pre-taxincome of $8.3 million ($5.5 million after tax) and a charge to fiscal 2004retained earnings of $365 thousand; and

 

·                  Errorsin the accounting for the acquisition of Chester Valley Bancorp and the relatedcalculation of goodwill of approximately $497 thousand.

 

For additionaldiscussion, see Note 2 included in Item 8 and Management’s Discussion andAnalysis of Financial Condition and Results of Operations in Item 7 of thisreport.

 

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**Willow Financial Bancorp, Inc.FORM 10-K/AFor the Fiscal Year Ended June 30, 2007INDEX**

 
| PART I  |                                                                                        |   |   |
|--------------|---------------------------------------------------------------------------------------------|--------|--------|
| Item 1.      | Business                                                                                    |   | 1      |
|         |                                                                                        |   |   |
| PART II |                                                                                        |   |   |
| Item 6.      | Selected Financial Data                                                                     |   | 33     |
| Item 7.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |   | 35     |
| Item 8.      | Financial Statements and Supplementary Data                                                 |   | 52     |
| Item 9a.     | Controls and Procedures                                                                     |   | 104    |
|         |                                                                                        |   |   |
| PART IV |                                                                                        |   |   |
| Item 15.     | Exhibits and Financial Statement Schedules                                                  |   |   |
|         | Signatures                                                                                  |   |   |

 

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**Forward Looking Statements**

 

*This AnnualReport on Form 10-K/A contains certain forward-looking statements (asdefined in the Securities Exchange Act of 1934 and the regulations hereunder).Forward-looking statements are not historical facts but instead represent onlythe beliefs, expectations or opinions of Willow Financial Bancorp, Inc.and its management regarding future events, many of which, by their nature, areinherently uncertain. Forward-looking statements may be identified by the useof such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”,or words of similar meaning, or future or conditional terms such as “will”, “would”,“should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward-lookingstatements include, but are not limited to, financial projections and estimatesand their underlying assumptions; statements regarding plans, objectives andexpectations with respect to future operations, products and services; andstatements regarding future performance. Such statements are subject to certainrisks, uncertainties and assumption, many of which are difficult to predict andgenerally are beyond the control of Willow Financial Bancorp and itsmanagement, that could cause actual results to differ materially from thoseexpressed in, or implied or projected by, forward-looking statements. Thefollowing factors, among others, could cause actual results to differmaterially from the anticipated results or other expectations expressed in theforward-looking statements: (1) economic and competitive conditions whichcould affect the volume of loan originations, deposit flows and real estatevalues; (2) the levels of non-interest income and expense and the amountof loan losses; (3) competitive pressure among depository institutionsincreasing significantly; (4) changes in the interest rate environmentcausing reduced interest margins; (5) general economic conditions, eithernationally or in the markets in which Willow Financial Bancorp is or will bedoing business, being less favorable than expected;(6) political andsocial unrest, including acts of war or terrorism; or (7) legislation orchanges in regulatory requirements adversely affecting the business in whichWillow Financial Bancorp will be engaged. Willow Financial Bancorp undertakesno obligation to update these forward-looking statements to reflect events orcircumstances that occur after the date on which such statements were made.*

 

**PART I**

 

**Item 1.          Business**

 

**General.****  ** Effective on September 21,2006, Willow Grove Bancorp, Inc. and Willow Grove Bank changed their namesto Willow Financial Bancorp, Inc. and Willow Financial Bank, respectively.As contained herein, references to the Company include both Willow FinancialBancorp, Inc. and Willow Grove Bancorp, Inc. and references to theBank include both Willow Financial Bank and Willow Grove Bank. Coincident withthe name change, the Company’s trading symbol on the NASDAQ Global SelectMarket was changed from “WGBC” to “WFBC”.

 

WillowFinancial Bancorp, Inc. (the “Company”), is a Pennsylvania corporation andparent holding company for Willow Financial Bank (the “Bank”). The Companyoperates out of its Corporate Headquarters and operations center currentlylocated in Wayne, Pennsylvania. The Bank, which was originally organized in1909, is a Federally chartered savings bank and wholly owned subsidiary of theCompany. The Bank’s business consists primarily of making commercial businessand consumer loans as well as real estate loans, both commercial and residential,funded primarily by retail and business deposits along with borrowings obtainedfrom the Federal Home Loan Bank (“FHLB”) of Pittsburgh, or borrowings obtainedfrom third parties through repurchase agreements. The Bank operates a branchbanking network consisting of 29 full-service offices which are located inneighboring Chester County, Montgomery County and Bucks County, Pennsylvania,as well as Philadelphia.

 

After theclose of business on August 31, 2005, the Company completed its acquisitionof Chester Valley Bancorp Inc. (“Chester Valley”), a registered bankholding company headquartered in Downingtown, Pennsylvania, with over $654 millionin assets. Chester Valley had two wholly owned subsidiaries, First FinancialBank, a Pennsylvania chartered commercial bank (“FFB”) with 13 full-servicebanking offices, and Philadelphia Corporation for Investment Services, aregistered investment advisor and broker dealer (“PCIS”). Pursuant to theAgreement and

 

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Plan ofMerger, dated as of January 20, 2005 (the “Merger Agreement”), ChesterValley was merged with and into the Company, with the Company as the survivingcorporation (the “Merger”), and FFB was merged with and into the Bank with theBank as the surviving bank (the “Bank Merger”). PCIS, doing business as WillowInvestment Services (“WIS”) since March 2007, now operates as a businesssegment of the Company. As a result of the Merger, each outstanding share ofChester Valley common stock, par value $1.00 per share (the “Chester ValleyCommon Stock”), was converted into the right to receive, at the election of theshareholder, either $27.90 in cash or 1.4823 shares of Company common stock,par value $0.01 per share (the “Company Common Stock”), subject to theallocation and pro ration provisions set forth in the Merger Agreement. Theacquisition resulted in the Company’s issuance of an aggregate of4,977,256 shares of Company Common Stock and $51.0 million in cash,resulting in a total merger consideration paid for Chester Valley Common Stockof $145.3 million. This included capitalized acquisition costs and thevalue of Chester Valley vested stock options, which were converted to optionsof the Company. The Company used general corporate funds to pay the aggregatecash consideration of approximately $51.0 million for the shares ofChester Valley Common Stock acquired in the Merger for cash, as well as theapproximate $3.2 million in acquisition costs.

 

The Merger hasbeen accounted for using the purchase method of accounting, which requires thatour financial statements include activity of Chester Valley only subsequent tothe acquisition date of August 31, 2005. Accordingly, our consolidatedfinancial statements and the information herein include the combined results ofChester Valley and its former subsidiaries, FFB and PCIS, since September 1, 2005.

 

The Companybelieves the Merger enhanced its franchise value through the addition of 13branch locations in the growing and affluent county of Chester County,Pennsylvania. Additionally, the Company’s existing customers have benefitedfrom additional products offered by Chester Valley, which were not beingoffered previously by the Company.

 

Effective February 28,2006, the Company completed the sale of all outstanding shares of capital stockof WIS, formerly PCIS, to Uvest BD-A, Inc., a North Carolina Corporationand registered broker-dealer (“Uvest”) for consideration of $100 but providingthat such shares may be repurchased for $100 at any time after the closing dateof the stock sale. Concurrently with the execution of the sale of WIS, the Bankand Uvest entered into a related Sub-Clearing and Brokerage Services Agreement,which provides that an affiliate of Uvest provides securities clearing and certainsupervisory and compliance services for WIS, and a Financial Services Agreementbetween WIS and the Bank which provides that the Bank will be entitled to 90%of the revenue generated by the securities brokerage and investment advisoryactivities conducted at WIS and will bear substantially all operational andoverhead expenses. Upon consummation of the sale of WIS stock to Uvest, WIS isno longer a subsidiary of the Company. However, under the provisions ofFinancial Accounting Standards Board Interpretation No. 46R, “*Consolidation of Variable Interest Entities*”, the results ofWIS continue to be consolidated in the Company’s financial statements. Theaffiliation agreement with Uvest has the primary effect of relieving WIS ofdirect responsibility for securities clearing and certain back-office andoversight obligations.

 

On March 30,2007, the Company completed its acquisition of BeneServ, Inc. (“BeneServ”)for a purchase price of up to $5.5 million in cash. The purchase price includesa payment of $4.2 million at closing plus an additional amount up to $1.3million in payments through the three-year anniversary date of the acquisition,subject to the achievement of certain performance thresholds. BeneServ is aninsurance agency serving the corporate employee benefit market segment.BeneServ and the Company share a target market in small businesses located inChester, Montgomery, Bucks, and Philadelphia counties, Pennsylvania, therebyproviding a number of cross selling opportunities for both companies. As of June 30,2007, based on the preliminary purchase price allocation, the Company recordedgoodwill and other intangibles of $4.5 million on the statement of financialcondition as a result of this acquisition.

 

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References tothe Company include its consolidated entities, Willow Financial Bank, the Bank’ssubsidiaries, and WIS, which is a separate business segment, unless the contextof the reference indicates otherwise.

 

In recentyears, the Company’s business plan has focused on the following primarygoals—changing operations to a full-service community bank and continued steadygrowth while maintaining a high level of asset quality. Until the acquisitionof Chester Valley, the growth was accomplished through internal means. To theextent that additional acquisition opportunities present themselves and aredeemed prudent by the Company’s Board of Directors and management, additionalacquisitions of financial institutions will be considered to further enhanceshareholder value. The Company also will consider adding additional de novoBank branch offices to enhance its presence in its existing geographic network.

 

The Bank’scustomer deposits are insured to the maximum extent provided by law, by theFederal Deposit Insurance Corporation (“FDIC”) through the Deposit InsuranceFund (“DIF”). The Bank is subject to examination and comprehensive regulationby the Office of Thrift Supervision (“OTS”) and is also regulated by the FDIC.The Bank is also subject to reserve requirements established by the Board ofGovernors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”),and is a member of the FHLB of Pittsburgh, one of the regional banks comprisingthe Federal Home Loan Bank System.

 

The Company’sexecutive offices are located at 170 South Warner Road, Wayne, Pennsylvania,and its telephone number is (610) 995-1700.

 

**Available Information**

 

The Companyfiles annual, quarterly and special reports, proxy statements and otherinformation with the Securities and Exchange Commission (“SEC”). Our SECfilings are available to the public at the SEC’s web site at http://www.sec.gov. Members of the public may also read and copy any document wefile at the SEC’s Public Reference Room at 100 F Street, N.E., Washington,D.C. 20549. You can request copies of these documents by writing to the SEC andpaying a fee for the copying cost. Please call the SEC at 1-800-SEC-0330 formore information about the operation of the public reference room. In addition,our stock is listed for trading on the Nasdaq Global Select Market and tradesunder the symbol “WFBC”. You may find additional information regarding WillowFinancial Bancorp, Inc. at *www.nasdaq.com*.. In addition to the foregoing, we maintain a web site at *www.wfbonline.com*.. We make available on our Internet web site copies of Willow Financial Bancorp’sAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and any amendments to such documents as soon asreasonably practicable after the Company files such material with, or furnishsuch documents to, the SEC.

 

**Market Area and Competition**

 

The Bank’sprimary market area includes Bucks, Montgomery, Chester and PhiladelphiaCounties in Pennsylvania. To a lesser extent, the Bank provides services toareas of Delaware, Berks and Lancaster Counties, Pennsylvania as well ascentral and southern New Jersey and the state of Delaware.

 

The Bank’sdirect competition for attracting deposits and originating loans hashistorically come from savings associations, other savings banks, commercialbanks and credit unions. The Bank faces additional competition for depositsfrom short-term money market funds and other corporate and governmentsecurities funds, mutual funds, and other non-financial institutions such assecurities brokerage firms and insurance companies. The Bank competes for loansand deposits through competitive interest rates, maturities and fees as well asproviding quality service to its customers.

 

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**Employees**

 

The Companyhad 374 full-time employees and 44 part-time employees at June 30, 2007.None of these employees are covered by a collective bargaining agreement andthe Company believes it enjoys good relations with its personnel.

 

**Lending Activities**

 

**Loan Portfolio Composition.****  ** The following table sets forth the compositionof the loan portfolio as of the dates indicated. This data does not includesingle family loans classified as held for sale which amounted to $8.1 million,$2.6 million, $1.8 million, $1.1 million, and $5.3 million at June 30,2007, 2006, 2005, 2004, and 2003, respectively.

 
| ** **                               | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | ** **                           | ** ** | **Percent of**         | ** ** | ** **                  | ** ** | **Percent of**         | ** ** | ** **                  | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                               | ** ** | **Amount**                           | ** ** | **Total**                   | ** ** | **Amount**                  | ** ** | **total**                   | ** ** | **Amount**                  | ** ** | **total** | ** ** | **Amount** | ** ** | **total** | ** ** | **Amount** | ** ** | **total** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage loans:                          |       |                                 |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Single-family                            |       | $                                    | 273,247    |                        | 26.10      | %                           | $          | 298,509                     |       | 27.60                       | %          | $ | 202,942 |   | 34.34 | % | $ | 181,049 |   | 34.15 | % | $ | 131,821 |   | 31.40 | % |
| Commercial real  estate and multi-family |       | 316,099                              |       | 30.19                       |       | 325,987                     |       | 30.14                       |       | 174,920                     |       | 29.60 |   | 180,881 |   | 34.12 |   | 155,892 |   | 37.14 |   |
| Construction                             |       | 93,180                               |       | 8.90                        |       | 112,774                     |       | 10.43                       |       | 86,658                      |       | 14.66 |   | 57,014 |   | 10.75 |   | 36,191 |   | 8.62 |   |
| Home equity                              |       | 272,295                              |       | 26.01                       |       | 259,119                     |       | 23.96                       |       | 100,805                     |       | 17.06 |   | 91,848 |   | 17.32 |   | 72,990 |   | 17.39 |   |
| Total mortgage  loans                    |       | 954,821                              |       | 91.20                       |       | 996,389                     |       | 92.13                       |       | 565,325                     |       | 95.66 |   | 510,792 |   | 96.34 |   | 396,894 |   | 94.55 |   |
| Consumer loans                           |       | 3,917                                |       | 0.37                        |       | 4,304                       |       | 0.40                        |       | 2,106                       |       | 0.36 |   | 1,678 |   | 0.32 |   | 2,324 |   | 0.55 |   |
| Commercial  business loans               |       | 88,274                               |       | 8.43                        |       | 80,815                      |       | 7.47                        |       | 23,492                      |       | 3.98 |   | 17,686 |   | 3.34 |   | 20,549 |   | 4.90 |   |
| Total loans  receivable                  |       | 1,047,012                            |       | 100.00                      | %          | 1,081,508                   |       | 100.00                      | %          | 590,923                     |       | 100.00 | % | 530,156 |   | 100.00 | % | 419,767 |   | 100.00 | % |
| Allowance for  loan losses               |       | (12,210                              | )          |                        |       | (16,737                     | )          |                        |       | (6,113                      | )          |   |   | (5,220 | ) |   |   | (5,312 | ) |   |   |
| Deferred loan  cost(fees)                |       | 491                                  |       |                        |       | (1,170                      | )          |                        |       | (623                        | )          |   |   | (747 | ) |   |   | (656 | ) |   |   |
| Loans receivable,  net                   |       | 1,035,293                            |       |                        |       | $                           | 1,063,601  |                        |       |                        | $          | 584,187 |   |   |   | $ | 524,189 |   |   |   | $ | 413,799 |   |   |   |
|                                          |            |                                      |            |                             |            |                             |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Contractual Principal Repayments and Interest Rates.****  ** The following table setsforth scheduled contractual amortization of the loan portfolio at June 30,2007. Demand loans, loans having no schedule of repayments and no stated maturityand overdraft loans are reported as due in one year or less.

 
| ** **                                    | ** ** | **At June 30, 2007, the amount due within** | ** ** | ** **                                            | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                    | ** ** | **1 year or  less**                                                  | ** ** | **more than  1 year to  3 years** | ** ** | **more than  3 years to  5 years** | ** ** | **more than  5 years to  10 years** | ** ** | **more than  10 years to  20 years** | ** ** | **more than  20 years** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)**                                           | ** ** |
| Mortgage loans:                               |       |                                                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Single-family and home equity                 |       | $                                                                              | 1,142      |                                                  | $          | 11,239 |   | $ | 20,820 |   | $ | 73,926 |   | $ | 234,193 |   | $ | 204,222 |   | $ | 545,542 |   |
| Commercial real estate  and multi-family |       | 5,341                                                                          |       | 33,675                                                |       | 26,271 |   | 174,312 |   | 72,238 |   | 4,262 |   | 316,099 |   |
| Construction                                  |       | 51,535                                                                         |       | 32,025                                                |       | 9,620 |   | — |   | — |   | — |   | 93,180 |   |
| Total mortgage loans                          |       | 58,018                                                                         |       | 76,939                                                |       | 56,711 |   | 248,238 |   | 306,431 |   | 208,484 |   | 954,821 |   |
| Consumer                                      |       | 96                                                                             |       | 1,138                                                 |       | 884 |   | 1,435 |   | 154 |   | 210 |   | 3,917 |   |
| Commercial business                           |       | 14,556                                                                         |       | 18,729                                                |       | 12,750 |   | 24,323 |   | 2,886 |   | 15,030 |   | 88,274 |   |
| Total                                         |       | $                                                                              | 72,670     |                                                  | $          | 96,806 |   | $ | 70,345 |   | $ | 273,996 |   | $ | 309,471 |   | $ | 223,724 |   | $ | 1,047,012 |   |

 

Of the $974.3million of loan principal repayments due after June 30, 2008, $450.3million have fixed rates of interest and $524.0 million have adjustable ratesof interest.

 

**Lending Activity and Products.****  ** The Bank’s lending activities are subject tounderwriting standards and origination procedures, which have been approved by itsBoard of Directors.

 

**Single-FamilyResidential First Mortgage Loans.****  **We process, underwrite and originate single-family residential mortgage loanson both a retail and wholesale basis. We have developed an extensive network ofactive residential mortgage brokers and mortgage bankers to

 

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support ourwholesale production system. These brokers identify, process and close loans onour behalf based upon rates and terms that we provide to them on a regularbasis which correlate to our assessment of our demand for various types ofloans. The brokers forward completed loan applications that are underwrittenand approved by Bank personnel in accordance with standards previously approvedby the Board of Directors. Retail residential lending activities aresupplemented by loan originations through the Bank’s internal loan officers,whereby loan applications are obtained through our branch network and referralsfrom local builders, real estate brokers and financial consultants. In order tofacilitate sale in the secondary market, single-family residential mortgageloans generally are underwritten in accordance with Federal Home Loan MortgageCorporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”)guidelines. To a lesser extent, the Company originates single-familyresidential loans for its portfolio, primarily with adjustable interest rates.In general, these loans do not conform to their underwriting standards due tothe size of the loan. Upon completion of the Merger with Chester Valley, theCompany’s strategy has changed in that loan portfolio growth is concentrated incommercial business, construction, commercial real estate and multi-family andconsumer lending products. The Company does not originate sub-prime mortgageloans.

 

The Bankgenerally requires a current appraisal prepared by an independent appraiser oran acceptable alternative property valuation on all new single-familyresidential mortgage loans as well as private mortgage insurance on all firstmortgage loans with a loan to value in excess of 80%. Title insurance isrequired on loans secured by real estate with the exception of certainsingle-family residential loans originated under $150 thousand. Hazardinsurance is required on all real estate loans. Flood insurance is alsorequired for all loans secured by properties located in a designated floodarea.

 

During theyear ended June 30, 2007, the Company sold an aggregate of $51.9 millionin single-family residential mortgage loans into the secondary market. Most ofthe Company’s newly originated single-family residential mortgage loans,together with servicing rights, are now originated for re-sale in the secondarymarket.

 

At June 30,2007, single-family residential mortgage loans aggregated $273.2 million ascompared to $298.5 million at June 30, 2006. The $25.3 million or 8.5%decrease resulted largely from portfolio repayments while most new loans weresold in the secondary market during the year.

 

**HomeEquity Loans.****  ** Inrecent years, the Bank has increased its emphasis on the origination of homeequity loans and lines of credit, due to their shorter maturities and generallyhigher interest rates. The maximum term of the Bank’s home equity loans is20 years with the exception of purchase money second mortgage loans whosemaximum term may be up to 30 years. A home equity loan is a fixed-rateloan where the borrower receives the total loan amount at a closing and makesmonthly payments to repay the loan within a specific time period. Home equitylines of credit are revolving lines of credit with a variable rate and amaximum term of 15 years. The borrower may draw on this account up to themaximum credit amount and repay the line at any time. At June 30, 2007,home equity loans and lines of credit aggregated $272.3 million or 26.0%of the total loan portfolio. Of this amount, $164.8 million were lines ofcredit.

 

Home equityloans and lines of credit are secured by the borrower’s residence, on which theBank generally obtains a second lien position on the underlying real estate.The Bank’s home equity programs provide financing in amounts up to 95% of thevalue of the property securing

 

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the loan, whencombined with the first mortgage. In addition to originating home equity loansthrough our branch offices, the Bank relies considerably on purchased loansfrom its network of correspondents.

 

**OtherConsumer Lending Activities.****  **The Bank offers various types of other consumer loans through its branchnetwork primarily consisting of loans secured by automobiles, to a much lesserextent deposit account loans, and unsecured personal loans. The Bankfacilitates the funding of student loans in conjunction with American EducationServices (“AES/PHEAA”). At June 30, 2007, $3.9 million, or 0.4%of our total loan portfolio consisted of these types of loans. This compares to$4.3 million of other consumer loans, or 0.4% of the total loan portfolio,at June 30, 2006.

 

**CommercialBusiness Loans.****  ** AtJune 30, 2007, commercial business loans aggregated $88.3 million, or8.4% of total loans, compared to $80.8 million at June 30, 2006, or7.5% of total loans. The $7.5 million or 9.2% increase resulted primarily fromthe continued focus to increase this segment of the loan portfolio. These loansare generally originated to small and medium sized businesses in our marketarea. These types of loans assist in the Bank’s asset/liability managementsince they generally provide shorter maturities and/or adjustable rates ofinterest in addition to generally having higher rates of return that compensatefor the additional credit risk associated with these loans.

 

Generally, theBank provides these loans on a secured basis and they are collateralized byaccounts receivable, inventory, equipment, or other general corporate assets ofthe borrower. Additionally, the principals of the borrower guarantee mostcommercial business loans. In general, interest rates are adjustable, indexedto a published rate of interest or fixed.

 

Generally,commercial business loans have higher risks associated with them thansingle-family mortgage loans due to the borrowers’ business operations beingmore susceptible to local and national economic conditions as well ascollateral being less tangible than real estate. These risks are mitigated bythe Bank employing individuals experienced in this type of lending and bygenerally requiring the personal guarantees of the business’s principals.Additionally, in some instances, personal assets of the principals are obtainedas additional security for these loans.

 

**CommercialReal Estate and Multi-Family Residential Real Estate Loans.****  ** At June 30, 2007,commercial real estate and multi-family residential loans amounted to$316.1 million or 30.2% of the total loan portfolio. This compares to$326.0 million or 30.1% at June 30, 2006. Included in commercial realestate loans are approximately $107.7 million of loans to businesses secured byreal estate owned by the business.

 

The Bank’scommercial real estate and multi-family residential loan portfolio consistsprimarily of loans secured by office buildings, retail and industrialbuildings, strip shopping centers, residential properties with five or moreunits, non-FNMA eligible single-family residential investment properties andother properties used for commercial and multi-family purposes located withinthe Bank’s market area.

 

The Bank’sunderwriting standards for the commercial real estate and multi-familyresidential loan portfolio allows for terms up to 25 years with monthlyamortization over the life of the loan and loan to value ratios of not morethan 80%. Interest rates are generally adjustable with a maximum interest ratereset period of five years. Prepayment fees are generally charged on mostcommercial real estate and multi-family loans in order to partially protect theBank in a falling interest rate environment. Personal guarantees are generallyrequired as additional security for this portfolio of loans.

 

Commercialreal estate and multi-family real estate lending generally involves increasedrisks as compared to single-family residential lending including, but notlimited to, larger loans to individual borrowers and loan payments that aredependent upon the successful operation of the project or the borrower’sbusiness. The Bank attempts to mitigate these risks by limiting loans to provenbusinesses, properties with historical operating performance sufficient toservice the debt, utilizing conservative debt coverage ratios in the underwriting,and

 

6

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periodicallymonitoring the operation of the business or project and the physical conditionof the property. Additionally, independent appraisal reports are obtained oneach loan to substantiate the property’s market value, and are reviewed byqualified Bank personnel or, if required by the Bank’s policies, qualifiedthird party consultants, prior to the closing of the loan.

 

In addition tooriginating loans, the Bank periodically purchases participation interests inlarger balance loans, typically multi-family and commercial real estatemortgage loans and construction loans, from other financial institutions in ourmarket area. We may purchase these loans to supplement our own originations or sellparticipations to manage borrower concentration risks. All purchasedparticipations comply with the Bank’s approved underwriting standards. Duringfiscal 2007, the Company purchased an aggregate of $40.5 million inparticipation interests.

 

**Constructionand Land Acquisition Loans.****  **Construction loans for residential and commercial projects, which generally aresecured by properties in southeastern Pennsylvania, southern New Jersey andnorthern Delaware are originated within our market area. The Bank generallylimits construction loans to builders and developers with whom the Bank has anestablished relationship, or who are otherwise known to officers of the Bank.Additionally, the Bank may acquire participation interests in certainconstruction loans originated by other local financial institutions that havesimilar underwriting standards as the Bank. These participation loans undergo afull underwriting in accordance with the Bank’s established policy.Construction loans outstanding at June 30, 2007 were$93.2 million, or 8.9% of total loans, compared to $112.8 million or10.4% of total loans at June 30, 2006. The $19.6 million or 17.4% decreaseis due primarily to the diminishing demand for new construction financing,resulting from a slowdown in the housing market.

 

Constructionloans generally have variable rates of interest, which is a strong tool inmanaging the interest rate risk exposure of the Bank. Generally, they have amaximum term to maturity of three years and loan to value ratios of 80% orless. Residential construction loans to developers are made on either apre-sold or speculative (unsold) basis. Limits are placed on the number ofunits that can be built on a speculative basis based upon the reputation, priorexperience and financial position of the builder, the location of the property,and prior sales in the development and the surrounding area.

 

Independentappraisals are obtained for all construction loans and are reviewed andanalyzed by qualified employees of the Bank or, in some instances, qualifiedthird party consultants. Property inspections are done at inception as well asprior to advancing additional proceeds committed under the loan documents.Monthly payment of interest is required on all construction loans.

 

Constructionloans can also be originated for the acquisition and development of land forsale (i.e. roads or other improvements). These loans generally require that thebuilder have a commitment for a construction loan for the units to be built onthe site. These loans are secured by a lien on the property and are generallylimited to a loan to value of 75% or less of the appraised value. The loanshave a variable rate of interest and require monthly payments of interest. Theprincipal of the loan is repaid as units are sold and released. Generally, allof these loans are in the Bank’s market area and are to developers with whomthe Bank has a prior relationship. Personal guarantees from the borrowers aregenerally required for these loans.

 

Constructionand land loans generally carry a higher degree of risk than single-familyresidential lending, due to the concentration of principal in a limited numberof loans and borrowers and the effect of economic conditions on developers,builders and projects. Additional risk is also associated with constructionlending because of the inherent difficulty in estimating both a property’svalue at completion and the estimated cost to complete a project. The nature ofthese loans is such that they are more difficult to evaluate and monitor. Inaddition, speculative construction loans to a builder are not pre-sold and thuspose a greater potential risk than construction loans to individuals on theirpersonal residences.

 

7

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In order tomitigate some of the risks inherent to construction lending, inspections aredone both prior to origination and throughout construction prior to advancingfunds, limiting the advancement of funds for speculative homes, limitingoriginations to builders who have established relationships or significantexperience, as well as obtaining personal guarantees from the principals.

 

The following table shows the activity in our loan portfolio during theperiods indicated:

 
| ** **                                      | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**   | ** ** |
| Loans held at the beginning of the period       |       | $                                      | 1,081,508  |   | $ | 590,923 |   | $ | 530,156 |   |
| Originated and purchased for  portfolio(1)(2):  |       |                                   |       |   |   |   |   |
| Mortgage loans:                                 |       |                                   |       |   |   |   |   |
| Single-family                                   |       | 30,049                                 |       | 142,305 |   | 52,933 |   |
| Commercial real estate and multi-family         |       | 36,738                                 |       | 20,646 |   | 39,879 |   |
| Construction                                    |       | 76,017                                 |       | 73,573 |   | 70,558 |   |
| Home equity                                     |       | 95,845                                 |       | 96,995 |   | 54,782 |   |
| Consumer loans                                  |       | 1,218                                  |       | 1,088 |   | 267 |   |
| Commercial business loans                       |       | 67,187                                 |       | 24,578 |   | 11,153 |   |
| Total originations and purchases for  portfolio |       | 307,054                                |       | 359,185 |   | 229,572 |   |
| Loans acquired from the Merger                  |       | —                                 |       | 467,700 |   | — |   |
| Amortization and curtailments                   |       | (336,370                               | )          | (336,607 | ) | (168,466 | ) |
| Net (charge-offs) recoveries                    |       | (5,180                                 | )          | 307 |   | (339 | ) |
| Net (decrease) increase in loans                |       | (34,496                                | )          | 490,585 |   | 60,767 |   |
| Total loans held at the end of the period       |       | $                                      | 1,047,012  |   | $ | 1,081,508 |   | $ | 590,923 |   |

 

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(1)             Excludesloans classified as held for sale at the time of origination.

 

(2)             Includes$22.8 million, and $21.7 million in purchased single-family mortgage loansin fiscal 2006 and 2005, respectively.

 

**Loans toOne Borrower.****  **Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989(“FIRREA”) and pursuant to regulations for Federal Savings Banks, the aggregateloans that the Bank can make to any one borrower is equal to 15% of the Bank’sunimpaired capital and surplus. For the Bank, this amount would beapproximately $19.2 million at June 30, 2007. There are provisionsthat would allow us to lend an additional 10% of unimpaired capital and surplusif the loans are secured by readily marketable securities. At June 30,2007, our three largest credit relationships with an individual borrower andrelated entities amounted to $16.1 million, $16.0 million and$16.0 million; each of which are in conformity with the current loans toone borrower regulations described above.

 

**Asset Quality**

 

**General.****  ** As a part of the effortsto maintain asset quality, the Bank has developed and implemented an assetclassification system in conjunction with federal regulations. All of ourassets are subject to this classification system. Loans are periodicallyreviewed and the classifications reviewed at least quarterly by the LoanCommittee of the Board of Directors.

 

When aborrower fails to make a scheduled payment, the Bank attempts to cure thedelinquency by making personal contact with the borrower. Initial contacts aregenerally made 16 days after the date the payment is due. In most cases,delinquencies are promptly resolved. If the delinquency continues, late chargesare assessed and additional efforts are made to collect the deficiency. TheBank generally works with borrowers to resolve such problems; however, when theaccount becomes 90 days delinquent, the Bank institutes foreclosure or otherproceedings, as necessary, to minimize any potential loss.

 

8

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On loans forwhich the Bank considers the collection of principal or interest paymentsdoubtful, the Bank ceases the accrual of interest income. On loans more than90 days past due, as to principal and interest payments, it is the Bank’spolicy to discontinue accruing additional interest and reverse any interestcurrently accrued unless it is determined that the loan principal and interestare fully secured and in the process of collection. On occasion, a loan may beplaced on non-accrual earlier if the financial condition of the borrower raisessignificant concern with regard to the borrower’s ability to service the debtin accordance with the terms of the loan. Interest income is not accrued onthese loans until the borrower’s financial condition and payment recorddemonstrate an ability to service the debt.

 

Real estatethat the Bank acquires as a result of foreclosure or deed-in-lieu of foreclosureis classified as real estate owned until sold. Real estate owned is recorded atthe lower of cost or fair value less estimated selling cost. Costs associatedwith acquiring and improving a foreclosed property are usually capitalized tothe extent that the carrying value does not exceed fair value less estimatedselling costs. Holding costs are charged to expense. Gains and losses on thesale of real estate owned are reflected in operations, as incurred.

 

**Delinquent Loans.****  **The following table sets forth information concerning delinquent loans at thedates indicated. The amounts presented represent the total outstandingprincipal balances of the related loans rather than the actual payment amountsthat are past due.

 
| ** **                              | ** ** | **At  June 30, 2007**      | ** ** | **At  June 30, 2006** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **30 to  59 days**         | ** ** | **60 to  89 days**    | ** ** | **30 to  59 days** | ** ** | **60 to  89 days** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage loans:                         |       |                                 |       |                            |       |   |   |   |   |
| Single-family                           |       | $                                    | 1,400      |                            | $          | 147 |   | $ | 1,204 |   | $ | 71 |   |
| Commercial real estate and multi-family |       | 427                                  |       | 268                             |       | 519 |   | 5,466 |   |
| Construction                            |       | 317                                  |       | 406                             |       | 239 |   | 264 |   |
| Home equity                             |       | 541                                  |       | 349                             |       | 587 |   | 152 |   |
| Consumer loans                          |       | —                               |       | 6                               |       | — |   | 1 |   |
| Commercial business loans               |       | 72                                   |       | 5                               |       | 51 |   | 689 |   |
| Total delinquent loans receivable       |       | $                                    | 2,757      |                            | $          | 1,181 |   | $ | 2,600 |   | $ | 6,643 |   |

 

Loansdelinquent 30 to 89 days amounted to $3.9 million at June 30,2007 compared to $9.2 million at June 30, 2006. Management regularlymonitors all delinquent loan activity. Management believes that these loans areadequately collateralized or the allowance is adequate to cover any potentialcollateral shortfall.

 

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**Non-Performing Assets.****  **The following table sets forth information with respect to non-performingassets the Bank has identified, including non-accrual loans and other real estateowned. Total non-performing assets amounted to $3.9 million, or 0.25% of totalassets, at June 30, 2007 compared to $15.8 million, or 1.01% of totalassets, at June 30, 2006. The $11.9 million decrease in the Company’snon-performing assets during fiscal 2007 was due primarily to the followingfactors: (1) net charge-offs during the year of $4.8 million relating totwo commercial business loan relationships categorized as non-accrual at June 30,2006; (2) the sale of an approximate $3.5 million commercial real estateloan which was classified as non-accrual at June 30, 2006; (3) thesale of commercial real estate which was foreclosed upon during the year andhad secured a $2.0 million commercial real estate loan categorized asnon-accrual at June 30, 2006; and (4) payments of $2.1 million duringthe year on loans in non-accrual status at June 30, 2006. These decreaseswere partially offset by a commercial business loan relationship and aconstruction loan relationship of $780 thousand and $463 thousand,respectively, which were transferred to non-accrual status during fiscal 2007.

 
| ** **                                     | ** ** | **At June 30,**            | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                     | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Accruing loans 90 or more days past due        |       |                                 |       |   |   |   |   |   |   |   |   |
| Mortgage loans                                 |       | $                                    | —     |   | $ | — |   | $ | 109 |   | $ | — |   | $ | 367 |   |
| Commercial business loans                      |       | —                               |       | — |   | — |   | — |   | 147 |   |
| Other                                          |       | —                               |       | — |   | — |   | 3 |   | — |   |
| Total accruing loans 90 or more days past  due |       | —                               |       | — |   | 109 |   | 3 |   | 514 |   |
| Non-accrual loans                              |       |                                 |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                  |       | 845                                  |       | 1,059 |   | 146 |   | 568 |   | 1,064 |   |
| Construction                                   |       | 463                                  |       | — |   | — |   | — |   | — |   |
| Commercial real estate and multi-family        |       | 697                                  |       | 7,753 |   | 315 |   | 48 |   | 48 |   |
| Home equity                                    |       | 601                                  |       | 479 |   | 99 |   | 39 |   | 236 |   |
| Consumer                                       |       | 56                                   |       | 154 |   | — |   | 16 |   | 7 |   |
| Commercial business                            |       | 1,188                                |       | 6,036 |   | 106 |   | 698 |   | 360 |   |
| Total non-accrual loans                        |       | 3,850                                |       | 15,481 |   | 666 |   | 1,369 |   | 1,715 |   |
| Performing troubled debt restructurings        |       | 1                                    |       | 256 |   | 1,912 |   | 1,404 |   | 1,463 |   |
| Total non-performing loans                     |       | 3,851                                |       | 15,737 |   | 2,687 |   | 2,776 |   | 3,692 |   |
| Other real estate owned, net                   |       | —                               |       | 51 |   | 439 |   | 403 |   | 391 |   |
| Total non-performing assets                    |       | $                                    | 3,851      |   | $ | 15,788 |   | $ | 3,126 |   | $ | 3,179 |   | $ | 4,083 |   |
| Non-performing loans to total loans            |       | 0.37                                 | %          | 1.46 | % | 0.46 | % | 0.52 | % | 0.88 | % |
| Non-performing assets to total assets          |       | 0.25                                 | %          | 1.01 | % | 0.33 | % | 0.34 | % | 0.48 | % |

 

**Classifiedand Criticized Assets.****  **Federal regulations require that each insured institution classify its assetson a regular basis. Furthermore, in connection with examinations of insuredinstitutions, federal examiners have authority to identify problem assets and,based upon their judgment, classify them. There are three classifications forproblem assets: “substandard,” “doubtful,” and “loss.” Substandard assets haveone or more defined weaknesses and are characterized by the distinctpossibility that the insured institution will sustain some loss if thedeficiencies are not corrected. Doubtful assets have weaknesses of substandardassets with the additional characteristic that the weaknesses make collectionor liquidation in full on the basis of current existing facts, conditions andvalues, questionable, and there is a high probability of loss. An assetclassified as loss is considered uncollectible and of such little value thatcontinuance as an asset of the institution is not warranted. Federal regulationsalso require another unclassified category designated “special mention” to beestablished and maintained for assets that do not currently expose an insuredinstitution to a sufficient degree of risk to warrant classification assubstandard, doubtful, or loss.

 

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At June 30,2007, the Company had $8.2 million of assets classified as substandard,consisting of $6.2 million of commercial real estate and business loans,$1.3 million of single-family mortgage loans, and $660 thousand ofconsumer loans, and $1.4 million classified as doubtful, consisting ofcommercial real estate and business loans. This compares to $6.6 millionof assets classified as substandard, consisting of $5.1 million of commercialreal estate and business loans, $974 thousand of single-family mortgageloans, $525 thousand of consumer loans, and $12.4 million classified asdoubtful, consisting of $12.3 million of commercial real estate and businessloans and $86 thousand of single-family mortgage loans at June 30, 2006.There were no loans classified as loss at June 30, 2007 or 2006.

 

**Allowancefor Loan Losses.****  **The allowance for loan losses is maintained at a level management believes isadequate to cover known and inherent losses in the loan portfolio that are bothprobable and reasonable to estimate at each reporting date. Our determinationof the adequacy of the allowance is based upon an evaluation of the portfolio,loss experience, current economic conditions, volume, growth, composition ofthe portfolio, and other relevant factors. The Bank uses historical lossfactors for each loan type and for loans considered to have a higher degree ofrisk. Additional components that may be used include, but are not limited todelinquency trends, asset classification trends and current economicconditions. Management then assesses these conditions and establishes theallowance for loan loss based upon the facts known at that time. Themethodology does not imply that any portion of the allowance for loan loss isrestricted, as the allowance for loan losses applies to the entire loanportfolio.

 

The allowance is increased by a provision for loan losses, which ischarged against income. As shown in the table below, at June 30, 2007, ourallowance for loan losses amounted to $12.2 million or 317.1% and 1.17% of ournon-performing loans and total loans receivable less deferred fees,respectively.

 
| ** **                                                                    | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands)**   | ** ** |
| Balance—beginning of period                                              |       | $                                      | 16,737     |   | $ | 6,113 |   | $ | 5,220 |   | $ | 5,312 |   | $ | 4,626 |   |
| Plus: provisions for loan losses                                              |       | 653                                    |       | 3,380 |   | 1,232 |   | 426 |   | 1,034 |   |
| Less: charge-offs for                                                         |       |                                   |       |   |   |   |   |   |   |   |   |
| Mortgage loans                                                                |       | (76                                    | )          | (24 | ) | (7 | ) | (58 | ) | (284 | ) |
| Consumer loans                                                                |       | (277                                   | )          | (237 | ) | (22 | ) | (11 | ) | (4 | ) |
| Commercial real estate loans                                                  |       | (1,848                                 | )          | — |   | — |   | — |   | — |   |
| Commercial business loans                                                     |       | (3,185                                 | )          | (47 | ) | (316 | ) | (658 | ) | (103 | ) |
| Total charge-offs                                                             |       | (5,386                                 | )          | (308 | ) | (345 | ) | (727 | ) | (391 | ) |
| Plus: recoveries for                                                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Mortgage loans                                                                |       | 1                                      |       | 36 |   | 6 |   | 74 |   | — |   |
| Consumer loans                                                                |       | 45                                     |       | 44 |   | — |   | 1 |   | — |   |
| Commercial business loans                                                     |       | 160                                    |       | 535 |   | — |   | 134 |   | 43 |   |
| Total recoveries                                                              |       | 206                                    |       | 615 |   | 6 |   | 209 |   | 43 |   |
| Allowance acquired from the Merger                                            |       | —                                 |       | 6,937 |   | — |   | — |   | — |   |
| Balance—end of period                                                    |       | $                                      | 12,210     |   | $ | 16,737 |   | $ | 6,113 |   | $ | 5,220 |   | $ | 5,312 |   |
| Allowance for loan loss to total end of  period non-performing loans          |       | 317.06                                 | %          | 106.35 | % | 227.50 | % | 188.04 | % | 143.88 | % |
| Charge-offs to average loans                                                  |       | 0.51                                   | %          | 0.03 | % | 0.06 | % | 0.16 | % | 0.08 | % |
| Allowance for loan loss to end of period  total loans less deferred fees |       | 1.17                                   | %          | 1.55 | % | 1.05 | % | 1.27 | % | 1.27 | % |

 

The provisionfor loan losses for the year ended June 30, 2007 was $653 thousand, adecrease of $2.7 million from $3.4 million in the prior year. Net charge-offsin fiscal 2007 were $5.2 million as compared to net recoveries of$307 thousand in fiscal year 2006. The

 

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increase isdue primarily to the charge-off of two loan relationships which werecategorized as non-accrual at June 30, 2006. The decrease in the provisionfor loan losses in fiscal 2007 compared to fiscal 2006 was due primarily to thedecrease in non-performing assets. The increase in the provision for loanlosses in fiscal 2006 compared to fiscal 2005 was due primarily to a correspondingincrease in non-performing loans and classified loans. Management assesses theallowance for loan losses at least quarterly, and makes any necessary provisionfor losses needed to maintain the its allowance for losses at a level deemedadequate. Management believes that the allowance for loan losses was adequateat June 30, 2007 to cover losses that are both probable and reasonablyestimable based upon the facts and circumstances known to us at that date.

 

Effective December 21,1993, the OTS in conjunction with the Comptroller of the Currency, the FDIC andthe Federal Reserve Board issued a Policy Statement regarding a financialinstitution’s allowance for loan and lease losses. The Policy Statement, whichreflects the position of the regulatory agencies and does not necessarilyconstitute generally accepted accounting principles, includes guidance (i) onour responsibilities for the assessment and establishment of an adequateallowance; and (ii) for the agencies’ examiners to use in evaluating theadequacy of such allowance and the policies used to determine such allowance.The Policy Statement also sets forth quantitative measures for the allowancewith respect to assets classified substandard and doubtful and with respect tothe remaining portion of the institution’s portfolio. Specifically, the PolicyStatement sets forth the following quantitative measures which examiners mayuse to determine the reasonableness of an allowance: (i) 30% to 50% of theportfolio that is classified doubtful; (ii) 10% to 20% of the portfolioclassified substandard; and (iii) for the portions of the portfolio thathave not been classified (including loans designated special mention),estimated credit losses over the upcoming twelve months based on facts andcircumstances available as of the evaluation date. While the Policy Statementsets forth this quantitative measure, such guidance is not intended as a “floor”or “ceiling”. Our policy for establishing loan losses is consistent with thePolicy Statement. In July 2001, the SEC issued Staff Accounting Bulletin (“SAB”)No. 102, “Selected Loan Loss Allowance Methodology And DocumentationIssues”. The guidance in the SAB was effective immediately and focuses on thedocumentation the SEC staff normally expects registrants to prepare andmaintain in support of the allowance for loan losses. Concurrent with the SEC’sissuance of SAB No. 102, the federal banking agencies, represented by theFFIEC issued an interagency policy statement entitled “Allowance For Loan andLease Loss Methodologies And Documentation For Banks and Savings Institutions”(“FFIEC Policy Statement”). The SAB and FFIEC Policy Statement were the resultof an agreement between the SEC and the federal banking agencies in March 1999to provide guidance on allowance for loan loss methodologies and supportingdocumentation. Management believes that the Bank’s documentation relating tothe allowance for loan loss is consistent with this guidance.

 

The allocationof the allowance for loan losses is shown in the table below. It is broken downby loan type at June 30, 2007. Through such allocations, the Bank does notintend to imply that actual future charge-offs will necessarily follow the samepattern or that any portion of the allowance is restricted.

 
| ** **                              | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006**                                   | ** ** | **June 30, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Amount**                           | ** ** | **Percent of  loan type to  total loans** | ** ** | **Amount**                  | ** ** | **Percent of  loan type to  total loans** | ** ** | **Amount** | ** ** | **Percent of  loan type to  total loans** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage loans:                         |       |                                 |       |                                                          |       |                        |       |   |   |   |   |   |   |
| Single-family                           |       | $                                    | 438        |                                                          | 26.10      | %                           | $          | 473 |   | 27.60 | % | $ | 155 |   | 34.34 | % |
| Commercial real estate and multi-family |       | 6,121                                |       | 30.19                                                         |       | 7,412                       |       | 30.14 |   | 2,280 |   | 29.60 |   |
| Construction                            |       | 1,768                                |       | 8.90                                                          |       | 1,979                       |       | 10.43 |   | 2,169 |   | 14.66 |   |
| Home equity                             |       | 1,435                                |       | 26.01                                                         |       | 1,351                       |       | 23.96 |   | 537 |   | 17.06 |   |
| Total mortgage loans                    |       | 9,762                                |       | 91.20                                                         |       | 11,215                      |       | 92.13 |   | 5,141 |   | 95.66 |   |
| Consumer loans                          |       | 776                                  |       | 0.37                                                          |       | 663                         |       | 0.40 |   | 71 |   | 0.36 |   |
| Commercial business loans               |       | 1,672                                |       | 8.43                                                          |       | 4,859                       |       | 7.47 |   | 901 |   | 3.98 |   |
| Total                                   |       | $                                    | 12,210     |                                                          | 100.00     | %                           | $          | 16,737 |   | 100.00 | % | $ | 6,113 |   | 100.00 | % |

 

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**Securities Activities**

 

**General.**   The Bank’s investment policy is designed, among other things, toprovide management with an additional tool in implementing its asset/liabilitystrategies. It emphasizes principal preservation, favorable returns, maintainingliquidity and flexibility, and minimizing credit risk. The policy permitsinvestments in US government and agency securities, investment grade corporatebonds and commercial paper, municipal bonds, various types of mortgage-backedsecurities and collateralized mortgage obligations, certificates of deposit andfederal funds sold to financial institutions approved by our Board ofDirectors, and certain equity investments and mutual funds.

 

The Bank willfrom time to time use hedging programs such as interest rate swaps, caps,collars or other activities involving the use of off-balance sheet financialderivatives to assist in its’ Asset/Liability management and the mitigation ofinterest rate risk. The Bank has not purchased mortgage-backed derivative instrumentsthat would be characterized “high-risk” under OTS regulations at the time ofpurchase, nor has it purchased corporate obligations, which are not ratedinvestment grade.

 

Statement ofFinancial Accounting Standards (“SFAS”) No. 115 requires the Company toclassify a security as available for sale (“AFS”), held-to-maturity (“HTM”), ortrading, at the time of acquisition. Securities classified as HTM must bepurchased with the intent and ability to hold that security until its finalmaturity, and can be sold prior to maturity only under certain rarecircumstances. HTM securities are accounted for based upon the historical costof the security. AFS securities can be sold at any time based upon our needs orjudgment as to market changes. AFS securities are accounted for at fair valuewith unrealized gains and losses on these securities, net of income taxeffects, reflected in the stockholders’ equity section of our Statement ofFinancial Condition.

 

Additionally,securities are evaluated periodically to determine whether a decline in theirfair value is other than temporary. Management utilizes criteria such as themagnitude and duration of the decline, in addition to the reasons underlyingthe decline, to determine whether the loss in value is other than temporary.The term “other than temporary” is not intended to indicate that the decline ispermanent, but indicates that the prospects for a near-term recovery of valueis not necessarily favorable, or that there is a lack of evidence to supportrealizable value equal to or greater than carrying value of the investment.Once a decline in fair value is determined to be other than temporary, the fairvalue of the security is reduced through a charge to earnings in theconsolidated statements of income.

 

Managementdoes not believe any individual unrealized loss on its securities as of June 30,2007 represents an other-than-temporary impairment. The temporary impairment isdirectly related to changes in market interest rates. In general, as interestrates rise, the fair value of fixed-rate securities will decrease and, asinterest rates fall, the fair value of fixed-rate securities will increase. Theseverity of the impairment as a percent of the total investment position isnominal and the duration of the impairment to date is short. The impairmentsare deemed temporary based on the direct relationship of the decline in fairvalue to movements in interest rates, as well as the relatively short durationof the investments and their high credit quality. Additionally, the Company hasthe ability and intent to hold these securities until such time as the valuerecovers or the securities mature.

 

At June 30,2007, investment securities amounted to $277.9 million, or 17.9% of totalassets. This includes a $3.2 million unrealized loss, net of income tax,on those investment securities classified as AFS. The portfolio consists of USgovernment and agency securities, many with callable features and agency andnon-agency mortgage-backed pass-through securities, collateralized mortgageobligations, municipal bonds, equity investments primarily in mutual funds.

 

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The followingtable sets forth information on the carrying value and the amortized cost ofour securities classified as held to maturity and available for sale at thedates indicated.

 
|                            |   | **At June 30,**            |       |
|---------------------------------|--------|--------------------------------------|------------|
|                            |   | **2007**                             | ** ** | **2006** |   | **2005** |   |
|                            |   | **Amortized  Cost**                  | ** ** | **Fair  value** | ** ** | **Amortized  Cost** | ** ** | **Fair  value** | ** ** | **Amortized  Cost** | ** ** | **Fair  value** |   |
|                            |   | **(Dollars in thousands)** |       |
| Held to maturity:               |   |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Municipal bonds                 |   | $                                    | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 19,801 |   | $ | 20,230 |   |
| US Gov’t agency securities |   | —                               |       | — |   | — |   | — |   | 15,000 |   | 14,818 |   |
| CMOs                            |   | 60,271                               |       | 59,261 |   | 72,355 |   | 70,425 |   | 90,449 |   | 90,856 |   |
| Mortgage-backed securities      |   | 28,092                               |       | 27,227 |   | 33,206 |   | 31,662 |   | 39,201 |   | 39,005 |   |
| Total held to maturity          |   | 88,363                               |       | 86,488 |   | 105,561 |   | 102,087 |   | 164,451 |   | 164,909 |   |
|                                 |        |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                      | ** ** | **Amortized  Cost** | ** ** | **Carrying  value** | ** ** | **Amortized  Cost** | ** ** | **Carrying  value** | ** ** | **Amortized  Cost** | ** ** | **Carrying  value** | ** ** |
|---------------------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|---------------------|------------|
| Available for sale:             |       |                |       |                |       |                |       |                |       |                |       |                |       |
| Corporate debt securities       |       | 19,978              |       | 19,426              |       | 14,419              |       | 14,208              |       | —              |       | —              |       |
| Municipal bonds                 |       | 30,585              |       | 30,005              |       | 9,105               |       | 9,127               |       | —              |       | —              |       |
| Equity securities(1)            |       | 11,464              |       | 11,162              |       | 11,642              |       | 11,326              |       | 9,733               |       | 9,502               |       |
| US Gov’t agency securities |       | 35,285              |       | 34,208              |       | 35,473              |       | 34,297              |       | 45,484              |       | 44,867              |       |
| CMOs                            |       | 22,080              |       | 21,769              |       | 29,059              |       | 28,498              |       | 3,786               |       | 3,795               |       |
| Mortgage-backed securities      |       | 73,840              |       | 71,769              |       | 103,523             |       | 99,469              |       | 91,565              |       | 90,255              |       |
| Total available for sale        |       | 193,232             |       | 188,339             |       | 203,221             |       | 196,925             |       | 150,568             |       | 148,419             |       |
| Total securities                |       | $                   | 281,595    |                | $          | 274,827             |       | $                   | 308,782    |                | $          | 299,012             |       | $ | 315,019 |   | $ | 313,328 |   |
|                                 |            |                     |            |                     |            |                     |            |                     |            |                     |            |                     |            |  |  |  |  |  |  |

 

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(1)      Includes mutual funds with afair value of approximately $10.1 million at June 30, 2007.

 

Prior to theeffective date of the Merger, the Bank undertook a strategy to de-leverage aportion of its balance sheet by, among other things, selling certain of its AFSsecurities. This effort resulted in the Company selling an aggregate ofapproximately $95.9 million in securities, which resulted in an aggregatenet loss of approximately $919 thousand, which was recognized in fiscal2006. Prior to the effective date of the Merger, both Willow Financial Bank andFirst Financial Bank had taken advantage of market conditions in sellingcertain securities which did not result in an aggregate loss to either Company,or in the case of First Financial Bank, would potentially reduce a negativemark to market in purchase accounting. The net proceeds received from thisstrategy were utilized to repay higher costing FHLB borrowings.

 

In addition toHTM and AFS securities , at June 30, 2007 and 2006 the company had $1.2million and $902 thousand, respectively, of trading account securitiesconsisting of mutual funds related to the Company’s deferred compensation planfor certain executive level employees and members of the Board of Directors.There is a corresponding liability in other liabilities on the consolidatedstatements of financial condition at June 30, 2007 and 2006.

 

**Mortgage-BackedSecurities (“MBS”) and Collateralized Mortgage Obligations (“CMOs”).****  ** At June 30, 2007, theinvestment securities portfolio contained MBSs with a carrying value of $28.1million and $71.8 million in HTM and AFS, respectively, and CMOs of$60.3 million and $21.8 million in HTM and AFS, respectively. Thiscompared to $33.2 million and $99.5 million in HTM and AFS MBSs,respectively, and $72.4 million and $28.5 million in HTM and AFS CMOs,respectively, at June 30, 2006. The decline during the year resulted fromprincipal repayments being utilized to repay higher costing borrowings. MBSsrepresent a participation interest in a pool of single-family or multi-familymortgages. Mortgages are sold by various originators to intermediaries(generally agencies of the US Government and government sponsored enterprises)that pool and repackage the mortgages and sell participation interests in thepools to investors. The servicer of the mortgage loan collects the principaland interest payments and passes those payments through to the intermediary whothen remits the payment to the investor. The US Government agencies andgovernment sponsored enterprises, primarily the Government National

 

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MortgageAssociation (“GNMA”), FNMA and FHLMC, guarantee the timely payment of principaland interest on these securities. MBSs that are pooled by US Government orgovernment sponsored enterprises are known as agency mortgage-backedsecurities. Other private servicers may pool mortgages into similarpass-through securities and are known as non-agency MBSs. These non-agency MBSsdo not have the guaranteed timely payment of principal and interest that anagency MBS has, and may also include loans that may not qualify to be includedin an agency MBS, for reasons such as, but not limited to, the size of theloan. At June 30, 2007, the Company’s mortgage-backed securities portfoliodoes not include any securities backed by sub-prime mortgage loans.

 

MBSs areissued in stated principal amounts and are backed by mortgage loans within aspecific interest rate range, but may have varying maturity dates. Theunderlying pool of mortgages may be comprised of either fixed-rate oradjustable-rate mortgage loans. Each MBS pool will also differ based upon theactual level of prepayment experienced by the underlying mortgage loans.

 

At June 30,2007, the weighted average life of our fixed-rate and adjustable-ratemortgage-backed securities was approximately 3.2 years and 3.0 years,respectively, based upon management’s assumptions related to the futureprepayments of the underlying mortgages. Prepayments that are greater thanthose projected will shorten the remaining term of the security, while adecrease in the amount of prepayments will lengthen the amount of time untilthe security matures. Prepayments depend on many factors, including the type ofmortgage, the coupon rate, the remaining period until the loan matures or therate is scheduled to reset, the geographic region, and the general level ofmarket interest rates. During periods of rising interest rates, if the couponrates of the underlying mortgages are less than prevailing market rates offeredon mortgages, refinancing will decrease and prepayments of the mortgagesunderlying the security will decline. Conversely, when market interest ratesare falling, and the coupon rate on the underlying mortgage exceeds theprevailing market interest rate for mortgages offered, refinancings tend toincrease which will increase the amount of prepayments of the underlyingmortgages.

 

CMOs aresecurities that are structured from a pool of MBSs or whole loans. Thestructuring results in sectors known as tranches. Each tranche within a CMOwill have different cash flow requirements and interest rates. Although stillsubject to prepayments, this structuring into tranches provides a morepredictable cash flow to the bondholder.

 

**USGovernment and Government Agency Securities and Municipal Bonds.****  ** At June 30, 2007, thecarrying value of US government and US government agency securities within theinvestment securities portfolio was $34.2 million, which includesapproximately $1.1 million in unrealized losses, compared to$34.3 million, which included approximately $1.2 million in unrealizedlosses, at June 30, 2006. This portfolio is comprised primarily of securitiesissued by the FHLB. Many of these securities have call features that allow theissuer to redeem these securities at par value prior to their stated maturity.Generally, if the prevailing market interest rate on new issue callable agencysecurities with similar maturities exceeds the coupon rate of the security withthe call feature, the call will not be exercised. Conversely, if the prevailingmarket interest rate for new issue agency callable securities with similarmaturities is below the coupon rate of the security with the call feature, thecall will be exercised and the bond will be redeemed. When calls are exercisedand bonds redeemed prior to their maturity, the Bank faces the risk ofre-investing those proceeds into other investments with lower yields or longerterms.

 

Municipalbonds classified as held to maturity at June 30, 2005, were sold in fiscal2006 as part of the Company’s de-leveraging strategy referenced above inaccordance with the provisions of Financial Accounting Standards Board (“FASB”)Statement No. 115, “Accounting for Certain Investments in Debt and EquitySecurities.”

 

15

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Municipalbonds classified as AFS at June 30, 2007 are comprised primarily of bondsissued by local school districts as well as three non-rated PennsylvaniaMunicipal Authority bonds that are classified as substandard. At June 30,2007, the aggregate book value of these substandard bonds was$3.6 million. Two of the three bonds, with an aggregate book value of$3.2 million at June 30, 2007, are zero coupon bonds with maturitiesextending up to 2034. Both bonds are secured by the revenue streams ofcommercial office buildings, which are leased to various agencies of theCommonwealth of Pennsylvania under long-term lease arrangements with renewaloptions. A third bond was issued by the Housing Authority of Chester County andhas a book balance of $294 thousand at June 30, 2007, and bearsinterest at rates between 5.60% and 6.00% and matures in June 2019. Thisbond involves low-income scattered housing in Chester County under a program ofthe Office of Housing and Urban Development (“HUD”). HUD has providedadditional funds to build additional houses, which have been donated to thisbond issue. The construction of the homes has been completed and the proceedsfrom the sale of the homes have been utilized to liquidate the bond issue.During fiscal 2007, principal repayments were received on the bond issue. TheBank’s remaining par value is $505 thousand.

 

**Other Investments.****  ** Other than MBSs, USgovernment and government agency securities and municipal bonds, the Companyhas investments in various equity securities and mutual funds. At June 30,2007, the Company was invested in equity securities with a fair value of$1.1 million and mutual funds with a fair value of $10.1 million. Theequity securities include stock of several publicly traded companies, primarilylocal financial institutions. The mutual fund investment of $10.1 millionis backed primarily by investments in adjustable-rate mortgage-backedsecurities and other investments authorized by our investment policy.

 

**Sources of Funds**

 

**General.****  ** Deposits are the primarysource of funds for the Bank’s lending and investment activities. In additionto deposits, funds are provided from the amortization and prepayments withinthe loan and mortgage-backed securities portfolios, maturities of investments,and borrowings. Scheduled loan amortization is a relatively stable source offunds. However, competition, the general level of interest rates and marketconditions significantly influences deposit inflows and outflows. Borrowingsmay be used on a short-term basis to compensate for reductions in other fundingsources. On a longer-term basis, borrowings may be used for general businesspurposes.

 

**Deposits.****  ** As shown in the tablebelow, the Bank’s core deposit accounts at June 30, 2007 (which the Bankconsider to be all deposits other than certificate accounts) represent 69.3% oftotal deposits as compared to 70.3% at June 30, 2006.

 
| ** **                                          | ** ** | **At June 30,**            | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **Amount**                           | ** ** | **Percent of  total** | ** ** | **Amount** | ** ** | **Percent of  total** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Savings accounts (passbooks, statements and  clubs) |       | $                                    | 87,565     |   | 8.0 | % | $ | 101,119 |   | 9.9 | % |
| Money market accounts                               |       | 403,487                              |       | 36.9 | % | 338,451 |   | 33.3 | % |
| Certificates of deposit                             |       | 334,672                              |       | 30.7 | % | 301,627 |   | 29.7 | % |
| Checking accounts:                                  |       |                                 |       |   |   |   |   |   |   |
| Interest-bearing                                    |       | 125,905                              |       | 11.5 | % | 152,056 |   | 15.0 | % |
| Non-interest-bearing                                |       | 141,101                              |       | 12.9 | % | 123,247 |   | 12.1 | % |
| Total                                               |       | $                                    | 1,092,730  |   | 100.0 | % | $ | 1,016,500 |   | 100.0 | % |
|                                                     |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

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During theyear ended June 30, 2007, total deposits increased by $76.2 million, or7.5% compared to the year ended June 30, 2006. The increase occurredprimarily from an increase in money market demand deposit accounts as theCompany has been successful in migrating money market balances from customersof its business segment, WIS, as well as an increase in certificates of depositresulting from customer preference for higher rate deposit accounts. Coredeposits, as previously defined, increased by $43.2 million.

 
| ** **                          | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**   | ** ** |
| Beginning balance                   |       | $                                      | 1,016,500  |   | $ | 602,678 |   | $ | 603,115 |   |
| Net increase (decrease) in deposits |       | 49,510                                 |       | (36,332 | ) | (9,569 | ) |
| Deposits assumed in acquisition     |       | —                                 |       | 437,065 |   | — |   |
| Interest credited                   |       | 26,720                                 |       | 13,089 |   | 9,132 |   |
| Ending balance                      |       | $                                      | 1,092,730  |   | $ | 1,016,500 |   | $ | 602,678 |   |

 

The followingtable sets forth by various interest rate ranges, the amount of ourcertificates of deposit at the dates indicated.

 
| ** **          | ** ** | **At June 30,**            | ** ** |
|---------------------|------------|--------------------------------------|------------|
| ** **          | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **          | ** ** | **(Dollars in thousands)** | ** ** |
| Interest rates:     |       |                                 |       |   |   |
| from 0.00% to 2.99% |       | $                                    | 18,547     |   | $ | 76,344 |   |
| from 3.00% to 3.99% |       | 16,796                               |       | 115,702 |   |
| from 4.00% to 4.99% |       | 196,705                              |       | 96,206 |   |
| from 5.00% to 5.99% |       | 101,799                              |       | 11,211 |   |
| 6.00% and over      |       | 825                                  |       | 2,164 |   |
| Total               |       | $                                    | 334,672    |   | $ | 301,627 |   |

 

Shown beloware the amount and remaining term to maturity for certificates of deposit as ofJune 30, 2007.

 
| ** **               | ** ** | **Amounts maturing in**    | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| **Interest rates:** | ** ** | **Six months  or less**    | ** ** | **Over six  months  through one  year** | ** ** | **Over one  year through  two years** | ** ** | **Over two  years through  three years** | ** ** | **Over three  years** | ** ** |
| ** **               | ** ** | **(Dollars in thousands**) |       |
| 0.00% to 2.99%           |       | $                                    | 10,405     |   | $ | 3,920 |   | $ | 2,592 |   | $ | 567 |   | $ | 1,063 |   |
| 3.00% to 3.99%           |       | 8,711                                |       | 3,805 |   | 2,020 |   | 1,275 |   | 985 |   |
| 4.00% to 4.99%           |       | 97,353                               |       | 55,253 |   | 23,587 |   | 16,026 |   | 4,486 |   |
| 5.00% to 5.99%           |       | 51,140                               |       | 41,575 |   | 4,976 |   | 2,932 |   | 1,176 |   |
| 6.00% and over           |       | 204                                  |       | 15 |   | 41 |   | 303 |   | 262 |   |
| Total                    |       | $                                    | 167,813    |   | $ | 104,568 |   | $ | 33,216 |   | $ | 21,103 |   | $ | 7,972 |   |

 

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At June 30,2007 the total amount of outstanding certificates of deposit in amounts greaterthan or equal to $100 thousand was $94.7 million. The following tableprovides information regarding the maturity of these certificates of deposit.

 
| **Amounts maturing in**    | ** ** |
|--------------------------------------|------------|
| **Three months  or less**  | ** ** | **Over three  months  through six  months** | ** ** | **Over six  months  through one  year** | ** ** | **Over one  year** | ** ** | **Total** | ** ** |
| **(Dollars in thousands)** | ** ** |
| $                                    | 36,257     |   | $ | 11,405 |   | $ | 19,159 |   | $ | 27,884 |   | $ | 94,705 |   |
|                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Borrowings.****  ** The Bank utilizesborrowings to supplement its funding needs and in the past, under certaininstances, as revenue enhancement programs to take advantage of arbitrageopportunities when investment returns exceeded the cost of borrowings. At June 30,2007, the Company had $235.5 million in outstanding borrowings, which werecomprised of $189.8 million of FHLB borrowings, $25.8 million of trustpreferred securities, and $20.0 million of repurchase agreements. Theinvestment in FHLB stock, as well as a portion of our residential mortgage loanportfolio and investment securities portfolio, secure advances from the FHLB.The FHLB of Pittsburgh provides an array of borrowing programs which include:fixed or variable rate programs; various fixed terms ranging from overnight to20 years; and other programs that have callable or putable featuresattached to them. The Bank intends to continue to utilize borrowings in thefuture as an alternative source of funds. The repurchase agreements are securedby various securities within the Company’s investment securities portfolio.During the current fiscal year, approximately $103.2 million of theseborrowings were paid down with proceeds from repayments within the investmentand loan portfolios as well as the funds generated from the growth in theCompany’s deposits.

 

The followingtable sets forth certain information regarding our borrowings for the periodsindicated.

 
| ** **                                 | ** ** | **At or for the year ended** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | **June 30, 2007**                           | ** ** | **June 30, 2006** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)**                  | ** ** |
| FHLB advances:                             |       |                                                  |       |   |   |
| Average balance outstanding for the period |       | $                                                     | 225,722    |   | $ | 312,420 |   |
| Maximum outstanding at any month end       |       | 258,035                                               |       | 364,572 |   |
| Balance outstanding at end of the period   |       | 189,764                                               |       | 282,555 |   |
| Average interest rate for the period       |       | 3.93                                                  | %          | 4.04 | % |
| Interest rate at the end of the period     |       | 4.19                                                  | %          | 4.24 | % |
| Repurchase agreements:                     |       |                                                  |       |   |   |
| Average balance outstanding for the period |       | $                                                     | 22,767     |   | $ | 4,959 |   |
| Maximum outstanding at any month end       |       | 30,000                                                |       | 20,000 |   |
| Balance outstanding at end of the period   |       | 20,000                                                |       | 20,000 |   |
| Average interest rate for the period       |       | 4.99                                                  | %          | 4.60 |   |
| Interest rate at the end of the period     |       | 4.52                                                  | %          | 4.56 |   |

 

At June 30,2007 the maturity dates of our FHLB advances ranged from July 2, 2007 to October 1,2018. Certain advances also require monthly payments of principal. At June 30,2007, $152.5 million of FHLB advances were callable at the option of theFHLB within certain parameters, of which $107.5 million could be called withinone year. Of the FHLB advances that are callable at the discretion of the FHLB,$47.5 million of such advances could be called only if an index exceeded aspecific pre-determined rate.

 

**TrustPreferred Securities.****  **Effective with the acquisition of Chester Valley, the Company assumed theliability for $10.5 million of Junior Subordinated Debentures to the ChesterValley Statutory Trust, a Pennsylvania Business Trust, in which the Companyowns all of the

 

18

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common equityas a result of the acquisition of Chester Valley. The Trust issued $10.0million of Trust Preferred Securities to investors, which are secured by theJunior Subordinated Debentures and the guarantee of the Company. These TrustPreferred Securities were redeemed by the Company on March 26, 2007 inaccordance with the Trust Agreement.

 

On March 31,2006, the Company issued $25.8 million of Junior Subordinated Debentures toWillow Grove Statutory Trust I, a Connecticut Statutory Trust, in which theCompany owns all of the common equity. The Trust then issued $25.0 million ofTrust Preferred Securities, which pay interest quarterly at three-month Liborplus 1.31% to investors, which are secured by the Junior SubordinatedDebentures and the guarantee of the Company. The Junior Subordinated Debenturesare treated as debt of the Company but qualify as Tier I capital of the Bank tothe extent of the amount of the proceeds, which are invested in the Bank. TheTrust Preferred Securities are callable by the Company on or after September 30,2011. The Trust Preferred Securities must be redeemed by the Company upon theirmaturity in the year 2036.

 

**Accounting for Derivative Instruments and Hedging**

 

The Companymay from time to time utilize derivative instruments such as interest rateswaps, interest rate collars, interest rate floors, interest rate swaptions orcombinations thereof to assist in its asset/liability management. In accordancewith SFAS No. 133, “Accounting for Derivative Instruments,” the Companydocuments its hedge relationships, including identification of the hedginginstruments and the hedged items, as well as its risk management objectives andstrategies for undertaking the hedge. The Company also assesses, both atinception and at least quarterly thereafter, whether the derivative instrumentsthat are used in hedging transactions are highly effective in offsetting thechanges in either the fair value or cash flows of the hedged item. For fairvalue hedges, both the effective and ineffective portions of the changes in thefair value of the derivative, along with the gain or loss on the hedged itemthat is attributable to the hedged risk, are recorded in the statement ofoperations within interest income or interest expense. For cash flow hedges,the effective portion of the change in the fair value of the derivative isrecorded in accumulated other comprehensive income. When the hedged itemimpacts the statement of operations, the gain or loss included in accumulatedother comprehensive income is reported on the same line in the statement ofoperations as the hedged item. In addition, the ineffective portion of thechanges in the fair value of derivatives used as cash flow hedges is reportedin the statement of operations.

 

As part of theMerger, the Company assumed the responsibility for a $20 million notionalinterest rate swap whereby the Company paid a variable rate and received afixed rate. The interest rate swap had been used to hedge certain Federal HomeLoan Bank borrowings of the former Chester Valley. On the date of the Merger,the interest rate swap and the hedged borrowings were marked to fair value inpurchase accounting. In September 2005, the hedged borrowings were repaidand $10 million notional amount of the interest rate swap was unwound with thecounter-party. After performing the appropriate documentation of the derivativeinstrument, the Company designated the remaining $10 million notional amountinterest rate swap as a fair value hedge of certain existing borrowings ofWillow Financial Bank. The swap had the effect of converting a fixed rateborrowing to an adjustable rate borrowing. During the quarter ended December 31,2005, the derivative instrument ceased to be a highly effective hedge;therefore, the Company discontinued hedge accounting resulting in a pre-taxcharge to the statement of operations of $47 thousand. The interest rate swapwas unwound in February 2006 without resulting in any additional impact tothe statement of operations. The basis adjustment that was previously recordedon the hedged borrowing that is recorded in the statement of financialcondition is amortized as an increase in interest expense over the remaininglife of the borrowing using the interest method.

 

Additionally,in August 2003, Chester Valley purchased a $30.0 million notional amount3.50% six month LIBOR interest rate cap while simultaneously selling a$30.0 million notional amount 6.00% six-month LIBOR interest rate cap (“InterestRate Corridor”) which expires

 

19

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in August 2008.Chester Valley paid a net premium, which entitled it to receive the differencebetween six-month LIBOR from 3.50% up to 6.00% applied to the $30.0 millionnotional amount. Upon consummation of the Merger, the Company assumed theInterest Rate Corridor and designated it to hedge certain borrowings of WillowFinancial Bank, which were variable in nature and indexed to six-month LIBOR.The Interest Rate Corridor was being used to hedge the cash flows of this borrowing.Prior to October 23, 2006, the Interest Rate Corridor reduced the negativeimpact on earnings of the borrowings in a rising interest rate environment. Thefair market value of the Interest Rate Corridor had two components: theintrinsic value and the time value of the option. The Interest Rate Corridorwas marked-to-market quarterly, with changes in the intrinsic value of theInterest Rate Corridor, net of tax, included as a separate component of othercomprehensive income, and the change in the time value of the option includeddirectly as interest expense as required under SFAS 133. In addition, theineffective portion, if any, would have been expensed in the period in whichineffectiveness was determined.

 

On October 23,2006, the Company unwound the Interest Rate Corridor and recognized a gain of$804 thousand in the statement of operations upon repayment of the $30 millionFHLB advance.

 

At June 30,2007 and 2006, the Company had five interest rate swap arrangements used tohedge specific loans originated by the Bank for which the transactions wereeconomically beneficial to the Bank in passing along the interest rate risk tothe borrower. The swaps effectively convert the rates from a floating ratebased on LIBOR to a fixed rate throughout the life of the underlying loans. At June 30,2007, the total outstanding notional amount on these swaps was $9.3 million.The weighted average floating and fixed rates on these transactions were 4.6%and 5.3%, respectively at June 30, 2007. The Company lacked sufficientdocumentation for these transactions to receive hedge accounting treatment. Assuch, the Bank has recorded a net receivable of $196 thousand and $480thousand, respectively, at June 30, 2007 and 2006. The change in the fairvalue of the interest rate swaps is included as a component of other income onthe consolidated statements of income.

 

**REGULATION**

 

Set forthbelow is a brief description of certain laws and regulations, which areapplicable to Willow Financial Bancorp and Willow Financial Bank, including ourbusiness segment, PCIS. The description of these laws and regulations, as wellas descriptions of laws and regulations contained elsewhere herein, does notpurport to be complete and is qualified in its entirety by reference to theapplicable laws and regulations.

 

**General**

 

WillowFinancial Bank, as a federally chartered savings institution, is subject tofederal regulation and oversight by the Office of Thrift Supervision extendingto all aspects of its operations. Willow Financial Bank also is subject toregulation and examination by the Federal Deposit Insurance Corporation, whichinsures the deposits of Willow Financial Bank to the maximum extent permittedby law, and requirements established by the Federal Reserve Board. Federallychartered savings institutions are required to file periodic reports with theOffice of Thrift Supervision and are subject to periodic examinations by theOffice of Thrift Supervision and the Federal Deposit Insurance Corporation.Federal laws and regulations determine the investment and lending authority ofsavings institutions, and such institutions are prohibited from engaging in anyactivities not permitted by such laws and regulations. Such regulation andsupervision primarily is intended for the protection of depositors and not forthe purpose of protecting stockholders.

 

The Office ofThrift Supervision regularly examines Willow Financial Bank and preparesreports for consideration by its Board of Directors on any deficiencies that itmay find in the Bank’s operations. The Federal Deposit Insurance Corporationalso has the authority to examine Willow Financial Bank in its role as theadministrator of the Deposit Insurance Fund. Willow Financial Bank’srelationship with its

 

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depositors andborrowers also is regulated to a great extent by both federal and, to a lesserextent, state laws, especially in such matters as the ownership of savingsaccounts and the form and content of Willow Financial Bank’s mortgage requirements.The Office of Thrift Supervision’s enforcement authority over all savingsinstitutions and their holding companies includes, among other things, theability to assess civil money penalties, to issue cease and desist or removalorders and to initiate injunctive actions. In general, these enforcementactions may be initiated for violations of laws and regulations and unsafe orunsound practices. Other actions or inactions may provide the basis forenforcement action, including misleading or untimely reports filed with theOffice of Thrift Supervision. Any change in such laws or regulations, whetherby the Federal Deposit Insurance Corporation, Office of Thrift Supervision orCongress, could have a material adverse impact on us and Willow Financial Bankand our operations.

 

**Willow Financial Bancorp, Inc.**

 

WillowFinancial Bancorp is a registered savings and loan holding company under Section 10of the Home Owners’ Loan Act, as amended and subject to Office of ThriftSupervision examination and supervision as well as certain reportingrequirements. In addition, Willow Financial Bank is subject to certainrestrictions in dealing with Willow Financial Bancorp and with other personsaffiliated with the Bank.

 

Generally, theHome Owners’ Loan Act prohibits a savings and loan holding company, such as us,directly or indirectly, from (1) acquiring control (as defined) of asavings institution (or holding company thereof) without prior Office of ThriftSupervision approval, (2) acquiring more than 5% of the voting shares of asavings institution (or holding company thereof) which is not a subsidiary,subject to certain exceptions, without prior Office of Thrift Supervisionapproval, or (3) acquiring through a merger, consolidation or purchase ofassets of another savings institution (or holding company thereof) or acquiringall or substantially all of the assets of another savings institution (orholding company thereof) without prior Office of Thrift Supervision approval or(4) acquiring control of an uninsured institution. A savings and loanholding company may not acquire as a separate subsidiary a savings institutionwhich has its principal offices outside of the state where the principaloffices of its subsidiary institution is located, except (a) in the caseof certain emergency acquisitions approved by the Federal Deposit InsuranceCorporation, (b) if the holding company controlled (as defined) suchsavings institution as of March 5, 1987 or (c) when the laws of thestate in which the savings institution to be acquired is located specificallyauthorize such an acquisition. No director or officer of a savings and loanholding company or person owning or controlling more than 25% of such holdingcompany’s voting shares may, except with the prior approval of the Office ofThrift Supervision, acquire control of any savings institution which is not asubsidiary of such holding company.

 

**Willow Financial Bank**

 

**Insuranceof Accounts.****  **The deposits of Willow Financial Bank are insured to the maximum extent permittedby the Deposit Insurance Fund, which is administered by the Federal DepositInsurance Corporation, and are backed by the full faith and credit of the U.S.Government. As insurer, the Federal Deposit Insurance Corporation is authorizedto conduct examinations of, and to require reporting by, insured institutions.It also may prohibit any insured institution from engaging in any activity theFederal Deposit Insurance Corporation determines by regulation or order to posea serious threat to the Federal Deposit Insurance Corporation. The FederalDeposit Insurance Corporation also has the authority to initiate enforcementactions against savings institutions, after giving the Office of ThriftSupervision an opportunity to take such action.

 

Under currentFederal Deposit Insurance Corporation regulations, insured institutions areassigned to one of three capital groups which are based solely on the level ofan institution’s capital—“well capitalized,” “adequately capitalized,” and “undercapitalized”—whichare defined in the same manner as the regulations establishing the promptcorrective action system discussed below. Effective January 1, 2007, theprevious

 

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nine riskclassifications have been consolidated into four risk categories, which reflectvarying levels of supervisory concern, from those, which are considered to behealthy to those, which are considered to be of substantial supervisoryconcern. The risk categories were created with rates during the last six monthsof fiscal 2007 ranging from five basis points for well capitalized, healthyinstitutions, such as Willow Financial Bank, to 43 basis points forundercapitalized institutions with substantial supervisory concerns.

 

In addition,all institutions with deposits insured by the Federal Deposit InsuranceCorporation are required to pay assessments to fund interest payments on bondsissued by the Financing Corporation, a mixed-ownership government corporationestablished to recapitalize the predecessor to the Savings AssociationInsurance Fund. The assessment rate for the third calendar quarter of 2007 was..00139% of insured deposits and is adjusted quarterly. These assessments willcontinue until the Financing Corporation bonds mature in 2019. The FederalDeposit Insurance Corporation approved a one-time assessment credit to banksand savings associations in existence on December 31, 1996. The credit isapplied on a quarterly basis up to the amount of the respective quarter’sassessment. The remaining balance of the Company’s credit is $607 thousand at June 30,2007. The Company anticipates the assessment credit for the three months ended September 30,2007 to be approximately $145,000. It is anticipated that the assessment creditwill be fully utilized by December 31, 2008.

 

The FederalDeposit Insurance Corporation may terminate the deposit insurance of anyinsured depository institution, including Willow Financial Bank, if itdetermines after a hearing that the institution has engaged or is engaging in unsafeor unsound practices, is in an unsafe or unsound condition to continueoperations, or has violated any applicable law, regulation, order or anycondition imposed by an agreement with the Federal Deposit InsuranceCorporation. It also may suspend deposit insurance temporarily during thehearing process for the permanent termination of insurance, if the institutionhas no tangible capital. If insurance of accounts is terminated, the accountsat the institution at the time of the termination, less subsequent withdrawals,shall continue to be insured for a period of six months to two years, asdetermined by the Federal Deposit Insurance Corporation. Management is aware ofno existing circumstances, which would result in termination of WillowFinancial Bank’s deposit insurance.

 

**DepositInsurance Reform.**    On February 8,2006, President George W. Bush signed into law legislation that merged the BankInsurance Fund and the Savings Association Insurance Fund to form the DepositInsurance Fund, eliminated any disparities in bank and thrift risk-basedpremium assessments, reduced the administrative burden of maintaining andoperating two separate funds and established certain new insurance coveragelimits and a mechanism for possible periodic increases. The legislation alsogave the Federal Deposit Insurance Corporation greater discretion to identifythe relative risks all institutions present to the Deposit Insurance Fund andset risk-based premiums.

 

Majorprovisions in the legislation include:

 

·                  merging the Savings AssociationInsurance Fund and Bank Insurance Fund, which became effective March 31,2006;

 

·                  maintaining basic deposit andmunicipal account insurance coverage at $100,000 but providing for a new basicinsurance coverage for retirement accounts of $250,000. Insurance coverage forbasic deposit and retirement accounts could be increased for inflation everyfive years in $10,000 increments beginning in 2011;

 

·                  providing the Federal DepositInsurance Corporation with the ability to set the designated reserve ratiowithin a range of between 1.15% and 1.50%, rather than maintaining 1.25% at alltimes regardless of prevailing economic conditions;

 

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·                  providing aone-time assessment credit of $4.7 billion to banks and savings associations inexistence on December 31, 1996, which may be used to offset futurepremiums with certain limitations; and

 

·                  requiring the payment of dividends of100% of the amount that the insurance fund exceeds 1.5% of the estimatedinsured deposits and the payment of 50% of the amount that the insurance fundexceeds 1.35% of the estimated insured deposits (when the reserve is greaterthan 1.35% but no more than 1.5%).

 

**RegulatoryCapital Requirements.****  **The Office of Thrift Supervision capital requirements consist of a “tangiblecapital requirement,” a “leverage capital requirement” and a “risk-basedcapital requirement.” The Office of Thrift Supervision is authorized to imposecapital requirements in excess of those standards on individual institutions ona case-by-case basis.

 

Under thetangible capital requirement, a savings bank must maintain tangible capital inan amount equal to at least 1.5% of adjusted total assets. Tangible capital isdefined as core capital less all intangible assets (including supervisorygoodwill), plus a specified amount of purchased mortgage-servicing rights.

 

Under theleverage capital requirement adopted by the Office of Thrift Supervision, savingsbanks must maintain “core capital” in an amount equal to at least 3.0% ofadjusted total assets. Core capital is defined as common stockholders’ equity(including retained earnings), non-cumulative perpetual preferred stock, andminority interests in the equity accounts of consolidated subsidiaries, pluspurchased mortgage servicing rights valued at the lower of 90% of fair marketvalue, 90% of original cost or the current amortized book value as determinedunder generally accepted accounting principles, and “qualifying supervisorygoodwill,” less non-qualifying intangible assets.

 

Under therisk-based capital requirement, a savings bank must maintain total capital(which is defined as core capital plus supplementary capital) equal to at least8.0% of risk-weighted assets. A savings bank must calculate its risk-weightedassets by multiplying each asset and off-balance sheet item by various riskfactors, which range from 0% for cash and securities issued by the UnitedStates Government or its agencies to 100% for repossessed assets or loans morethan 90 days past due. Qualifying one- to-four family residential realestate loans and qualifying multi-family residential real estate loans (notmore than 90 days delinquent and having an 80% or lower loan-to-valueratio) are weighted at a 50% risk factor. Supplementary capital may include,among other items, cumulative perpetual preferred stock, perpetual subordinateddebt, mandatory convertible subordinated debt, intermediate-term preferredstock, and general allowances for loan losses. The allowance for loan lossesincludable in supplementary capital is limited to 1.25% of risk-weightedassets. The amount of supplementary capital that can be included is limited to100% of core capital.

 

Certainexclusions from capital and assets are required for the purpose of calculatingtotal capital, in addition to the adjustments required for calculating corecapital. Such exclusions consist of equity investments (as defined byregulation) and that portion of land loans and non-residential constructionloans in excess of an 80% loan-to-value ratio and reciprocal holdings ofqualifying capital instruments. However, in calculating regulatory capital,institutions must exclude unrealized losses and gains on securities available forsale, net of taxes, reported as a separate component of capital calculatedaccording to U.S. generally accepted accounting principles.

 

In its letterapproving the merger of Willow Financial Bank and Chester Valley, the Office ofThrift Supervision, as one of its conditions for approval, indicated that, forthe periods ending December 31, 2005, 2006 and 2007, Willow Financial Bankmust have tier one core capital ratios at least equal to 6.50%, 6.75%, and7.25%, respectively, and total risk-based capital ratios at least equal to11.97%, 12.02% and 12.40%, respectively. Willow Financial Bank also must submitto the Office of Thrift Supervision, quarterly status reports detailing itscompliance with the conditions on regulatory capital outlined in its approvalletter. The Office of Thrift Supervision’s conditions for approval of the BankMerger also indicated that, for the periods ending December 31, 2005, 2006and 2007, Willow Financial Bancorp must have consolidated tangible capitalratios at least equal to 5.14%, 5.59% and 6.12%, respectively. Willow FinancialBancorp also must submit to the Office of

 

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ThriftSupervision quarterly status reports. The Company and Bank are in compliancewith these regulatory capital ratios.

 

Office ofThrift Supervision regulations establish special capitalization requirementsfor savings banks that own service corporations and other subsidiaries,including subsidiary savings banks. According to these regulations, certain subsidiariesare consolidated for capital purposes and others are excluded from assets andcapital. In determining compliance with the capital requirements, allsubsidiaries engaged solely in activities permissible for national banks,engaged solely in mortgage-banking activities, or engaged in certain otheractivities solely as agent for its customers are “includable” subsidiaries thatare consolidated for capital purposes in proportion to Willow Financial Bank’slevel of ownership, including the assets of includable subsidiaries in whichWillow Financial Bank has a minority interest that is not consolidated forgenerally accepted accounting principles purposes. For excludable subsidiaries,the debt and equity investments in such subsidiaries are deducted from assetsand capital. At June 30, 2007, Willow Financial Bank had no investmentssubject to a deduction from tangible capital.

 

Undercurrently applicable Office of Thrift Supervision policy, savings institutionsmust value securities available for sale at amortized cost for regulatorycapital purposes. This means that in computing regulatory capital, savingsinstitutions should add back any unrealized losses and deduct any unrealizedgains, net of income taxes, on debt securities reported as a separate componentof capital calculated according to U.S. generally accepted accountingprinciples.

 

At June 30,2007, Willow Financial Bank exceeded all of its regulatory capitalrequirements, including capital requirements provided for with the approval ofthe Merger, with tangible, core and risk-based capital ratios of 8.0%, 8.0% and13.3%, respectively.

 

The Office ofThrift Supervision and the Federal Deposit Insurance Corporation generally areauthorized to take enforcement action against a savings bank that fails to meetits capital requirements, which action may include restrictions on operationsand banking activities, the imposition of a capital directive, acease-and-desist order, civil money penalties or harsher measures such as theappointment of a receiver or conservator or a forced merger into anotherinstitution. In addition, under current regulatory policy, a savings bank thatfails to meet its capital requirements is prohibited from paying any dividends.

 

**PromptCorrective Action.****  **Under the Federal Deposit Insurance Corporation Improvement Act of 1991,the federal banking regulators are required to take prompt corrective action ifan insured depository institution fails to satisfy certain minimum capitalrequirements, including a leverage limit, a risk-based capital requirement, andany other measure of capital deemed appropriate by the federal bankingregulator for measuring the capital adequacy of an insured depositoryinstitution. All institutions, regardless of their capital levels, are restrictedfrom making any capital distribution or paying management fees if theinstitution would thereafter fail to satisfy the minimum levels for any of itscapital requirements.

 

Under theFederal Deposit Insurance Corporation Improvement Act an institution is deemedto be (a) “well capitalized” if it has total risk-based capital of 10.0%or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1leverage capital ratio of 5.0% or more and is not subject to any order or finalcapital directive to meet and maintain a specific capital level for any capitalmeasure, (b) “adequately capitalized” if it has a total risk-based capitalratio of 8.0% or more, a Tier 1 risk-based capital ratio of 4.0% or more and aTier 1 leverage capital ratio of 4.0% or more (3.0% under certaincircumstances) and does not meet the definition of “well capitalized,” (c) “undercapitalized”if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1risk-based capital ratio that is less than 4.0% or a Tier 1 leverage capitalratio that is less than 4.0% (3.0% under certain circumstances), (d) “significantlyundercapitalized” if it has a total risk-based capital ratio that is less than6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1 leveragecapital ratio that is less than 3.0%, and (e) “critically undercapitalized”if it has a ratio of tangible equity to total assets that is equal to or lessthan 2.0%. Under specified circumstances, a federal banking agency mayreclassify a well capitalized institution as adequately capitalized and mayrequire an adequately capitalized institution or an undercapitalizedinstitution to comply with supervisory actions as if it were in the next lowercategory (except that the Federal Deposit Insurance Corporation may notreclassify a significantly undercapitalized institution ascritically undercapitalized).

 

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An institutiongenerally must file a written capital restoration plan which meetsspecified requirements with its appropriate federal banking agency within45 days of the date that the institution receives notice or is deemed tohave notice that it is undercapitalized, significantly undercapitalized orcritically undercapitalized. A federal banking agency must provide theinstitution with written notice of approval or disapproval within 60 daysafter receiving a capital restoration plan, subject to extensions by theagency. An institution that is required to submit a capital restoration planmust concurrently submit a performance guaranty by each company that controlsthe institution. In addition, undercapitalized institutions are subject tovarious regulatory restrictions, and the appropriate federal banking agencyalso may take any number of discretionary supervisory actions.

 

At June 30,2007, Willow Financial Bank was in the “well capitalized” category for purposesof the above regulations.

 

**Safety andSoundness Guidelines.****  **The Office of Thrift Supervision and the other federal bank regulatory agencieshave established guidelines for safety and soundness, addressing operationaland managerial standards, as well as compensation matters for insured financialinstitutions. Institutions failing to meet these standards may be required tosubmit compliance plans to their appropriate federal regulators. The Office ofThrift Supervision and the other agencies have also established guidelinesregarding asset quality and earnings standards for insured institutions. WillowFinancial Bank believes that it is in compliance with these guidelines andstandards.

 

**CapitalDistributions.****  **Office of Thrift Supervision regulations govern capital distributions bysavings institutions, which include cash dividends, stock repurchases and othertransactions charged to the capital account of a savings institution to makecapital distributions. A savings institution must file an application forOffice of Thrift Supervision approval of the capital distribution if any of thefollowing occur or would occur as a result of the capital distribution (1) thetotal capital distributions for the applicable calendar year exceed the sum ofthe institution’s net income for that year to date plus the institution’sretained net income for the preceding two years, (2) the institution wouldnot be at least adequately capitalized following the distribution, (3) thedistribution would violate any applicable statute, regulation, agreement orOffice of Thrift Supervision-imposed condition, or (4) the institution isnot eligible for expedited treatment of its filings. If the filing of anapplication is not required, savings institutions that are a subsidiary of aholding company (as well as certain other institutions) must still file anotice with the Office of Thrift Supervision at least 30 days before theboard of directors declares a dividend or approves a capital distribution.

 

**Branchingby Federal Savings Institutions.****  **Office of Thrift Supervision policy permits interstate branching to the fullextent permitted by statute (which is essentially unlimited). Generally,federal law prohibits federal savings institutions from establishing, retainingor operating a branch outside the state in which the federal institution hasits home office unless the institution meets the IRS’ domestic building andloan test (generally, 60% of a thrift’s assets must be housing-related) (“IRSTest”). The IRS Test requirement does not apply if: (a) the branch(es)result(s) from an emergency acquisition of a troubled savings institution(however, if the troubled savings institution is acquired by a bank holdingcompany, does not have its home office in the state of the bank holding companybank subsidiary and does not qualify under the IRS Test, its branching islimited to the branching laws for state-chartered banks in the state where thesavings institution is located); (b) the law of the state where the branchwould be located would permit the branch to be established if the federalsavings institution were chartered by the state in which its home office islocated; or (c) the branch was operated lawfully as a branch under statelaw prior to the savings institution’s reorganization to a federal charter.

 

Furthermore,the Office of Thrift Supervision will evaluate a branching applicant’s recordof compliance with the Community Reinvestment Act of 1977. An unsatisfactoryCommunity Reinvestment Act record may be the basis for denial of a branchingapplication.

 

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**CommunityReinvestment Act and the Fair Lending Laws.****  ** Savings institutions have a responsibilityunder the Community Reinvestment Act and related regulations of the Office ofThrift Supervision to help meet the credit needs of their communities,including low- and moderate-income neighborhoods. In addition, the Equal CreditOpportunity Act and the Fair Housing Act prohibit lenders from discriminatingin their lending practices on the basis of characteristics specified in thosestatutes. An institution’s failure to comply with the provisions of theCommunity Reinvestment Act could, at a minimum, result in regulatoryrestrictions on its activities, and failure to comply with the fair lendinglaws could result in enforcement actions by the Office of Thrift Supervision,as well as other federal regulatory agencies and the Department of Justice.

 

**QualifiedThrift Lender Test.****  **All savings institutions are required to meet a qualified thrift lender test toavoid certain restrictions on their operations. Under Section 2303 of theEconomic Growth and Regulatory Paperwork Reduction Act of 1996, a savingsinstitution can comply with the qualified thrift lender test by eitherqualifying as a domestic building and loan bank as defined in Section 7701(a)(19)of the Internal Revenue Code or by meeting the second prong of the qualifiedthrift lender test set forth in Section 10(m) of the Home Owner’sLoan Act. A savings institution that does not meet the qualified thrift lendertest must either convert to a bank charter or comply with the followingrestrictions on its operations: (a) the institution may not engage in anynew activity or make any new investment, directly or indirectly, unless suchactivity or investment is permissible for a national bank; (b) thebranching powers of the institution shall be restricted to those of a nationalbank; and (c) payment of dividends by the institution shall be subject tothe rules regarding payment of dividends by a national bank. Upon theexpiration of three years from the date the savings institution ceases to be aqualified thrift lender, it must cease any activity and not retain anyinvestment not permissible for a national bank (subject to safety and soundnessconsiderations).

 

Currently, theportion of the qualified thrift lender test that is based on Section 10(m) ofthe Home Owners’ Loan Act rather than the Internal Revenue Code requires that65% of an institution’s “portfolio assets” (as defined) consist of certainhousing and consumer-related assets on a monthly average basis in nine out ofevery 12 months. Assets that qualify without limit for inclusion as partof the 65% requirement are loans made to purchase, refinance, construct,improve or repair domestic residential housing and manufactured housing; homeequity loans; mortgage-backed securities (where the mortgages are secured bydomestic residential housing or manufactured housing); stock issued by theFederal Home Loan Bank of Pittsburgh; and direct or indirect obligations of theFederal Deposit Insurance Corporation. Small business loans, credit card loansand student loans are also included without limitation as qualifiedinvestments. In addition, the following assets, among others, may be includedin meeting the test subject to an overall limit of 20% of the savingsinstitution’s portfolio assets: 50% of residential mortgage loans originatedand sold within 90 days of origination; 100% of loans for personal, familyand household purposes (other than credit card loans and educational loans);and stock issued by Fannie Mae or Freddie Mac. Portfolio assets consist of totalassets minus the sum of (a) goodwill and other intangible assets, (b) propertyused by the savings institution to conduct its business, and (c) liquidassets up to 20% of the institution’s total assets. At June 30, 2007,approximately 69.5% of the portfolio assets of Willow Financial Bank werequalified thrift investments.

 

**FederalHome Loan Bank System.****  **Willow Financial Bank is a member of the Federal Home Loan Bank of Pittsburgh,which is one of 12 regional Federal Home Loan Banks that administer the home financingcredit function of savings institutions. Each Federal Home Loan Bank serves asa reserve or central bank for its members within its assigned region. It isfunded primarily from proceeds derived from the sale of consolidatedobligations of the Federal Home Loan Bank System. It makes loans to members(i.e., advances) in accordance with policies and procedures established by itsboard of directors. At June 30, 2007, Willow Financial Bank had$189.8 million of Federal Home Loan Bank advances.

 

As a member,Willow Financial Bank is required to purchase and maintain stock in the FederalHome Loan Bank of Pittsburgh in an amount equal to at least 1% of its aggregateunpaid residential mortgage loans, home purchase contracts or similarobligations at the beginning

 

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of each yearor 5% of the members’ aggregate amount of outstanding advances and 0.7% of themembers’ unused borrowing capacity. At June 30, 2007, Willow FinancialBank had $11.4 million in stock of the Federal Home Loan Bank ofPittsburgh, which was in compliance with this requirement.

 

The FederalHome Loan Banks are required to provide funds for the resolution of troubledsavings institutions and to contribute to affordable housing programs throughdirect loans or interest subsidies on advances targeted for communityinvestment and low- and moderate-income housing projects. These contributionshave adversely affected the level of Federal Home Loan Bank dividends paid andcould continue to do so in the future and could also result in the Federal HomeLoan Banks imposing higher interest rates on advances to members. Thesecontributions also could have an adverse effect on the value of Federal HomeLoan Bank stock in the future.

 

**FederalReserve System.****  **Federal Reserve Board regulations require all depository institutions tomaintain non-interest earning reserves against their transaction accounts(primarily NOW and Super NOW checking accounts) and non-personal time deposits.At June 30, 2007, Willow Financial Bank was in compliance with thesereserve requirements. The balances maintained to meet the reserve requirementsimposed by the Federal Reserve Board may be used to satisfy liquidityrequirements that may be imposed by the Office of Thrift Supervision.

 

Savings banksare authorized to borrow from a Federal Reserve Bank “discount window,” butFederal Reserve Board regulations require savings banks to exhaust otherreasonable alternative sources of funds, including Federal Home Loan Bankadvances, before borrowing from a Federal Reserve Bank.

 

**AffiliateRestrictions.****  ** Section 11of the Home Owners’ Loan Act provides that transactions between an insuredsubsidiary of a holding company and an affiliate thereof will be subject to therestrictions that apply to transactions between banks that are members of theFederal Reserve System and their affiliates pursuant to Sections 23A and 23B ofthe Federal Reserve Act.

 

Generally, Section 23Aand Office of Thrift Supervision regulations issued in connection therewithlimit the extent to which a savings institution or its subsidiaries may engagein certain “covered transactions” with affiliates to an amount equal to 10% ofthe institution’s capital and surplus, in the case of covered transactions withany one affiliate, and to an amount equal to 20% of such capital and surplus,in the case of covered transactions with all affiliates. Section 23Bapplies to “covered transactions” and certain other transactions and requiresthat all such transactions be on terms and under circumstances that aresubstantially the same, or at least as favorable to the savings institution orits subsidiary, as those prevailing at the time for comparable transactionswith nonaffiliated companies. A “covered transaction” is defined to include aloan or extension of credit to an affiliate; a purchase of investmentsecurities issued by an affiliate; a purchase of assets from an affiliate, withcertain exceptions; the acceptance of securities issued by an affiliate ascollateral for a loan or extension of credit to any party; or the issuance of aguarantee, acceptance or letter of credit on behalf of an affiliate. Section 23Btransactions also apply to the provision of services and the sale of assets bya savings association to an affiliate.

 

In addition,under Office of Thrift Supervision regulations, a savings institution may notmake a loan or extension of credit to an affiliate unless the affiliate isengaged only in activities permissible for bank holding companies; a savingsinstitution may not purchase or invest in securities of an affiliate other thanshares of a subsidiary; a savings institution and its subsidiaries may notpurchase a low-quality asset from an affiliate; and covered transactions andcertain other transactions between a savings institution or its subsidiariesand an affiliate must be on terms and conditions that are consistent with safeand sound banking practices. With certain exceptions, each loan or extension ofcredit by a savings institution to an affiliate must be secured by collateralwith a market value ranging from 100% to 130% (depending on the type ofcollateral) of the amount of the loan or extension of credit.

 

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The Office ofThrift Supervision regulation generally excludes all non-bank and non-savingsinstitution subsidiaries of savings institutions from treatment as affiliates,except to the extent that the Office of Thrift Supervision or the FederalReserve Board decides to treat such subsidiaries as affiliates. The regulationalso requires savings institutions to make and retain records that reflectaffiliate transactions in reasonable detail, and provides that certain classesof savings institutions may be required to give the Office of Thrift Supervisionprior notice of affiliate transactions.

 

**Federal Securities Law**

 

The Company’scommon stock is registered with the SEC under the Securities Exchange Act of1934, as amended. It is therefore subject to the information, proxysolicitation, insider trading restrictions and other requirements of theSecurities Exchange Act of 1934, as amended.

 

**Sarbanes-Oxley Act of 2002**

 

On July 30,2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementinglegislative reforms intended to address corporate and accounting fraud. Inaddition to the establishment of a new accounting oversight board whichenforces auditing, quality control and independence standards and is funded byfees from all publicly traded companies, the Sarbanes-Oxley Act restricts provisionof both auditing and consulting services by accounting firms. To ensure auditorindependence, any non-audit services being provided require pre-approval by theCompany’s audit committee. In addition, the audit partners must be rotated. TheSarbanes-Oxley Act requires chief executive officers and chief financialofficers, or their equivalent, to certify to the accuracy of periodic reportsfiled with the SEC, subject to civil and criminal penalties if they knowinglyor willfully violate this certification requirement. In addition, under theSarbanes-Oxley Act, counsel will be required to report evidence of a materialviolation of the securities laws or a breach of fiduciary duty by a company toits chief executive officer or its chief legal officer, and, if such officerdoes not appropriately respond, to report such evidence to the audit committeeor other similar committee of the board of directors or the board itself.

 

Longer prisonterms will also be applied to corporate executives who violate federalsecurities laws, the period during which certain types of suits can be broughtagainst a company or its officers has been extended, and bonuses issued to topexecutives prior to restatement of a company’s financial statements are subjectto disgorgement if such restatement was due to corporate misconduct. Executivesare also prohibited from insider trading during retirement plan “blackout”periods, and loans to company executives are restricted. In addition, aprovision directs that civil penalties levied by the SEC as a result of anyjudicial or administrative action under the Act be deposited to a fund for thebenefit of harmed investors. The Federal Accounts for Investor Restitution (“FAIR”)provision also requires the SEC to develop methods of improving collectionrates. The legislation accelerated the time frame for disclosures by publiccompanies, as they must immediately disclose any material changes in theirfinancial condition or operations. Directors and executive officers must alsoprovide information for most changes in ownership in a company’s securitieswithin two business days of the change.

 

TheSarbanes-Oxley Act increased the oversight of, and codified certainrequirements relating to audit committees of public companies and how they interactwith the Company’s “registered public accounting firm” (“RPAF”). Auditcommittee members must be independent and are barred from accepting consulting,advisory or other compensatory fees from the issuer. In addition, companiesmust disclose whether at least one member of the committee is a “financialexpert” (as such term is defined by the SEC) and if not, why not. Under theSarbanes-Oxley Act, a RPAF is prohibited from performing statutorily mandatedaudit services for a company if such company’s chief executive officer, chieffinancial officer, comptroller, chief accounting officer or any person servingin equivalent positions has been employed by such firm and participated in theaudit of such company during the one-year period preceding the audit initiationdate. The Sarbanes-Oxley Act also prohibits any officer or director of acompany or any other person acting under their direction from taking any actionto fraudulently influence,

 

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coerce, manipulateor mislead any independent public or certified accountant engaged in the auditof a company’s financial statements for the purpose of rendering the financialstatement’s materially misleading. The Sarbanes-Oxley Act also required the SECto prescribe rules requiring inclusion of an internal control report andassessment by management in the annual report to shareholders, which becameeffective for the Company for the fiscal year ended June 30, 2005. TheSarbanes-Oxley Act requires the RPAF that issues the audit report to attest toand report on management’s assessment of the company’s internal controls. Inaddition, the Sarbanes-Oxley Act requires that each financial report requiredto be prepared in accordance with (or reconciled to) U.S. generally acceptedaccounting principles and filed with the SEC reflect all material correctingadjustments that are identified by a RPAF in accordance with U.S. generallyaccepted accounting principles and the rules and regulations of the SEC.

 

**Regulation of WIS**

 

**General**

 

As notedabove, while WIS is no longer a subsidiary of the Company, it operates as abusiness segment of the Company, and its results continue to be included in theCompany’s consolidated financial statements. WIS is subject to regulation by anumber of federal regulatory agencies that are charged with safeguarding theintegrity of the securities and other financial markets and with protecting theinterests of customers participating in those markets. The SEC is the federalagency that is primarily responsible for the regulation of broker-dealers andinvestment advisers doing business in the United States. The Federal ReserveBoard promulgates regulations applicable to securities credit transactionsinvolving broker-dealers and certain other institutions. Much of the regulationof broker-dealers, however, has been delegated to self-regulatory organizations(“SROs”), principally the NASD (and its subsidiaries NASD Regulation, Inc.),and the other national securities exchanges. These SROs, which are subject tooversight by the SEC, adopt rules (which are subject to approval by theSEC) that govern the industry, monitor daily activity and conduct periodicexaminations of member broker-dealers.

 

WIS is alsosubject to the Uniting and Strengthening America by Providing Appropriate ToolsRequired to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act’),signed into law on October 26, 2001. The USA Patriot Act requiresfinancial institutions to adopt and implement policies and procedures designedto prevent and defeat money laundering. WIS believes it is in compliance withthe USA Patriot Act.

 

Securitiesfirms are also subject to regulation by state securities commissions in thestates in which they are required to be registered. WIS is registered as abroker-dealer with the SEC and in all 50 states and in the District ofColumbia, and is a member of, and subject to regulation by, a number of SROs,including the NASD.

 

As a result offederal and state registration and SRO memberships, WIS is subject tooverlapping schemes of regulation that cover all aspects of its securitiesbusiness. Such regulations cover matters including capital requirements, usesand safe-keeping of clients’ funds, conduct of directors, officers andemployees, record-keeping and reporting requirements, supervisory and organizationalprocedures intended to assure compliance with securities laws and to preventimproper trading on material nonpublic information, employee-related matters,including qualification and licensing of supervisory and sales personnel,limitations on extensions of credit in securities transactions, clearance andsettlement procedures, requirements for the registration, underwriting, saleand distribution of securities, and rules of the SROs designed to promotehigh standards of commercial honor and just and equitable principles of trade.A particular focus of the applicable regulations concerns the relationshipbetween broker-dealers and their customers. As a result, the many aspects ofthe broker-dealer customer relationship are subject to regulation including, insome instances, “suitability” determinations as to certain customertransactions, limitations on the

 

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amounts thatmay be charged to customers, timing of proprietary trading in relation tocustomers’ trades and disclosures to customers.

 

WIS also issubject to “Risk Assessment Rules” imposed by the SEC which require, amongother things, that certain broker-dealers maintain and preserve certain information,describe risk management policies and procedures and report on the financialcondition of certain affiliates whose financial and securities activities arereasonably likely to have a material impact on the financial and operationalcondition of the broker-dealers. Certain “Material Associated Persons” (asdefined in the Risk Assessment Rules) of the broker-dealers and the activitiesconducted by such Material Associated Persons may also be subject to regulationby the SEC.

 

WIS isregistered as an investment adviser with the SEC. As an investment adviserregistered with the SEC, it is subject to the requirements of the InvestmentAdvisers Act of 1940 and the SEC’s regulations thereunder, as well as certainstate securities laws and regulations. Such requirements relate to, among otherthings, limitations on the ability of an investment adviser to chargeperformance-based or non-refundable fees to clients, record-keeping andreporting requirements, disclosure requirements, limitations on principal transactionsbetween an adviser or its affiliates and advisory clients, as well as generalanti-fraud prohibitions. The state securities law requirements applicable toregistered investment advisers are in certain cases more comprehensive thanthose imposed under the federal securities laws.

 

In the eventof non-compliance with an applicable regulation, governmental regulators andthe NASD may institute administrative or judicial proceedings that may resultin censure, fine, civil penalties (including treble damages in the case ofinsider trading violations), the issuance of cease-and-desist orders, thederegistration or suspension of the non-compliant broker-dealer or investmentadviser, the suspension or disqualification of the broker-dealer’s officers oremployees or other adverse consequences. With the sale of PCIS to Uvest, Uvestis now responsible for any such penalties or orders imposed on WIS subsequentto effective date of the sale, which was February 28, 2006.

 

**TAXATION**

 

**Federal Taxation**

 

**General.****  ** The Company is subject tofederal income taxation in the same general manner as other corporations withsome exceptions listed below. The following discussion of federal taxation isonly intended to summarize certain pertinent federal income tax matters and isnot a comprehensive description of the applicable tax rules. Tax years 2004,2005 and 2006 are open under the statute of limitations and subject to reviewby the Internal Revenue Service.

 

The Companyfiles a consolidated federal income tax return, which includes the Bank.Accordingly, it is anticipated that any cash distributions made by it would betreated as cash dividends, and not as a non-taxable return of capital tostockholders for federal and state tax purposes.

 

**Method ofAccounting.****  **For federal income tax purposes, income and expenses are reported on theaccrual method of accounting and the Company files its federal income taxreturn using a June 30 fiscal year end.

 

**Bad DebtReserves.****  **The Small Business Job Protection Act of 1996 (the “1996 Act”) eliminated theuse of the reserve method of accounting for bad debt reserves by savingsinstitutions, effective for taxable years beginning after 1995. Prior to the1996 Act, the Bank was permitted to establish a reserve for bad debts and tomake additions to the reserve. These additions could, within specified formulalimits, be deducted in arriving at taxable income. As a result of the 1996 Act,savings associations must use the specific charge-off method in computing theirbad debt deduction beginning with their 1996 federal tax return. In addition,federal legislation requires the recapture (over a six year period) of theexcess of tax bad debt reserves at December 31, 1995 over thoseestablished as of December 31, 1987. The Bank has no excess

 

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reservessubject to recapture as of June 30, 2007.

 

**TaxableDistributions and Recapture.****  **Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988were subject to recapture into taxable income if the Bank failed to meetcertain thrift asset and definitional tests. New federal legislation eliminatedthese thrift related recapture rules. However, under current law, pre-1988reserves remain subject to recapture should the Bank make certain non-dividenddistributions or ceases to maintain a bank charter.

 

At June 30,2007, the Bank’s total federal pre-1988 reserve was approximately$8.9 million. The reserve reflects the cumulative effects of federal taxdeductions for which no federal income tax provisions have been made.

 

**MinimumTax.****  **The Code imposes an alternative minimum tax (“AMT”) at a rate of 20% on a baseof regular taxable income plus certain tax preferences (“alternative minimumtaxable income” or “AMTI”). The AMT is payable to the extent such AMTI is inexcess of regular income tax. Net operating losses can offset no more than 90%of AMTI. Certain payments of alternative minimum tax may be used as creditsagainst regular tax liabilities in future years.

 

**NetOperating Loss Carryovers.****  **Net operating losses may be carried back to the three preceding taxable yearsand forward to the succeeding 15 taxable years. This provision applies tolosses incurred in taxable years beginning before August 6, 1997. For netoperating losses in years beginning after August 5, 1997, net operatinglosses can be carried back to the two preceding taxable years and forward tothe succeeding 20 taxable years with some exceptions. At June 30, 2007,the Company has no operating loss carry-forwards for federal income taxpurposes.

 

**CorporateDividends—Received Deduction.****  **The Company may exclude from income 100% of dividends received from a member ofthe same affiliated group of corporations. The corporate dividends receiveddeduction is 80% in the case of dividends received from corporations, which acorporate recipient owns less than 80%, but at least 20% of the distributioncorporation. Corporations, which own less than 20% of the stock of acorporation distributing a dividend, may deduct only 70% of dividends received.

 

**State and Local Taxation**

 

**PennsylvaniaTaxation.****  **Willow Financial Bancorp is subject to the Pennsylvania Corporate Net IncomeTax and Capital Stock and Franchise Tax. The Corporation Net Income Tax ratefor fiscal 2007 is 9.99% and is imposed on the Company’s unconsolidated taxableincome for federal purposes with certain adjustments. In general, the CapitalStock Tax is a property tax imposed at the rate of approximately 0.489% of acorporation’s capital stock value, which is determined in accordance with afixed formula based upon average net income and net worth.

 

The Bank issubject to tax under the Pennsylvania Mutual Thrift Institutions Tax Act (the “MTIT”),as amended to include thrift institutions having capital stock. Pursuant to theMTIT, the tax rate is 11.5%. The MTIT exempts the Bank from other taxes imposedby the Commonwealth of Pennsylvania for state income tax purposes and from alllocal taxation imposed by political subdivisions, except taxes on real estateand real estate transfers. The MTIT is a tax upon net earnings, determined inaccordance with U.S. generally accepted accounting principles (“GAAP”) withcertain adjustments. The MTIT, in computing GAAP income, allows for thededuction of interest earned on state and federal obligations, whiledisallowing a percentage of a thrift’s interest expense deduction in theproportion of interest income on those securities to the overall interestincome of the Bank. Net operating losses, if any, thereafter can be carriedforward three years for MTIT purposes.

 

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**Subsidiaries**

 

As of June 30,2007, the Company’s sole direct subsidiary was Willow Financial Bank. At suchdate, Willow Financial Bank had five direct subsidiaries, including WillowGrove Investment Corporation, a Delaware corporation which holds and managescertain securities investments, Willow Grove Insurance Agency, LLC, aPennsylvania limited liability company formed to conduct permitted fixed-rateannuity sales and BeneServ, Inc, a corporate benefit insurance firm acquired onMarch 31, 2007. As of June 30, 2007, Willow Financial Bank’saggregate investment in these three subsidiaries was $282.8 million. As aresult of the Merger on August 31, 2005, D&S Service Corporation (“D&SService”) and First Financial Investments (“FFI”), which previously weresubsidiaries of Chester Valley, are now operating as active subsidiaries ofWillow Financial Bank. D&S Service has participated in the development forsale of residential properties, in particular condominium conversions, anddevelopment of commercial properties located in or within close proximity ofChester Valley’s market area and FFI conducts retail investment serviceactivities. D&S Service also operates two wholly owned subsidiaries,Wildman Projects and D&F Projects, Inc. As of June 30, 2007, theBank had $1.7 million invested in D&S Service and its subsidiaries.

 

Effective February 28,2006, the Company completed the sale of all outstanding shares of capital stockof WIS, formerly PCIS, to Uvest BD-A, Inc., a North Carolina Corporationand registered broker-dealer (“Uvest”), for consideration of $100 but providingthat such shares may be repurchased for $100 at any time after the closing dateof the stock sale. Concurrently with the execution of the sale of WIS, the Bankand Uvest entered into a related Sub-Clearing and Brokerage Services Agreement,which provides that an affiliate of Uvest will provide securities clearing andcertain supervisory and compliance services for the Bank, and a FinancialServices Agreement between WIS and the Bank which provides that the Bank willbe entitled to 90% of the revenue generated by the securities brokerage andinvestment advisory activities conducted at the WIS office and will bearsubstantially all operational and overhead expenses. Upon consummation of thesale of WIS stock to Uvest, WIS is no longer a subsidiary of the Company.However, under the provisions of FIN 46R, “Consolidation of Variable InterestEntities”, the results of WIS continue to be consolidated in the Company’sfinancial statements. The affiliation agreement with Uvest has the primaryeffect of relieving WIS of direct responsibility for securities clearing andcertain back-office and oversight obligations.

 

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**PART II**

 

**Item 6.              SelectedFinancial Data**

 
| ** **                      | ** ** | **At June 30,**            | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(As restated)**               | ** ** | **(As restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| Total assets                    |       | $                                    | 1,551,296  |   | $ | 1,570,734 |   | $ | 958,891 |   | $ | 921,228 |   | $ | 845,124 |   |
| Cash and cash equivalents       |       | 60,277                               |       | 30,955 |   | 20,609 |   | 39,445 |   | 98,040 |   |
| Securities held to maturity     |       | 88,363                               |       | 105,561 |   | 164,451 |   | 98,513 |   | 17,320 |   |
| Securities available for sale   |       | 188,339                              |       | 196,925 |   | 148,517 |   | 234,207 |   | 291,885 |   |
| Loans held for sale             |       | 8,075                                |       | 2,635 |   | 1,795 |   | 1,136 |   | 5,293 |   |
| Loans receivable, net           |       | 1,035,293                            |       | 1,063,601 |   | 584,187 |   | 524,189 |   | 413,799 |   |
| Deposits                        |       | 1,092,730                            |       | 1,016,500 |   | 602,678 |   | 603,115 |   | 586,643 |   |
| Borrowings                      |       | 235,538                              |       | 338,753 |   | 237,400 |   | 206,168 |   | 132,557 |   |
| Total stockholders’ equity |       | 199,433                              |       | 198,624 |   | 106,679 |   | 103,412 |   | 117,130 |   |
|                                 |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                               | ** ** | **For the year ended June 30,**                        | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(As restated)**                                                          | ** ** | **(As restated)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest income                                          |       | $                                                                               | 86,050     |   | $ | 81,530 |   | $ | 49,679 |   | $ | 40,628 |   | $ | 46,445 |   |
| Interest expense                                         |       | 41,062                                                                          |       | 32,205 |   | 18,749 |   | 15,074 |   | 18,746 |   |
| Net interest income                                      |       | 44,988                                                                          |       | 49,325 |   | 30,930 |   | 25,554 |   | 27,699 |   |
| Provision for loan losses                                |       | 653                                                                             |       | 3,380 |   | 1,232 |   | 426 |   | 1,034 |   |
| Net interest income after provision for loan losses |       | 44,335                                                                          |       | 45,945 |   | 29,698 |   | 25,128 |   | 26,665 |   |
| Non-interest income                                      |       | 12,267                                                                          |       | 8,114 |   | 3,477 |   | 3,983 |   | 3,492 |   |
| Non-interest expense                                     |       | 46,449                                                                          |       | 44,382 |   | 23,397 |   | 20,390 |   | 19,058 |   |
| Income before income taxes                               |       | 10,153                                                                          |       | 9,677 |   | 9,778 |   | 8,721 |   | 11,099 |   |
| Income tax expense                                       |       | 2,886                                                                           |       | 3,010 |   | 3,052 |   | 2,610 |   | 3,610 |   |
| Net income                                               |       | 7,267                                                                           |       | 6,667 |   | 6,726 |   | 6,111 |   | 7,489 |   |
| Earnings per share—basic(1)                         |       | $                                                                               | 0.48       |   | $ | 0.47 |   | $ | 0.70 |   | $ | 0.63 |   | $ | 0.71 |   |
| Earnings per share—diluted(1)                       |       | 0.47                                                                            |       | 0.46 |   | 0.67 |   | 0.59 |   | 0.68 |   |
| Cash dividends declared per share(1)                     |       | 0.46                                                                            |       | 0.46 |   | 0.44 |   | 0.36 |   | 0.29 |   |
| Dividend payout ratio                                    |       | 97.87                                                                           | %          | 100.00 | % | 65.67 | % | 61.02 | % | 42.65 | % |

 

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| ** **                                                                    | ** ** | **At or for the year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Return on average assets                                                      |       | 0.47                                                                     | %          | 0.45 | % | 0.70 | % | 0.73 | % | 0.93 | % |
| Return on average equity                                                      |       | 3.58                                                                     |       | 3.64 |   | 6.33 |   | 5.56 |   | 6.10 |   |
| Average interest-earning assets to  average interest-bearing liabilities |       | 115.9                                                                    |       | 116.7 |   | 121.6 |   | 124.2 |   | 127.1 |   |
| Interest rate spread(2)                                                       |       | 2.85                                                                     |       | 3.31 |   | 2.88 |   | 2.94 |   | 2.91 |   |
| Interest rate margin(3)                                                       |       | 3.32                                                                     |       | 3.71 |   | 3.30 |   | 3.17 |   | 3.55 |   |
| Non-performing assets to total assets(4)                                 |       | 0.25                                                                     |       | 1.01 |   | 0.33 |   | 0.34 |   | 0.48 |   |
| Allowance for loan losses to:                                                 |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Non-performing loans                                                          |       | 317.1                                                                    |       | 106.4 |   | 227.5 |   | 188.0 |   | 143.9 |   |
| Total loans less deferred fees                                                |       | 1.17                                                                     |       | 1.55 |   | 1.05 |   | 0.99 |   | 1.27 |   |
| Average stockholders’ equity to  average assets                     |       | 13.26                                                                    |       | 12.31 |   | 10.88 |   | 13.10 |   | 15.19 |   |
| Tangible stockholders’ equity to end of  period assets                   |       | 5.75                                                                     |       | 5.80 |   | 11.07 |   | 11.43 |   | 13.52 |   |
| Total regulatory capital to  risk-weighted assets(5)                     |       | 13.31                                                                    |       | 12.60 |   | 17.70 |   | 17.72 |   | 19.61 |   |

 

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| (1)    | The earnings  and dividends per share and amounts for periods prior to February 23,  2007 have been adjusted to give retroactive effect to the 5% stock dividend. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                   |
| (2)    | The weighted  average yield on interest-earning assets less the weighted average cost of  interest-bearing liabilities.                                                |
|   |                                                                                                                                                                   |
| (3)    | This  represents net interest income as a percentage of average interest-earning  assets.                                                                              |
|   |                                                                                                                                                                   |
| (4)    | Non-performing  assets equal non-accrual loans, troubled debt restructurings plus accruing  loans 90 or more days past due and real estate owned.                      |
|   |                                                                                                                                                                   |
| (5)    | This ratio  relates to the Bank only.                                                                                                                                  |

 

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**Item 7.              Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The followingdiscussion is intended to assist in understanding our financial condition, andthe results of operations for Willow Financial Bancorp, Inc., and itssubsidiary Willow Financial Bank, for the fiscal years ended June 30,2007, 2006 and 2005. The information in this section should be read inconjunction with the Company’s financial statements and the accompanying notesincluded elsewhere herein.

 

**General**

 

Net income islargely driven by net interest income, which is the difference between theincome earned on interest-earning assets and the interest paid oninterest-bearing liabilities and the relative amount of our interest-earningassets to interest-earning liabilities. Non-interest income and expenses, theprovision for loan losses and income tax expense also affect the Company’sresults of operations.

 

**Critical Accounting Policies**

 

The followingdiscussion and analysis of the Company’s financial condition and results ofoperations is based upon consolidated financial statements, which have beenprepared in accordance with U.S. generally accepted accounting principles. Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets and liabilities,revenues and expenses and related disclosures of contingent assets andliabilities at the date of the financial statements. Actual results may differ fromthese estimates under different assumptions or conditions.

 

In management’sopinion, the most critical accounting policies affecting the consolidatedfinancial statements are:

 

1.                   *Evaluation of the allowance for loan losses.  * Thedetermination of the allowance for loan losses involves significant judgmentsand assumptions by management which may have a material impact on the carryingvalue of net loans and, potentially, on the amount of net income we recognizefrom period to period. For a description of the methods the Company uses todetermine the adequacy of the allowance for loan losses, see “Results ofOperations—Provision for Loan Losses.”

 

2.                   *Realization of deferred income tax items* .  Included in other assets is a “net deferred tax asset”, which is an estimate ofnet deferred tax assets and deferred tax liabilities. These estimates involvesignificant judgments and assumptions by management, which may have a materialeffect on the carrying value of this asset for financial reporting purposes.For a more detailed description of these items and estimates, see Note 15(Income Taxes) to the audited consolidated financial statements at and for thefiscal year ended June 30, 2007.

 

*3.*                  *Goodwill and core deposit intangibles.  * Goodwillrepresents the excess cost over fair value of assets acquired over liabilitiesas a result of the Merger and earlier branch acquisitions. Core depositintangibles are a measure of the value of the checking, savings and moneymarket deposits acquired in the Merger accounted for under the purchase method.The core deposit intangible is being amortized to expense over a twelve-yearlife using a method that approximates a level yield method. The Company followsthe provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,”and performs impairment tests of the intangible assets as well as the review ofthe estimated life at least annually and impairment losses are recognized ifthe carrying value of the intangible exceeds its fair value. The Company hasnot recorded any impairment losses as a result of this analysis during fiscalyears 2007, 2006 and 2005.  As discussedin Note 26 of the Notes to the Consolidated Financial Statements, the Companyexpects to record an impairment charge to goodwill for the quarter ended December 31,2007.

 

The Notes toConsolidated Financial Statements identify other significant accountingpolicies used in the development and presentation of the financial statements.This discussion and analysis, the significant accounting policies and otherfinancial statement disclosures identify and address key variables and otherqualitative and quantitative factors that are necessary for an understandingand evaluation of the Company and its results of operations.

 

As indicatedin Note 2 to the Notes to Consolidated Financial Statements, the Company hasrestated its financial statements for the fiscal years ended June 30, 2007and June 30, 2006.  The discussionin this Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations”, gives effect to the restatement of the Company’sfinancial statements.

 

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**Changes in Financial Condition**

 

***General.******  ***Total assets decreased by $19.4 million, or 1.2% to $1.55 billion at June 30,2007 from $1.57 billion at June 30, 2006. The net loan portfoliodecreased $28.3 million or 2.7% while total deposits increased by $76.2million or 7.5%.

 

***Cash and Cash Equivalents.******  *** Cash and cashequivalents, which consist of cash on hand and in other banks ininterest-earning and non-interest earning accounts, amounted to$60.3 million and $31.0 million at June 30, 2007 and 2006,respectively. The increase in cash and cash equivalents of $29.3 millionor 94.7% was primarily the result of the growth in interest-bearing deposits,repayment of loan balances and sales and repayments of investment securities.

 

***Securities Available for Sale.******  *** At June 30, 2007,investment securities that were classified as available for sale (“AFS”)totaled $188.3 million, compared to $196.9 million in AFS securitiesat June 30, 2006. The decrease in available for sale securities was due tosales and repayments in the investment portfolio with the proceeds primarilybeing utilized to repay higher costing borrowings. The unrealized loss, net ofincome taxes, on AFS securities amounted to approximately $3.2 million at June 30,2007 compared to $4.1 million at June 30, 2006. The decrease in theunrealized loss was the result of a decline in long-term interest rates duringthe year.

 

***Securities Held to Maturity.******  *** At June 30, 2007,investment securities classified as held to maturity totaled$88.4 million, compared to $105.6 million in held to maturitysecurities at June 30, 2006. Held to maturity securities were comprisedprimarily of CMOs and mortgage-backed securities. The decrease in held tomaturity securities was the result of principal repayments experienced in theportfolio with the proceeds primarily being utilized to repay higher costingborrowings. Held to maturity investment securities are carried at amortizedcost. In order to more effectively manage its interest rate risk, the Companyplans limited additions to its HTM portfolio.

 

***Loans.******  ***The net loan portfolio, which does not include loans held for sale, decreased$28.3 million or 2.7% from $1.06 billion at June 30, 2006. Thedecrease was primarily the result of increased repayment levels within theconstruction and commercial real estate loan portfolios, which decreased $19.6million and $9.9 million, respectively, at June 30, 2007 compared to June 30,2006. The commercial real estate loan decrease includes the sale of anon-performing commercial real estate loan of $3.5 million and the liquidationof $2.0 million in real estate of a previous non-performing loan. In addition,single family residential loans decreased $25.3 million at June 30, 2007compared to June 30, 2006 as a part of management’s strategy to reducereliance on long-term single family residential mortgage loans. Commercialbusiness loans increased by $7.5 million from June 30, 2006 to June 30,2007. This increase occurred despite the charge-off of a $2.9 millioncommercial business borrowing relationship. At June 30, 2007, home equityloans and lines of credit increased $13.2 million compared to June 30,2006.

 

With theinverted (long term rates are lower than short term rates) and/or flat yieldcurve experienced during the year, a number of loans within the commercial realestate portfolio were refinanced through other lenders who offered extendedterms without recourse. Additionally, the construction loan portfolio includedlarger residential projects, which sold at a more rapid pace than anticipatedand the demand for new construction was not as robust as a result of a slowingin the housing market. The Company plans to focus its growth in commerciallending with a focus on small businesses, middle market commercial loans,commercial real estate lending, as well as consumer lending.

 

The allowancefor loan losses decreased to $12.2 million at June 30, 2007 comparedto $16.7 million at June 30, 2006, due primarily to charge-offsrecorded during the year. The current fiscal year provision for loan lossesdecreased from fiscal 2006 by approximately $2.7 million due largely to an$11.9 million decrease in non-performing loans. During the current fiscal year,the Company recorded net charge-offs of $5.2 million due largely to thecharge-off of two loan relationships, which were categorized as non-accrual at June 30,2006.

 

36

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***Loans Held for Sale.******  ***Mortgage loans originated or purchased with the intention of being sold intothe secondary market are classified as held for sale and are carried at thelower of aggregate cost or fair value with any unrealized loss reflected in theconsolidated statements of income. At June 30, 2007, $8.1 million offixed-rate, single-family residential mortgages were classified as held forsale compared to $2.6 million in loans classified as held for sale at June 30,2006. The increase of $5.5 million resulted primarily from an increase in theBank’s expansion of this business line as well as the timing of the originationof the loans and the ultimate delivery to the purchaser of the loans. In orderto mitigate the risk of loss on the sale of these loans, the Company generallycommits these loans for sale, on a best efforts basis, to a third party at thetime that the borrower locks the loan with the Company.

 

***Intangible Assets.******  ***At June 30, 2007, intangible assets aggregated $109.9 million as comparedto $107.5 million at June 30, 2006. Intangible assets include a coredeposit intangible of $10.9 million, which resulted from the acquisition ofChester Valley. The core deposit intangible is being amortized using an acceleratedmethod over a 12-year life. Intangible assets also include goodwill, whichprimarily represents the excess cost over fair value of assets acquired overliabilities as a result of the Chester Valley acquisition. The goodwill thatresulted from the Chester Valley acquisition was approximately $93.7 million.As a result of the BeneServ acquisition, goodwill of $1.0 million and customerintangibles of $3.5 million were recorded at June 30, 2007. The customerintangible balance is being amortized using a straight line method over a10-year life. The remaining balance of the goodwill relates to a branchacquisition in 1994 approximated $837 thousand at June 30, 2007. Goodwillis measured for impairment at least annually. As discussed in Note 26 of theNotes to the Consolidated Financial Statements, the Company expects to recordan impairment charge to goodwill for the quarter ended December 31, 2007.

 

***Deposits.******  ***During the year ended June 30, 2007, total deposits increased by $76.2million or 7.5%. The increase resulted primarily from an increase in moneymarket demand deposit accounts as the Company has been successful in migratingcustomer money market balances from its business segment, WIS, as well as anincrease in certificates of deposit resulting from customer preference forhigher rate deposit accounts. Core deposits, which we define as savings,checking, NOW and money market accounts, increased by $43.2 million as aresult of the migration of WIS deposits noted above. Checking accounts totaled$267.0 million or 24.4% of total deposits at June 30, 2007 compared to$275.3 million, or 27.1% of total deposits at June 30, 2006.

 

The Companywill continue to deploy a strategy to increase core deposit accounts andbalances through targeted marketing, cross-selling of our existing customerbase and expansion of our commercial business lending, which typically resultsin the opening of a checking account.

 

***Federal Home Loan Bank Advances.******  *** Advances from the FHLBprovide the Company with an additional source to fund interest-earning assetgrowth and are a tool in meeting the Company’s asset/liability strategies. At June 30,2007, the total amount of these borrowings was $189.8 million, a decreaseof $92.8 million or 32.8% from the $282.6 million outstanding at June 30,2006. This decrease was the direct result of repayments as the excess cashgenerated from the deposit growth, investment securities sales and repayments,and loan repayments was utilized to repay certain FHLB advances.

 

***Trust Preferred Securities.***   Effective with the acquisition of Chester Valley, the Company assumed theliability for $10.5 million of Junior Subordinated Debentures to the ChesterValley Statutory Trust, a Pennsylvania Business Trust, in which the Companyowned all of the common equity as a result of the acquisition of ChesterValley. The Trust issued $10.0 million of Trust Preferred Securities toinvestors, which were secured by the Junior Subordinated Debentures and theguarantee of the Company. These Trust Preferred Securities were redeemed by theCompany on March 26, 2007 in accordance with the Trust Agreement.

 

On March 31,2006, the Company issued $25.8 million of Junior Subordinated Debentures toWillow Financial Statutory Trust I, a Connecticut Statutory Trust, in which theCompany owns all of the common equity. The Trust then issued $25.0 million ofTrust Preferred Securities, which pay interest quarterly at three-month Liborplus 1.31% to investors, which are secured by the Junior Subordinated

 

37

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Debentures andthe guarantee of the Company. The Junior Subordinated Debentures are treated asdebt of the Company but qualify as Tier I capital of the Bank to the extent ofthe amount of the proceeds which are invested in the Bank. The Trust PreferredSecurities are callable by the Company on or after September 30, 2011. TheTrust Preferred Securities must be redeemed by the Company upon their maturityin the year 2036.

 

***Accounting for Derivative Instruments and Hedging.***   The Company may from time to time utilize derivative instrumentssuch as interest rate swaps, interest rate collars, interest rate floors,interest rate swaptions or combinations thereof to assist in itsasset/liability management. In accordance with SFAS No. 133, “Accountingfor Derivative Instruments,” the Company documents its hedge relationships,including identification of the hedging instruments and the hedged items, aswell as its risk management objectives and strategies for undertaking thehedge. The Company also assesses, both at inception and at least quarterlythereafter, whether the derivative instruments that are used in hedgingtransactions are highly effective in offsetting the changes in either the fairvalue or cash flows of the hedged item. For fair value hedges, both theeffective and ineffective portions of the changes in the fair value of thederivative, along with the gain or loss on the hedged item that is attributableto the hedged risk, are recorded in the statement of operations within interestincome or interest expense. For cash flow hedges, the effective portion of thechange in the fair value of the derivative is recorded in accumulated othercomprehensive income. When the hedged item impacts the statement of operations,the gain or loss included in accumulated other comprehensive income is reportedon the same line in the statement of operations as the hedged item. Inaddition, the ineffective portion of the changes in the fair value ofderivatives used as cash flow hedges is reported in the statement ofoperations.

 

As part of theMerger, the Company assumed the responsibility for a $20 million notionalinterest rate swap whereby the Company paid a variable rate and received afixed rate. The interest rate swap had been used to hedge certain FHLBborrowings of the former Chester Valley. On the date of the Merger, theinterest rate swap and the hedged borrowings were marked to fair value as aresult of purchase accounting. In September 2005, the hedged borrowingswere repaid and the $10 million notional amount of the interest rate swap wasunwound with the counter-party. After performing the appropriate documentationof the derivative instrument, the Company designated the remaining $10 millionnotional amount interest rate swap as a fair value hedge of certain existingborrowings of Willow Financial Bank. The swap had the effect of converting afixed rate borrowing to an adjustable rate borrowing. During the quarter ended December 31,2005, the derivative instrument ceased to be a highly effective hedge;therefore, the Company discontinued hedge accounting resulting in a pre-taxcharge to income of $47 thousand. The interest rate swap was unwound in February 2006without .any additional impact to operations. The basis adjustment that was previouslyrecorded on the hedged borrowing that is recorded in the statement of financialcondition is amortized as an increase in interest expense over the remaininglife of the borrowing using the interest method.

 

Additionally,in August 2003, Chester Valley purchased a $30.0 million notional amount3.50% six month LIBOR interest rate cap while simultaneously selling a$30.0 million notional amount 6.00% six-month LIBOR interest rate cap (“InterestRate Corridor”) which expires in August 2008. Chester Valley paid a netpremium, which entitled it to receive the difference between six-month LIBORfrom 3.50% up to 6.00% applied to the $30.0 million notional amount. Uponconsummation of the Merger, the Company assumed the Interest Rate Corridor anddesignated it to hedge certain borrowings of Willow Financial Bank, which werevariable in nature and indexed to six-month LIBOR. The Interest Rate Corridorwas being used to hedge the cash flows of this borrowing. Prior to October 23,2006, the Interest Rate Corridor reduced the negative impact on earnings of theborrowings in a rising interest rate environment. The fair market value of theInterest Rate Corridor had two components: the intrinsic value and the timevalue of the option. The Interest Rate Corridor was marked-to-market quarterly,with changes in the intrinsic value of the Interest Rate Corridor, net of tax,included as a separate component of other comprehensive income, and the changein the time value of the option included directly as interest expense asrequired under SFAS 133. In addition, the ineffective portion, if any,

 

38

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would havebeen expensed in the period in which ineffectiveness was determined. On October 23,2006, the Company unwound the Interest Rate Corridor and recognized a gain of$804 thousand upon repayment of the $30 million FHLB advance.

 

At June 30,2007, the Company had five interest rate swap arrangements used to hedgespecific loans originated by the Bank for which the transactions wereeconomically beneficial to the Bank in passing along the interest rate risk tothe borrower. The swaps effectively convert the rates from a floating ratebased on LIBOR to a fixed rate throughout the life of the underlying loans. At June 30,2007, the total outstanding notional amount on these swaps was $9.3 million.The weighted average floating and fixed rates on these transactions were 4.6%and 5.3%, respectively at June 30, 2007. The Company lacked sufficientdocumentation for these transactions to receive hedge accounting treatment. Assuch, the Bank has recorded a net receivable of $196 thousand at June 30,2007. The change in the fair value of the interest rate swaps is included as acomponent of other income on the consolidated statements of income.

 

***Other Liabilities.******  ***At June 30, 2007, other liabilities increased $7.2 million to $17.0million from $9.8 million at June 30, 2006.  This increase was due primarily to aliability established for an investment security purchase with a trade date in June 2007for which settlement occurred in early July 2007.

 

***Stockholders’ Equity.******  ***At June 30, 2007, total stockholders’ equity amounted to $199.4 millionor 12.9% of total assets compared to $198.6 million, or 12.6% of assets atJune 30, 2006. During the year, the Company paid aggregate cash dividendsof $6.9 million. As described in Note 2 to the Company’s financial statementsincluded in Item 8 hereof, the restatement of the Company’s statements offinancial condition resulted in net reductions in retained earnings of $1.0million and $4.8 million in fiscal 2007 and 2006, respectively.

 

39

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**Average Balances, Net Interest Income, Yields Earned and Rates Paid**

 

The followingtable presents the average daily balances for various categories of assets andliabilities, and income and expense related to those assets and liabilities forthe years ended June 30, 2007, 2006 and 2005. The table also shows theaverage yields and costs on interest-earning assets and interest-bearingliabilities for each of those years. Loans receivable include non-accrualloans. To adjust nontaxable loans and securities to a taxable equivalent, a34.0%, 34.0% and 31.2% effective rate has been used for the fiscal years endingJune 30, 2007, 2006, and 2005, respectively. The adjustment of tax-exemptloans and securities to a tax equivalent yield in the table below may beconsidered to include non-GAAP financial information. Management believes thatit is a standard practice in the banking industry to present net interestmargin, net interest rate spread and net interest income on a fully taxequivalent basis. Therefore, management believes, these measures provide usefulinformation to investors by allowing them to make peer comparisons. A GAAPreconciliation also is included below.

 
| ** **                                                                             | ** ** | **At June 30,**            | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **Average  Balance**                 | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** |
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-earning  assets:                                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable—taxable                                                         |       | $                                    | 1,033,540  |   | $ | 68,374 |   | 6.62 | % | $ | 986,584 |   | $ | 64,947 |   | 6.58 | % | $ | 567,677 |   | $ | 34,536 |   | 6.08 | % |
| Loans  receivable—tax free                                                        |       | 16,926                               |       | 1,271 |   | 7.51 |   | 12,238 |   | 808 |   | 6.60 |   | — |   | — |   | — |   |
| Securities—taxable                                                                |       | 287,299                              |       | 15,485 |   | 5.39 |   | 320,271 |   | 14,983 |   | 4.68 |   | 341,346 |   | 13,878 |   | 4.07 |   |
| Securities—tax  free                                                              |       | 9,554                                |       | 689 |   | 7.21 |   | 13,213 |   | 1,041 |   | 7.88 |   | 19,783 |   | 1,286 |   | 6.50 |   |
| Interest-bearing  deposits                                                             |       | 22,640                               |       | 756 |   | 3.34 |   | 13,110 |   | 304 |   | 2.32 |   | 19,502 |   | 363 |   | 1.86 |   |
| Total  interest-earning assets                                                         |       | 1,369,959                            |       | 86,575 |   | 6.32 |   | 1,345,416 |   | 82,083 |   | 6.10 |   | 948,308 |   | 50,063 |   | 5.28 |   |
| Non-interest-earning  assets                                                           |       | 162,006                              |       |   |   |   |   | 142,022 |   |   |   |   |   | 21,500 |   |   |   |   |   |
| Total assets                                                                           |       | $                                    | 1,531,965  |   |   |   |   |   | $ | 1,487,438 |   |   |   |   |   | $ | 969,808 |   |   |   |   |   |
| Interest-bearing  liabilities:                                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                               |       | $                                    | 900,640    |   | 28,698 |   | 3.19 |   | $ | 820,124 |   | 18,476 |   | 2.25 |   | $ | 529,475 |   | $ | 9,931 |   | 1.88 |   |
| FHLB borrowings                                                                        |       | 225,722                              |       | 8,868 |   | 3.93 |   | 312,420 |   | 12,626 |   | 4.04 |   | 250,299 |   | 8,818 |   | 3.52 |   |
| Repurchase  agreements                                                                 |       | 22,767                               |       | 1,135 |   | 4.99 |   | 4,959 |   | 228 |   | 4.60 |   | — |   | — |   | — |   |
| Trust preferred  securities                                                            |       | 32,999                               |       | 2,361 |   | 7.15 |   | 15,548 |   | 875 |   | 5.63 |   | — |   | — |   | — |   |
| Total  interest-bearing liabilities                                                    |       | 1,182,128                            |       | 41,062 |   | 3.47 |   | 1,153,051 |   | 32,205 |   | 2.79 |   | 779,774 |   | 18,749 |   | 2.40 |   |
| Non-interest-bearing  liabilities:                                                     |       | 146,735                              |       |   |   |   |   | 151,331 |   |   |   |   |   | 84,185 |   |   |   |   |   |
| Total  stockholders’ equity                                                       |       | 203,102                              |       |   |   |   |   | 183,056 |   |   |   |   |   | 105,849 |   |   |   |   |   |
| Total liabilities  and equity                                                          |       | $                                    | 1,531,965  |   |   |   |   |   | $ | 1,487,438 |   |   |   |   |   | $ | 969,808 |   |   |   |   |   |
| Net  interest-earning assets                                                           |       | $                                    | 187,831    |   |   |   |   |   | $ | 192,365 |   |   |   |   |   | $ | 168,534 |   |   |   |   |   |
| Net interest  income                                                                   |       |                                 |       | $ | 45,513 |   |   |   |   |   | $ | 49,878 |   |   |   |   |   | $ | 31,314 |   |   |   |
| Net interest rate  spread                                                              |       |                                 |       |   |   | 2.85 | % |   |   |   |   | 3.31 | % |   |   |   |   | 2.88 | % |
| Net interest  margin                                                                   |       |                                 |       |   |   | 3.32 | % |   |   |   |   | 3.71 | % |   |   |   |   | 3.30 | % |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                                 |       |   |   | 116 | % |   |   |   |   | 117 | % |   |   |   |   | 122 | % |

 

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Althoughmanagement believes that the above non-GAAP financial measures enhanceinvestors’ understanding of the Company’s business and performance, thesenon-GAAP financial measures should not be considered an alternative to GAAP.The reconciliation of these non-GAAP financial measures to GAAP is presentedbelow.

 
| ** **  | ** ** | **Year Ended June 30,** | ** ** |
|-------------|------------|----------------------------------------|------------|
| ** **  | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **  | ** ** | **Interest  Income**                   | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** | **Interest  Income** | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** | **Interest  Income** | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** |
| ** **  | ** ** | **(Dollars in Thousands)**   | ** ** |
| Loans(a)    |       | $                                      | 69,315     |   | $ | 330 |   | $ | 69,645 |   | $ | 65,472 |   | $ | 283 |   | $ | 65,755 |   | $ | 34,536 |   | $ | — |   | $ | 34,536 |   |
| Investments |       | 16,735                                 |       | 195 |   | 16,930 |   | 16,058 |   | 270 |   | 16,328 |   | 15,143 |   | 384 |   | 15,527 |   |
| Total       |       | $                                      | 86,050     |   | $ | 525 |   | $ | 86,575 |   | $ | 81,530 |   | $ | 553 |   | $ | 82,083 |   | $ | 49,679 |   | $ | 384 |   | $ | 50,063 |   |

 

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 (a)  The Company didnot have tax-exempt loans in fiscal 2005.

 

** Rate/Volume Analysis**

 

The followingtable shows the effect of changing rates and volumes on net interest income ona tax equivalent basis for the years ended June 30, 2007 and 2006,compared to the prior fiscal year. Information provided shows the effect on netinterest income of (1) rates (changes in rate times prior volume), (2) volume(changes in volume times prior rate) and (3) rate/volume (changes in ratetimes change in volume).

 
| ** **                                                   | ** ** | **Increase (decrease) in net interest  income for the year ended June 30,  2007 compared to the year ended  June 30, 2006 due to** | ** ** | **Increase (decrease) in net interest  income for the year ended June 30,  2006 compared to the year ended  June 30, 2005 due to** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                                                                                                                                                                                                        | ** ** | ** **                                                                                                                                                                                                                        | ** ** | **Rate/** | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate/** | ** ** | **Increase/** | ** ** |
| ** **                                                   | ** ** | **Rate**                                                                                                                                                                                                                          | ** ** | **Volume**                                                                                                                                                                                                                        | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)**                                                                                                                                                                                              | ** ** |
| Interest-earning assets:                                     |       |                                                                                                                                                                                                                              |       |                                                                                                                                                                                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                             |       | $                                                                                                                                                                                                                                 | 506        |                                                                                                                                                                                                                              | $          | 3,399 |   | $ | (15 | ) | $ | 3,890 |   | $ | 2,838 |   | $ | 26,214 |   | $ | 2,167 |   | $ | 31,219 |   |
| Securities                                                   |       | 2,185                                                                                                                                                                                                                             |       | (1,831                                                                                                                                                                                                                            | )          | (204 | ) | 150 |   | 2,355 |   | (1,285 | ) | (210 | ) | 860 |   |
| Interest-bearing deposits                                    |       | 134                                                                                                                                                                                                                               |       | 221                                                                                                                                                                                                                               |       | 97 |   | 452 |   | 90 |   | (119 | ) | (30 | ) | (59 | ) |
| Total net change in income on  interest-earning assets       |       | 2,825                                                                                                                                                                                                                             |       | 1,789                                                                                                                                                                                                                             |       | (122 | ) | 4,492 |   | 5,283 |   | 24,810 |   | 1,927 |   | 32,020 |   |
| Interest-bearing liabilities:                                |       |                                                                                                                                                                                                                              |       |                                                                                                                                                                                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                     |       | 7,709                                                                                                                                                                                                                             |       | 1,812                                                                                                                                                                                                                             |       | 701 |   | 10,222 |   | 3,768 |   | 3,462 |   | 1,315 |   | 8,545 |   |
| FHLB Advances                                                |       | (343                                                                                                                                                                                                                              | )          | (3,503                                                                                                                                                                                                                            | )          | 88 |   | (3,758 | ) | 1,302 |   | 2,187 |   | 319 |   | 3,808 |   |
| Repurchase agreements                                        |       | 19                                                                                                                                                                                                                                |       | 820                                                                                                                                                                                                                               |       | 68 |   | 907 |   | — |   | — |   | 228 |   | 228 |   |
| Trust preferred Securities                                   |       | 236                                                                                                                                                                                                                               |       | 982                                                                                                                                                                                                                               |       | 268 |   | 1,486 |   | — |   | — |   | 875 |   | 875 |   |
| Total net change in expense on  interest-bearing liabilities |       | 7,621                                                                                                                                                                                                                             |       | 111                                                                                                                                                                                                                               |       | 1,125 |   | 8,857 |   | 5,070 |   | 5,649 |   | 2,737 |   | 13,456 |   |
| Change in net interest income                                |       | $                                                                                                                                                                                                                                 | (4,796     | )                                                                                                                                                                                                                                 | $          | 1,678 |   | $ | (1,247 | ) | $ | (4,365 | ) | $ | 213 |   | $ | 19,161 |   | $ | (810 | ) | $ | 18,564 |   |

 

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**Results of Operations**

 

***General.******  ***Net income for the year ended June 30, 2007 was $7.3 million, anincrease of $600 thousand or 9.0% from net income for the year ended June 30,2006. Net income for the year ended June 30, 2006 was $6.7 million, adecrease of $59 thousand from the year ended June 30, 2005.

 

***Net Interest Income.******  ***Net interest income decreased by $4.3 million or 8.8% to$45.0 million for the year ended June 30, 2007 as compared to$49.3 million for the year ended June 30, 2006. This decrease was dueprimarily to an increase in the average cost of interest-bearing liabilities to3.47% for the year ended June 30, 2007 from 2.79% for the year ended June 30,2006 while the yield on average earning assets increased by only 22 basispoints. One factor that influences net interest income is the interest ratespread (i.e., the difference between the average yields on interest-earningassets and the average rates paid on interest-bearing liabilities). The averageinterest rate spread computed on a fully tax equivalent basis for the yearsended June 30, 2007, 2006 and 2005 was 2.85%, 3.31% and 2.88%,respectively. The net interest margin (i.e., net interest income expressed as apercentage of average interest-earning assets) was 3.32%, 3.71% and 3.30% forthe same three respective fiscal years.

 

Net interestincome increased by $18.4 million or 59.5% to $49.3 million for theyear ended June 30, 2006 as compared to $30.9 million for the yearended June 30, 2005. The significant improvement largely resulted from theMerger and the balance sheet de-leveraging strategy deployed by the Company.Chester Valley’s balance sheet was asset sensitive (assets reprice quicker thanliabilities) during a year in which the Federal Reserve aggressively raisedshort-term rates. Additionally, the Company received the full benefit of theadditional earning assets from the acquisition for ten months. The balancesheet de-leveraging allowed the Company to sell lower yielding investmentsecurities while repaying higher costing borrowings.

 

***Interest Income.******  ***Interest income includes the interest earned on loans and investmentsecurities, as well as yield adjustments for the premiums, discounts anddeferred fees or costs recorded in connection with the acquisition of these assets.Total interest income for the year ended June 30, 2007 was$86.1 million compared to $81.5 million and $49.7 million forfiscal 2006 and 2005, respectively.

 

The increasein interest income in fiscal 2007 compared to fiscal 2006 was $4.5 millionor 5.5% due primarily to an increase in the average balance of outstandingloans of $51.6 million. Additionally, the yield on loans increasedapproximately five basis points in fiscal 2007 compared to fiscal 2006. Theincrease in the average yield of the loan portfolio was largely the result of achange in the mix of the loan portfolio reflecting the Company’s reducedreliance on long-term single-family residential mortgage loans and increase inhome equity loans and lines of credit, along with the interest rate sensitiveassets acquired from Chester Valley at a time in which the Federal Reserve wasaggressively raising short-term interest rates. Also contributing to theincrease was an approximate 71 basis point increase in the average yield in theinvestment securities portfolio.

 

The increasein interest income in fiscal 2006 compared to fiscal 2005 was$31.9 million or 64.1% due primarily to an increase in the average balanceof outstanding loans of $431.1 million as a result of the Merger. Additionally,the yield on loans increased approximately 50 basis points, as Chester Valley’sloans were re-pricing at a time when the Federal Reserve aggressively increasedshort-term rates. Also

 

42

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contributingto the increase was an approximate 59 basis point increase in the average yieldin the investment portfolio as the Company completed a de-leveraging strategyby liquidating approximately $95.9 million of investment securities with anaverage yield of 3.96%. The above factors were partially offset by reducedlevels in the average balance of investment securities.

 

***Interest Expense.******  ***Interest expense consists of the interest paid to depositors on theirinterest-bearing deposit accounts as well as interest paid on borrowings. Forthe fiscal year ended June 30, 2007, total interest expense was$41.1 million compared to $32.2 million and $18.7 million, forthe fiscal years ended June 30, 2006 and 2005, respectively.

 

For the fiscalyear ended June 30, 2007, interest expense increased by $8.9 million,or 27.5% compared to the fiscal year ended June 30, 2006. This increasewas due primarily to a $10.2 million, or 55.3%, increase in interest expense ondeposits, which was partially offset by a $1.4 million, or 9.9% decrease ininterest expense on borrowings and repurchase agreements. This increase ininterest expense on deposits was due primarily to the increase in averagedeposits of $87.0 million, or 9.2%. In addition, the average cost of depositsincreased by 94 basis points in fiscal 2007 as compared to fiscal 2006. Thisincrease was partially offset by a reduction of $51.4 million or 15.5% inaverage borrowings for the year ended June 30, 2007 compared to the yearended June 30, 2006.

 

For the fiscalyear ended June 30, 2006, interest expense increased by$13.5 million, or 71.8% compared to the fiscal year ended June 30,2005. This increase was due primarily to an increase in averageinterest-bearing liabilities resulting from the Merger. Average deposit andborrowings balances increased $290.6 million and $82.6 million, respectively,in fiscal 2006 compared to fiscal 2005. Additionally, the Company’s cost offunds increased approximately 39 basis points in fiscal 2006 compared to fiscal2005, as the Federal Reserve aggressively raised short-term rates coupled withthe competition for deposits in the Bank’s market area, which led the Bank toraise its interest rate paid on money market balances and certificates ofdeposits. Additionally, the trust preferred security assumed in the Merger wasa floating rate borrowing, for which the rate increased throughout the year.

 

***Provision for Loan Losses.******  *** In order to maintainthe allowance for loan losses at a level that management deems adequate toabsorb known and unknown losses which are both probable and can be reasonablyestimated, a provision for loan losses is recorded through charges to earnings.The determination of the adequacy of the allowance is based upon the Company’sregular review of credit quality and is based upon, but not limited to, thefollowing factors: an evaluation of our loan portfolio, loss experience,current economic conditions, volume, growth, composition of the loan portfolioand other relevant factors. The balance of the allowance for loan losses is anestimate and actual losses may vary from these estimates. Management assessesthe allowance for loan losses at least quarterly and makes any necessaryadjustments to maintain the allowance for losses at a level deemed adequate.For the years ended June 30, 2007, 2006 and 2005, the provisions for loanlosses were $653 thousand, $3.4 million, and $1.2 million, respectively. Thedecreased amount of the provision in fiscal 2007 compared to fiscal 2006 wasdue primarily to the decrease in non-performing assets of $11.9 million, whichwere partially offset by net charge-offs of $5.2 million. The increasedprovision in fiscal 2006 compared to fiscal 2005 was due primarily to theincrease in non-performing assets of $12.7 million.

 

At June 30,2007, the balance in the allowance for loan losses was $12.2 millioncompared to $16.7 million at June 30, 2006, with the decreaseresulting from $5.2 million in net charge-offs during fiscal 2007. Thepercentage of the allowance for losses to loans, net of deferred fees, decreasedto 1.17% at June 30, 2007 compared to 1.55% at June 30, 2006.

 

Managementbelieves the allowance for loan loss was adequate at June 30, 2007 andrepresents all known and inherent losses in the portfolio that are bothprobable and reasonably estimable. No assurance can be given as to the amountor timing of additional provisions for loan losses in the future as a result ofpotential increases in the amount of the Company’s non-performing loans in theremainder of the

 

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Company’s loanportfolio. Regulatory agencies, in the course of their regular examinations,review the allowance for losses and carrying value of non-performing assets. Noassurance can be given that these agencies might not require changes to theallowance for losses in the future.

 

***Non-Interest Income.******  ***Non-interest income is comprised of investment services income, account servicefees and charges, loan servicing fees, realized gains and losses on assetsavailable or held for sale, increases in the cash surrender value of bank ownedlife insurance (“BOLI”) and with the acquisition of BeneServ, insurancepremiums. Total non-interest income for the years ended June 30, 2007,2006, and 2005 was $12.3 million, $8.1 million and $3.5 million,respectively.

 

The increasein non-interest income of $4.2 million, or 51.2%, during fiscal 2007 comparedto fiscal 2006 was due primarily to a $1.1 million difference in the amount ofgain(loss) recognized on the sale of securities available-for-sale, a gain of$804 thousand recorded during the quarter ended December 31, 2006 on theunwinding of an interest rate corridor, increased investment services income of$687 thousand, $637 thousand for income from the insurance operations ofBeneServ, increased service charges and fees of $443 thousand, and $363thousand in gains on the sale of real estate. These items were partially offsetby a reduction in the fair value of interest rate swaps recognized in otherincome. The increase in service charges and fees was due primarily to growth inthe deposit base. The increase in investment services income was the result ofgrowth in the trust operations and the sales of retail investment productsthrough the branch network.

 

The increasein non-interest income of $4.6 million during fiscal 2006 compared to fiscal2005 was due primarily to investment services income of $2.6 million receivedfrom the acquisition of WIS and Chester Valley’s Trust division in the Merger.These were two new lines of business for the Company. Service charges and feesincreased by $2.6 million or 106.0% in fiscal 2006 due primarily to increaseddeposit fees associated with the growth in checking accounts from the Merger aswell as increases in the overdraft protection fees for which Chester Valley wasfurther along in implementation and thus had a higher volume of users. Gains onloans available for sale declined $240 thousand due primarily to lower loanvolumes resulting from the rising interest rate environment. This was largelyoffset by an increase in other income of $655 thousand, which resultedprimarily from income on the BOLI acquired from Chester Valley and an increasein the fair value of certain interest rate swaps recognized in other income. Asnoted previously, the Company implemented a de-leveraging strategy in which itincurred approximately $919 thousand in losses in the sale of investmentsecurities.

 

***Non-Interest Expense.******  ***The primary components of non-interest expense are compensation and employeebenefits, occupancy and equipment expenses, data processing costs, depositaccount services, professional fees and a variety of other expenses. For theyears ended June 30, 2007, 2006, and 2005, non-interest expense totaled$46.4 million, $44.4 million and $23.4 million, respectively.Non-interest expense increased $2.1 million, or 4.7%, from the year ended June 30,2006 to the comparable period ended June 30, 2007.

 

Salaries andemployee benefit expenses totaled $24.1 million, $19.4 million and$13.1 million, respectively, for the fiscal years ended June 30,2007, 2006, and 2005. For the year ended June 30, 2007, compensation costsincreased by $4.7 million partially as a result of operating our expandedbranch office network for a full 12 months after the acquisition of Chester Valleyon August 31, 2005 as well as new hirings in the lending and wealthmanagement areas during the year ended June 30, 2007 along with normalsalary increases. At June 30, 2007, the Company had 374 full-timeemployees compared to 312 at June 30, 2006. In addition, $519 thousand ofcompensation costs were recorded during fiscal 2007 due to severance paymentsand costs associated with the retirement of three Board members as well ascertain employee reductions. For the year ended June 30, 2006, compensationand benefit costs increased approximately $6.4 million or 48.8% dueprimarily to an increased number of employees as a result of the Merger.

 

Occupancy andequipment expenses were $8.1 million, $6.0 million, and$2.6 million for the fiscal years ended June 30, 2007, 2006, and2005, respectively. During fiscal year 2007, occupancy costs increasedpartially as a result of operating our expanded branch office network for 12full months after the acquisition of Chester Valley and also due to additionalrental costs incurred at the corporate headquarters building and rental expenseassociated with certain Bank buildings sold in a sale/leaseback transaction.During fiscal year 2006, these costs increased $3.4 million due to the additionof 13 branch locations from the Merger as well as the Company’s relocation to anew corporate headquarters and operations building in February 2006. Infiscal 2006, the approximate occupancy cost of $237 thousand for theheadquarters building was offset by a sale-leaseback of certain of the Bank’sbranches for which the cash proceeds were invested in loans or repaidborrowings. The Company’s rent expense increased from $2.0 million infiscal 2006 to $2.9 million in fiscal 2007 and is expected to remain relativelystable at $3.0 million in fiscal 2008 based on current leases.

 

Advertisingexpenses for fiscal 2007, 2006 and 2005 were $2.0 million, $1.5 million and$978 thousand, respectively. The increase in fiscal year 2007 was a resultof the Bank’s re-branding efforts during the year associated with the change inthe Bank’s name. The increase during fiscal 2006 was due primarily to directmail campaigns to the combined company’s customer base as the Companycommissioned a study of its customer base and found there were significant opportunitiesto cross-sell its existing products.

 

For the fiscalyears ended June 30, 2007, 2006, and 2005, amortization of intangibleassets was $2.1 million, $1.9 million and $57 thousand respectively. Thesignificant increase in fiscal 2006 was the result of the amortization of thecore deposit intangible recorded as a result of the Merger. The asset is beingamortized using an accelerated method over a twelve-year period. Amortizationof intangible assets is expected to be $2.1 million for the fiscal year ending June 30,2008.

 

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Dataprocessing expenses were $1.5 million, $1.2 million, and $960 thousand,respectively, for fiscal 2007, 2006 and 2005. The increase in each yearresulted from increased accounts and a rate increase in the Company’sthird-party data processing contract.

 

Professionalfees were $2.4 million, $2.3 million and $1.4 million for fiscal 2007,fiscal 2006 and fiscal 2005, respectively. In fiscal 2007, professional feeswere relatively stable as compared to fiscal 2006. The increase in the fiscal2006 resulted primarily from increased consulting costs related to theintegration of the Sarbanes-Oxley 404 compliance for the combined company, ananalysis of our customer base, and assistance with the development of thecombined company’s strategic plan and branding initiatives.

 

For the fiscalyears ended June 30, 2007, 2006, and 2005, other expenses, which includesmiscellaneous operating items, were $6.1 million, $11.9 million and$4.2 million, respectively. The significant increase in fiscal 2006 wasdue to an approximate $7.7 million write-off un-reconciled differences thatwere the result of the Company not completing reconciliations in a timely andconsistent manner nor investigating and resolving reconciling items identifiedin the reconciliation process. This write-off was partially offset by $670thousand in reductions to salaries and employee benefit expense and $487thousand in increased non-interest income as a result of the reconciliationreview.

 

***Income Tax Expense.****** ***For the fiscal years ended June 30, 2007, 2006, and 2005, income taxexpense amounted to $2.9 million, $3.0 million, and $3.1 million,respectively. The effective tax rates for fiscal 2007, 2006 and 2005 were 28.4%,31.1% and 31.2%, respectively. The decrease in the income tax expense and theeffective tax rate for the year ended June 30, 2007 was primarily relatedto an increase in the relative balance of income from tax-exempt securities asa proportion of income before income taxes.

 

** Liquidity and Commitments**

 

The Company’sprimary sources of funds are from deposits, principal amortization of loans,loan and securities prepayments and repayments, interest income from loans,mortgage-backed securities and other investments, and other funds provided fromoperations. While scheduled payments from the amortization of loans andmortgage-backed securities and maturing investment securities are relativelypredictable sources of funds, deposit flows and loan prepayments can be greatlyinfluenced by general interest rates, economic conditions and competition. Wealso maintain excess funds in short-term, interest-bearing assets that provideadditional liquidity. We have also utilized outside borrowings, primarily fromthe FHLB of Pittsburgh as an additional funding source.

 

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We use ourliquidity resources to fund existing and future loan commitments, to fundmaturing certificates of deposit and demand deposit withdrawals, to invest inother interest-earning assets, and to meet operating expenses. At June 30,2007, outstanding approved loan commitments were $27.4 million andcertificates of deposit maturing within the next twelve months amounted$272.4 million. Based upon historical experience, it is anticipated that asignificant portion of the maturing certificates of deposit will be reinvestedin the Bank. However, the Bank may not aggressively try to retain funds frommaturing certificates of deposits if it is a single relationship customerdriven by higher rates.

 

During thecurrent fiscal year, the Company utilized principal repayments on investmentsecurities and loans to reduce its use of borrowings from the FHLB. Outstandingborrowings from the FHLB have decreased to $189.8 million at June 30, 2007as compared to $282.6 million at June 30, 2006. Under terms of theborrowing agreement with the FHLB, the Bank pledges certain assets such asresidential mortgage loans and mortgage-backed securities as well as stock inthe FHLB as collateral for these advances. At June 30, 2007, the Bank had$464.4 million in additional borrowing capacity available from the FHLB.

 

Prior to theMerger, the Company had not in the past used any significant off-balance sheetfinancing arrangement for liquidity or other purposes. Our financial assetswith off-balance sheet risk are limited to obligations to fund loans toborrowers pursuant to existing loan commitments. Additionally, the Company hasnot had any transactions, arrangements or other relationships with anyunconsolidated, limited purpose entities that could affect its liquidity orcapital resources, nor do we currently intend to engage in trading commoditycontracts. With the Merger and the resulting increased size of the combinedcompanies, the Company may, from time to time, utilize certain derivativefinancial instruments to assist in its asset/liability strategies and has infact assumed the liability for certain interest rate derivatives entered intoby Chester Valley.

 

The Companyfully anticipates that it will continue to have sufficient funds andalternative funding sources to meet its current commitments.

 

The Company’scontractual obligations as of June 30, 2007 are as follows:

 
| ** **                            | ** ** | **Payments Due by Period:** | ** ** |
|---------------------------------------|------------|--------------------------------------------|------------|
| ** **                            | ** ** | **Total**                                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**       | ** ** |
| Federal Home Loan Debt |       | $                                          | 189,764    |   | $ | 17,677 |   | $ | 34,716 |   | $ | 51,728 |   | $ | 85,643 |   |
| Operating Leases                      |       | 29,170                                     |       | 2,791 |   | 4,926 |   | 4,059 |   | 17,394 |   |
| Total Obligations                     |       | $                                          | 218,934    |   | $ | 20,468 |   | $ | 39,642 |   | $ | 55,787 |   | $ | 103,037 |   |

 
| ** **                      | ** ** | **Total** | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** |
|---------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Lines of credit                 |       | $         | 164,833    |                            | $          | 35,478             |       | $                  | 6,608      |                             | $          | 9,869 |   | $ | 112,878 |   |
| Standby letters of credit       |       | 16,772    |       | 9,711                           |       | 7,061              |       | —             |       | —                           |       |
| Other commitments to make loans |       | 27,357    |       | 27,357                          |       | —             |       | —             |       | —                           |       |
| Construction loans              |       | 53,331    |       | 21,574                          |       | 31,757             |       | —             |       | —                           |       |
| Total                           |       | $         | 262,293    |                            | $          | 94,120             |       | $                  | 45,426     |                             | $          | 9,869 |   | $ | 112,878 |   |

 

** Impactof Inflation and Changing Prices**

 

The financialstatements, accompanying notes, and related financial data presented hereinhave been prepared in accordance with U.S. generally accepted accountingprinciples, which require the measurement of financial position and operatingresults in terms of historical dollars without considering the changes inpurchasing power of money over time due to inflation. The impact of inflationis reflected in the increased cost of our operations. Most of our assets andliabilities are monetary in nature; therefore, the impact of interest rates hasa greater impact on our performance than the effects of general levels ofinflation. Interest rates do not necessarily move in the same direction or tothe same extent as the prices of goods and services.

 

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**Item 7A.           Quantitativeand Qualitative Disclosure of Market Risk**

 

***Asset/Liability Management and Interest RateRisk***

 

The marketvalue of assets and liabilities, as well as future earnings, can be affected byinterest rate risk. Market values of certain financial assets have an inverserelationship to rates, i.e., when interest rates rise, the market value of manyof the Company’s assets decline and when rates fall, the market value of manyof the Company’s assets rise. The primary assets of the Company are loans toborrowers who often have the ability to prepay their loan. Therefore, in afalling rate environment, the increase in the market value of the Company’sassets is limited by this option for the borrower to prepay the loan.

 

The ability tomaximize net interest income is largely dependent upon the achievement of apositive interest spread that can be maintained during fluctuations inprevailing interest rates. Interest rate sensitivity gap (“gap”) is a measureof the difference between interest-earning assets and interest-bearingliabilities that either mature or re-price within a specified time period. Agap is considered positive when the amount of interest-earning assets exceedsthe amount of interest-bearing liabilities, and is considered negative when interest-bearingliabilities exceed interest-earning assets. Generally, during a period ofrising interest rates, a negative gap would adversely affect net interestincome, while a positive gap would result in an increase in net interestincome. During a period of falling interest rates, a negative gap wouldgenerally result in an increase in net interest income, and a positive gapwould result in a decrease in net interest income. This is usually the case;however, interest rates on differing financial instruments will not alwayschange at the same time or to the same extent.

 

The followinggap table shows the amount as of June 30, 2007 of the Bank’s assets andliabilities projected to mature or re-price within various time periods. Thistable includes certain assumptions management has made that affect the rate atwhich loans will prepay as well as the duration of core deposits. Changes ininterest rates may affect these assumptions, which would impact our gapposition.

 
| ** **                                                                                                                    | ** ** | **0 to 3**                 | ** ** | **3 to 12** | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **over 5** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|----------------------|------------|----------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                                    | ** ** | **months**                           | ** ** | **months**            | ** ** | **years**            | ** ** | **years**            | ** ** | **years**       | ** ** | **Total**  | ** ** |
| ** **                                                                                                                    |       | **(Dollars in thousands)** |       |
| Securities and interest-bearing deposits                                                                                      |       | $                                    | 101,675    |                  | $          | 58,249               |       | $                    | 58,980     |            | $          | 15,899     |       | $ | 93,622 |   | $ | 328,425 |   |
| Loans receivable                                                                                                              |       | 252,366                              |       | 159,469               |       | 315,875              |       | 94,500               |       | 232,877         |       | 1,055,087  |       |
| Total interest-earning assets                                                                                                 |       | 354,041                              |       | 217,718               |       | 374,855              |       | 110,399              |       | 326,499         |       | 1,383,512  |       |
| Certificates of deposit                                                                                                       |       | 93,765                               |       | 179,794               |       | 53,144               |       | 3,242                |       | 4,727           |       | 334,672    |       |
| Other interest-bearing deposits                                                                                               |       | 205,391                              |       | 115,770               |       | 202,456              |       | 5,784                |       | 80,989          |       | 610,390    |       |
| Borrowings                                                                                                                    |       | 102,873                              |       | 30,114                |       | 64,229               |       | 10,799               |       | 27,523          |       | 235,538    |       |
| Total interest-bearing liabilities                                                                                            |       | 402,029                              |       | 325,678               |       | 319,829              |       | 19,825               |       | 113,239         |       | 1,180,600  |       |
| Excess (deficiency) of  interest-earning assets over interest-bearing liabilities                                        |       | $                                    | (47,988    | )                     | $          | (107,960             | )          | $                    | 55,026     |            | $          | 90,574     |       | $ | 213,260 |   | $ | 202,912 |   |
| Cumulative excess (deficiency) of  interest-earning assets over interest-bearing liabilities                             |       | $                                    | (47,988    | )                     | $          | (155,948             | )          | $                    | (100,922   | )               | $          | (10,348    | )          | $ | 202,912 |   | $ | 405,824 |   |
| Cumulative excess (deficiency) of  interest-earning assets to Interest-bearing liabilities as a Percent  of total assets |       | (3.1                                 | )%         | (10.1                 | )%         | (6.5                 | )%         | (0.7                 | )%         | 13.1            | %          | 26.2       | %          |
| Ratio of interest-earning assets to  interest-bearing liabilities                                                             |       | 88.1                                 | %          | 66.9                  | %          | 117.2                | %          | 556.9                | %          | 288.3           | %          | 117.2      | %          |
| Cumulative ratio of interest-Earning assets  to assets to Interest-bearing liabilities                                   |       | 88.1                                 | %          | 78.6                  | %          | 90.4                 | %          | 99.0                 | %          | 117.2           | %          |       |       |

 

At June 30,2007, the ratio of the cumulative interest-earning assets maturing orre-pricing in one-year or less to interest-bearing liabilities maturing orre-pricing in one-year or less was 78.6%, which results in a cumulativeone-year gap to total assets ratio of negative 10.1%, indicating that the Bank’snet interest income could decline depending upon the degree to which interestrates change and the change in the relationship between interest rates used tore-price assets and interest rates used in the re-pricing of liabilities.

 

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The Companyhas adopted asset/liability management policies designed to quantify theinterest rate risk caused by mismatches in the maturities and re-pricing of ourinterest-earning assets and interest-bearing liabilities. These interest raterisk and asset/liability management actions are taken under the guidance of theFinance Committee. The Finance Committee’s purpose is to communicate,coordinate and control asset/liability management consistent with our businessplan and Board approved policies. The objective of the Finance Committee is tomanage asset and funding sources to produce results that are consistent withliquidity, capital adequacy, growth, risk and profitability goals. The FinanceCommittee meets at least quarterly and monitors the volume and mix of assetsand funding sources taking into account the relative costs and spreads, theinterest rate sensitivity gap and liquidity needs. The Finance Committee alsoreviews economic conditions and interest rate projections, current andprojected liquidity needs and capital positions, anticipated changes in the mixof assets and liabilities, and interest rate exposure limits versus currentprojections pursuant to gap analysis and interest income simulations. At eachmeeting, the Finance Committee recommends changes in strategy as appropriate.Interest rate risk issues are also discussed by the Board of Directors on aregular basis. Management meets periodically to monitor progress in achievingasset/liability targets approved by the Board, particularly the type and rateon asset generation and sources of funding.

 

In order tomanage the Company’s assets and liabilities and improve our interest rate riskposition, emphasis has been placed on the origination of assets with shortermaturities or adjustable rates such as commercial and multi-family real estateloans, construction loans, home equity loans and to a lesser extent commercialbusiness loans. At the same time, other actions include attempts to increaseour core deposits and the use of FHLB advances as additional sources of funds.Additionally, longer term fixed rate single-family residential mortgage loansare originated and held for sale.

 

The FinanceCommittee regularly reviews interest rate risk by, among other things,examining the impact of alternative interest rate environments on net interestincome and net portfolio value (“NPV”), and the change in NPV. NPV is thedifference between the market value of assets and the market value ofliabilities and off-balance sheet items under various interest rate scenarios.Sensitivity is the difference (measured in basis points) between the NPV toassets ratio at market rate and the NPV to assets ratio determined under eachrate scenario. The Finance Committee monitors both the NPV and sensitivityaccording to guidelines established by the OTS in Thrift Bulletin 13A “Managementof Interest Rate Risk, Investment Securities and Derivative Activities,” andboard approved limitations.

 

Presentedbelow, as of June 30, 2007 and 2006, is an analysis of the interest raterisk position as measured by NPV and sensitivity based upon various ratescenarios. These values were obtained from an internal model produced by theBank as required by OTS regulation as total assets now exceed $1.0 billion. Dueto the level of interest rates, no values are calculated for hypothetical ratescenarios of down 300 basis points at June 30, 2007. It only provides anestimate of economic value at a point in time and the economic value of thesame portfolio under the above referenced interest rate scenarios.

 

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**Estimated change in NPV and Sensitivity  At June 30, 2007**

 
| ** **                            | ** ** | **Net Portfolio Value** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Amount of  Change**        | ** ** | **Percent of  change** | ** ** | **To  Assets** | ** ** |
| ** **                            | ** ** | **(in thousands)**           | ** ** | ** ** | ** ** |
| Hypothetical change in interest rates |       |                              |       |   |   |   |   |
| up 300 basis points                   |       | $                                 | (53,648    | ) | (35.1 | )% | 7.26 | % |
| up 200 basis points                   |       | (35,035                           | )          | (22.9 | ) | 8.62 |   |
| up 100 basis points                   |       | (16,798                           | )          | (11.0 | ) | 9.96 |   |
| no change—base case              |       | —                            |       | — |   | 11.19 |   |
| down 100 basis points                 |       | 13,757                            |       | 9.0 |   | 12.20 |   |
| down 200 basis points                 |       | 21,829                            |       | 14.3 |   | 12.79 |   |
|                                       |            |                                   |            |  |  |  |  |  |  |

 

**Estimated change in NPV and Sensitivity  At June 30, 2006**

 
| ** **                            | ** ** | **Net Portfolio Value** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Amount of  Change**        | ** ** | **Percent of  change** | ** ** | **To  Assets** | ** ** |
| ** **                            | ** ** | **(in thousands)**           | ** ** | ** ** | ** ** |
| Hypothetical change in interest rates |       |                              |       |   |   |   |   |
| up 300 basis points                   |       | $                                 | (56,211    | ) | (28.4 | )% | 9.20 | % |
| up 200 basis points                   |       | (33,116                           | )          | (16.7 | ) | 10.70 |   |
| up 100 basis points                   |       | (14,395                           | )          | (7.3 | ) | 11.92 |   |
| no change—base case              |       | —                            |       | — |   | 12.85 |   |
| down 100 basis points                 |       | 8,812                             |       | 4.5 |   | 13.42 |   |
| down 200 basis points                 |       | 1,726                             |       | 0.9 |   | 12.96 |   |
| down 300 basis points                 |       | (15,299                           | )          | (7.7 | ) | 11.86 |   |
|                                       |            |                                   |            |  |  |  |  |  |

 

The Bank’ssensitivity remained relatively stable for fiscal 2007 as compared to fiscal2006 due primarily to interest sensitive assets acquired in the Merger, whichwas partially offset, by the intangible assets recorded with the acquisition.

 

NPV is moresensitive and may be more negatively impacted by rising interest rates than bydeclining rates. This occurs primarily because as rates rise, the market valueof long-term fixed rate assets, like fixed rate mortgage loans, declines due toboth the rate increase and slowing prepayments. When rates decline, theseassets do not experience similar appreciation in value. This is due to thedecrease in the duration of the asset resulting from the increase in prepayments.

 

***Recent Accounting Pronouncements***

 

*FASB Statement No, 159, The Fair Value Option for Financial Assets andFinancial Liabilities*

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities” (“SFAS 159”). This Statementpermits entities to choose to measure many financial instruments and certainother items at fair value. SFAS 159 provides entities with the opportunity toreduce volatility in reported earnings caused by measuring related assets andliabilities differently. SFAS 159 is effective as of the beginning of anentity’s first fiscal year that begins after November 15, 2007. Earlyadoption is permitted as of the beginning of a fiscal year that begins on orbefore November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, “Fair Value

 

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Measurements.”The Company did not elect early adoption and is currently assessing theimplications of this Statement on its financial statements.

 

*FASB Statement No, 157, Fair Value Measurements*

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 establishes a framework for measuring fair value in accordance with U.S.generally accepted accounting principles, and enhances disclosures about fairvalue measurements. SFAS 157 applies when other accounting pronouncementsrequire fair value measurements; it does not require new fair valuemeasurements. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and for interim periods withinthose years. The Company is currently assessing the implications of thisStatement on its financial statements.

 

*StaffAccounting Bulletin No. 108, Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatements*

 

In September 2006,the Securities and Exchange Commission (“SEC”) published Staff AccountingBulletin No. 108, “Considering the Effects of Prior Year MisstatementsWhen Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 expresses the SEC staff’s views regarding the process of quantifyingfinancial statement misstatements. The SEC staff suggests that registrantselecting not to restate prior periods should reflect the effects of applyingthe guidance in this interpretation in the annual financial statements coveringthe first fiscal year ending after November 15, 2006. This interpretationdid not have a material impact on the Company’s consolidated financialstatements.

 

*FASB Interpretation 48, Accounting for Uncertainty in Income TaxPositions*

 

Effective July 1, 2007the Company adopted Financial Interpretation No. 48, “Accounting forUncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN48”). FIN 48 provides guidance on financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.According to FIN 48, a tax position is recognized if it ismore-likely-than-not that the tax position will be sustained upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. If the tax position meets themore-likely-than-not recognition threshold, the position is measured todetermine the amount of benefit to recognize and should be measured at thelargest amount of benefit that is greater than 50 percent likely of beingrealized upon ultimate settlement. FIN 48 also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.

 

As of July 1,2007, the Company had no material unrecognized tax benefits, accrued interestor penalties.  Penalties are recorded in non-interest expense in the yearthey are assessed and are treated as a non-deductible expense for tax purposes.Interest is recorded in non-interest expense in the year it is assessed and istreated as a deductible expense for tax purposes. As of July 1, 2007, taxyears 2004 through 2007 remain subject to Federal examination as well asexamination by state taxing jurisdictions.

 

*FASBStatement No, 155, Accounting for Certain Hybrid Financial Instruments*

 

In February 2006,the FASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments* . Under this new statement, an entitymay re-measure at fair value a hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation from the host, ifthe holder irrevocably elects to account for the whole instrument on a fairvalue basis. Subsequent changes in the fair value of the instrument would berecognized in earnings. This statement is effective for all financialinstruments that the Company acquires or issues after July 1, 2007. Theadoption of this statement will not have a material impact on the Company’sfinancial position or results of operations.

 

*EITF 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects ofEndorsement Split-Dollar Life Insurance Arrangements*

 

In June 2006,the Emerging Issues Task Force reached a consensus that, for endorsementsplit-dollar life insurance arrangements, an employer should recognize theliability for future benefits based on the substantive agreement with theemployee, since the postretirement benefit obligation is not effectivelysettled. An entity is permitted to apply the consensus by retrospective applicationto all prior periods in accordance with FASB Statement No. 154, includingits required disclosures. The consensus is effective for fiscal years beginningafter

 

50

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December 15,2007, with early adoption permitted as of the beginning of an entity’s fiscalyear. The Bank has recorded a liability of $246 thousand within otherliabilities on its consolidated statements of financial condition to accountfor the settlement of the future benefit obligation.

 

**Selected Quarterly Financial Data**

 

The followingtable presents selected quarterly operating data for the fiscal years ended June 30,2007 and 2006. The earnings per share amounts for periods prior to March 31,2007 have been adjusted to give retroactive effect to the 5% stock dividend. Inaddition, as a result of the matters discussed in Item 9A. “Controls andProcedures” in this Form 10-K/A, the amounts reported for each quarter inthe fiscal years ended June 30, 2007 and June 30, 2006 have beenrevised from previously reported amounts.

 
| ** **                         | ** ** | **For the quarter ended (as restated)**                | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **06/30/07**                                                                    | ** ** | **03/31/07** | ** ** | **12/31/06** | ** ** | **09/30/06** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest income              |       | $                                                                               | 21,654     |   | $ | 21,122 |   | $ | 21,384 |   | $ | 21,890 |   |
| Total interest expense             |       | 10,734                                                                          |       | 10,381 |   | 10,396 |   | 9,551 |   |
| Net interest income                |       | 10,920                                                                          |       | 10,741 |   | 10,988 |   | 12,339 |   |
| Provision (recovery) for loan loss |       | 753                                                                             |       | — |   | — |   | (100 | ) |
| Total non-interest income          |       | 3,727                                                                           |       | 2,898 |   | 3,332 |   | 2,310 |   |
| Total non-interest expense         |       | 13,173                                                                          |       | 11,433 |   | 10,887 |   | 10,956 |   |
| Income tax (benefit) expense       |       | (43                                                                             | )          | 704 |   | 1,025 |   | 1,200 |   |
| Net income                         |       | 764                                                                             |       | 1,502 |   | 2,408 |   | 2,593 |   |
| Earnings per share                 |       |                                                                            |       |   |   |   |   |   |   |
| Basic                              |       | $                                                                               | 0.05       |   | $ | 0.10 |   | $ | 0.16 |   | $ | 0.17 |   |
| Diluted                            |       | $                                                                               | 0.05       |   | $ | 0.10 |   | $ | 0.16 |   | $ | 0.17 |   |

 
| ** **                   | ** ** | **For the quarter ended (as restated)**                | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **06/30/06**                                                                    | ** ** | **03/31/06** | ** ** | **12/31/05** | ** ** | **09/30/05** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest income        |       | $                                                                               | 22,561     |   | $ | 21,792 |   | $ | 21,605 |   | $ | 15,572 |   |
| Total interest expense       |       | 9,329                                                                           |       | 8,581 |   | 7,940 |   | 6,355 |   |
| Net interest income          |       | 13,232                                                                          |       | 13,211 |   | 13,665 |   | 9,217 |   |
| Provision for loan loss      |       | 2,660                                                                           |       | — |   | 207 |   | 513 |   |
| Total non-interest income    |       | 3,031                                                                           |       | 2,269 |   | 2,372 |   | 442 |   |
| Total non-interest expense   |       | 10,787                                                                          |       | 9,503 |   | 12,336 |   | 11,756 |   |
| Income tax expense (benefit) |       | 813                                                                             |       | 1,924 |   | 1,260 |   | (987 | ) |
| Net income (loss)            |       | 2,003                                                                           |       | 4,053 |   | 2,234 |   | (1,623 | ) |
| Earnings (loss) per share    |       |                                                                            |       |   |   |   |   |   |   |
| Basic                        |       | $                                                                               | 0.13       |   | $ | 0.27 |   | $ | 0.15 |   | $ | (0.15 | ) |
| Diluted                      |       | $                                                                               | 0.13       |   | $ | 0.27 |   | $ | 0.15 |   | $ | (0.14 | ) |

 

51

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**Item 8.****                                   FinancialStatements and Supplementary Data**

 

**Report of Independent Registered PublicAccounting Firm**

 

The Board ofDirectors and StockholdersWillow Financial Bancorp, Inc.:

 

We have audited the accompanying consolidated statements of financialcondition of Willow Financial Bancorp, Inc. and subsidiary (the Company)as of June 30, 2007 and 2006, and the related consolidated statements ofincome, changes in stockholders’ equity and comprehensive income, and cashflows for each of the years in the three-year period ended June 30, 2007.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of the Companyas of June 30, 2007 and 2006, and the results of their operations andtheir cash flows for each of the years in the three-year period ended June 30,2007, in conformity with U.S. generally accepted accounting principles.

 

As discussed in note 2, the Company has restated its consolidatedfinancials statements as of June 30, 2007 and 2006, and for the two yearsthen ended.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of June 30, 2007, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated September 28, 2007, except for the third andfourth paragraphs of Management Report on Effectiveness of Internal Controlover Financial Reporting (As Restated), which are as of May 2, 2008,expressed an adverse opinion on the effectiveness of the Company’s internalcontrol over financial reporting.

 
| /s/ KPMG LLP                                             |   |
|----------------------------------------------------------|--------|
| Philadelphia, Pennsylvania                               |   |
| September 28, 2007, except as to                    |   |
| notes 2 and 26 as to which the date is  May 2, 2008 |   |

 

52

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We have audited Willow Financial Bancorp, Inc. and subsidiary’s(the Company) internal control over financial reporting as of June 30,2007, based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying *Management Report onEffectiveness on Internal Control over Financial Reporting (As Restated)*in Item 9Ab. Our responsibility is to express an opinion on the Company’sinternal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audit also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controlsmay become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

A material weakness is a deficiency, or acombination of deficiencies, in internal control over financial reporting, suchthat there is a reasonable possibility that a material misstatement of thecompany’s annual or interim financial statements will not be prevented ordetected on a timely basis.  Materialweaknesses have been identified and included in *ManagementReport on Internal Controls Over Financial Reporting (as restated*)in the areas of review and analysis of financial statement accountreconciliations, application of accounting resources to the evaluation ofsignificant financial reporting matters, and documentation and review ofjournal entries.

 

We also have audited, in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theconsolidated statements of financial condition as of June 30, 2007 and2006 and the related consolidated statements of income, stockholders’ equityand comprehensive income, and cash flows for each of the years in thethree-year period ended June 30, 2007 of the Company. These materialweaknesses were considered in determining the nature, timing, and extent ofaudit tests applied in our audit of the June 30, 2007 consolidatedfinancial statements, and this report does not affect our report dated September 28,2007, except for note 2 and 26 to the consolidated financial statements, as towhich the date is May 2, 2008, which expressed an unqualified opinion onthose consolidated financial statements.

 

In our opinion, because of the effect of the aforementioned materialweaknesses on the achievement of the objectives of the control criteria, the Companyhas not maintained effective internal control over financial reporting as of June 30,2007, based on criteria established in *InternalControl—Integrated Framework* issued by COSO.

 

Management and we previously concluded that the Company did not maintaineffective internal control over financial reporting as of June 30,2007.   In connection with therestatement of the Company’s consolidated financial statements as described innote 2 to the consolidated financial statements, management and we determinedthat an additional material weakness in internal control over financialreporting  existed as of June 30,2007.   Accordingly, management and wehave restated our respective reports in internal control over financialreporting to include these modifications.

 
| /s/ KPMG LLP                                                         |   |
|----------------------------------------------------------------------|--------|
| Philadelphia, Pennsylvania                                           |   |
| September 28, 2007, except for the  third and fourth paragraphs |   |
| of Management Report of Effectiveness of  Internal Control over      |   |
| Financial Reporting (As Restated), as to  which the date is May      |
| 2, 2008                                                              |

 

53

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**Willow Financial Bancorp, Inc.Consolidated Statements of Financial Condition**

 
| ** **                                                                                                                              | ** ** | **At  June 30, 2007 (As  restated)**                     | ** ** | **At  June 30, 2006 (As  restated)** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **(Dollars in thousands,  except share data)** | ** ** |
| Assets:                                                                                                                                 |       |                                                               |       |                                           |       |
| Cash and cash equivalents:                                                                                                              |       |                                                               |       |                                           |       |
| Cash on hand and non-interest-earning  deposits                                                                                         |       | $                                                                  | 21,124     |                                           | $          | 27,978 |   |
| Interest-bearing deposits                                                                                                               |       | 39,153                                                             |       | 2,977                                          |       |
| Total cash and cash equivalents                                                                                                         |       | 60,277                                                             |       | 30,955                                         |       |
| Investment securities:                                                                                                                  |       |                                                               |       |                                           |       |
| Trading                                                                                                                                 |       | 1,176                                                              |       | 902                                            |       |
| Available for sale (amortized cost of  $193,232 and $203,221, respectively)                                                             |       | 188,339                                                            |       | 196,925                                        |       |
| Held to maturity (fair value of $86,488 and  $102,087, respectively)                                                                    |       | 88,363                                                             |       | 105,561                                        |       |
| Federal Home Loan Bank Stock                                                                                                            |       | 11,394                                                             |       | 16,856                                         |       |
| Loans (net of allowance for loan losses of  $12,210 and $16,737, respectively)                                                          |       | 1,035,293                                                          |       | 1,063,601                                      |       |
| Loans held for sale                                                                                                                     |       | 8,075                                                              |       | 2,635                                          |       |
| Accrued interest receivable                                                                                                             |       | 6,654                                                              |       | 6,647                                          |       |
| Property and equipment, net                                                                                                             |       | 11,307                                                             |       | 9,987                                          |       |
| Bank owned life insurance                                                                                                               |       | 11,930                                                             |       | 11,483                                         |       |
| Real estate owned                                                                                                                       |       | —                                                             |       | 51                                             |       |
| Other intangible assets, net                                                                                                            |       | 14,345                                                             |       | 12,975                                         |       |
| Goodwill                                                                                                                                |       | 95,597                                                             |       | 94,569                                         |       |
| Other assets                                                                                                                            |       | 18,546                                                             |       | 17,587                                         |       |
| Total assets                                                                                                                            |       | $                                                                  | 1,551,296  |                                           | $          | 1,570,734 |   |
| Liabilities and Stockholders’ Equity:                                                                                              |       |                                                               |       |                                           |       |
| Interest-bearing deposits                                                                                                               |       | $                                                                  | 951,629    |                                           | $          | 893,253 |   |
| Non-interest-bearing deposits                                                                                                           |       | 141,101                                                            |       | 123,247                                        |       |
| Securities sold under agreements to  repurchase                                                                                         |       | 20,000                                                             |       | 20,000                                         |       |
| Federal Home Loan Bank advances                                                                                                         |       | 189,764                                                            |       | 282,555                                        |       |
| Advance payments from borrowers for taxes                                                                                               |       | 4,254                                                              |       | 4,776                                          |       |
| Trust preferred securities                                                                                                              |       | 25,774                                                             |       | 36,198                                         |       |
| Accrued interest payable                                                                                                                |       | 2,303                                                              |       | 2,285                                          |       |
| Other liabilities                                                                                                                       |       | 17,038                                                             |       | 9,796                                          |       |
| Total liabilities                                                                                                                       |       | 1,351,863                                                          |       | 1,372,110                                      |       |
| Commitments and contingencies                                                                                                           |       | —                                                             |       | —                                         |       |
| Stockholders’ equity:                                                                                                              |       |                                                               |       |                                           |       |
| Common stock, $0.01 par value; (40,000,000  authorized; 17,487,770 and 16,584,870 issued at June 30, 2007 and 2006,  respectively) |       | 175                                                                |       | 166                                            |       |
| Additional paid-in capital                                                                                                              |       | 190,776                                                            |       | 178,886                                        |       |
| Retained earnings—substantially restricted                                                                                         |       | 46,030                                                             |       | 55,630                                         |       |
| Accumulated other comprehensive loss                                                                                                    |       | (3,180                                                             | )          | (3,317                                         | )          |
| Obligation of deferred compensation plan                                                                                                |       | 1,277                                                              |       | 1,258                                          |       |
| Treasury stock at cost, 1,920,025 and  1,665,443 shares at June 30, 2007 and 2006, respectively                               |       | (31,046                                                            | )          | (28,251                                        | )          |
| Unallocated common stock held by:                                                                                                       |       |                                                               |       |                                           |       |
| Employee Stock Ownership Plan (ESOP)                                                                                                    |       | (2,958                                                             | )          | (3,287                                         | )          |
| Recognition and Retention Plan Trust (RRP)                                                                                              |       | (1,641                                                             | )          | (2,461                                         | )          |
| Total stockholders’ equity                                                                                                         |       | 199,433                                                            |       | 198,624                                        |       |
| Total liabilities and stockholders’ equity                                                                                         |       | $                                                                  | 1,551,296  |                                           | $          | 1,570,734 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements

 

54

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**Willow Financial Bancorp, Inc.Consolidated Statements of Income**

 
| ** **                                                                             | ** ** | **For the year ended June 30,**                        | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **(As restated)**                                                          | ** ** | **(As restated)** | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest and dividend income:                                           |       |                                                                            |       |   |   |   |   |
| Loans                                                                                  |       | $                                                                               | 69,315     |   | $ | 65,472 |   | $ | 34,536 |   |
| Investment securities and interest-bearing deposits                |       | 16,735                                                                          |       | 16,058 |   | 15,143 |   |
| Total interest income                                                        |       | 86,050                                                                          |       | 81,530 |   | 49,679 |   |
| Interest expense:                                                                 |       |                                                                            |       |   |   |   |   |
| Deposits                                                                               |       | 28,698                                                                          |       | 18,476 |   | 9,931 |   |
| Securities sold under agreements to repurchase                |       | 1,135                                                                           |       | 228 |   | — |   |
| Borrowings                                                                             |       | 11,229                                                                          |       | 13,501 |   | 8,818 |   |
| Total interest expense                                                       |       | 41,062                                                                          |       | 32,205 |   | 18,749 |   |
| Net interest income                                                          |       | 44,988                                                                          |       | 49,325 |   | 30,930 |   |
| Provision for loan losses                                               |       | 653                                                                             |       | 3,380 |   | 1,232 |   |
| Net interest income after provision for loan losses |       | 44,335                                                                          |       | 45,945 |   | 29,698 |   |
| Non-interest income:                                                              |       |                                                                            |       |   |   |   |   |
| Investment services income, net                                         |       | 3,321                                                                           |       | 2,634 |   | — |   |
| Income from insurance operations                                        |       | 637                                                                             |       | — |   | — |   |
| Service charges and fees                                                |       | 5,423                                                                           |       | 4,980 |   | 2,418 |   |
| Realized gain (loss) on sale of:                              |       |                                                                            |       |   |   |   |   |
| Loans held for sale                                                     |       | 616                                                                             |       | 357 |   | 597 |   |
| Investment securities available for sale                           |       | 228                                                                             |       | (919 | ) | 73 |   |
| Real estate                                                                       |       | 380                                                                             |       | 17 |   | — |   |
| Gain on termination of interest rate  corridor                                         |       | 804                                                                             |       | — |   | — |   |
| Other income                                                                           |       | 858                                                                             |       | 1,045 |   | 389 |   |
| Total non-interest income                                                              |       | 12,267                                                                          |       | 8,114 |   | 3,477 |   |
| Non-interest expense:                                                                  |       |                                                                            |       |   |   |   |   |
| Salaries and employee benefits                                                         |       | 24,097                                                                          |       | 19,436 |   | 13,062 |   |
| Occupancy and equipment                                                                |       | 8,059                                                                           |       | 6,011 |   | 2,646 |   |
| Data processing                                                                        |       | 1,504                                                                           |       | 1,220 |   | 960 |   |
| Advertising                                                                            |       | 2,041                                                                           |       | 1,504 |   | 978 |   |
| Deposit insurance premiums                                                             |       | 120                                                                             |       | 124 |   | 85 |   |
| Amortization of intangible assets                                                      |       | 2,131                                                                           |       | 1,928 |   | 57 |   |
| Professional fees                                                                      |       | 2,444                                                                           |       | 2,303 |   | 1,441 |   |
| Other expense                                                                          |       | 6,053                                                                           |       | 11,856 |   | 4,168 |   |
| Total non-interest expense                                                             |       | 46,449                                                                          |       | 44,382 |   | 23,397 |   |
| Income before income taxes                                                             |       | 10,153                                                                          |       | 9,677 |   | 9,778 |   |
| Income tax expense                                                                     |       | 2,886                                                                           |       | 3,010 |   | 3,052 |   |
| Net Income                                                                             |       | $                                                                               | 7,267      |   | $ | 6,667 |   | $ | 6,726 |   |
| Earnings per share:                                                                    |       |                                                                            |       |   |   |   |   |
| Basic                                                                                  |       | $                                                                               | 0.48       |   | $ | 0.47 |   | $ | 0.70 |   |
| Diluted                                                                                |       | $                                                                               | 0.47       |   | $ | 0.46 |   | $ | 0.67 |   |

 

See accompanying Notes to Consolidated FinancialStatements

 

55

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**Willow Financial Bancorp, Inc.Consolidated Statements of Changes in Stockholders’ Equity and ComprehensiveIncome**

 
| ** **                                                | ** ** | **Common  stock**                                                               | ** ** | **Additional  paid in  capital** | ** ** | **Retained  earnings** | ** ** | **Accumulated**

**other**

**comprehensive  income (loss)** | ** ** | **Obligation of  deferred  compensation  plan** | ** ** | **Treasury  stock** | ** ** | **Common  stock  acquired by  benefit plans** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------|------------|---------------------------------------------------------|------------|-----------|------------|
| ** **                                                | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Balance at  June 30, 2004                            |       | $                                                                               | 114        |                                  | $          | 84,915                 |       | $                                                                 | 53,151     |                                                 | $          | (2,463              | )          | $                                                       | 525        |      | $          | (24,926 | ) | $ | (7,905 | ) | $ | 103,411 |   |
| Net income                                                |       | —                                                                          |       | —                                |       | 6,726                  |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 6,726     |       |
| Other  comprehensive income                               |       | —                                                                          |       | —                                |       | —                 |       | 1,110                                                             |       | —                                               |       | —              |       | —                                                  |       | 1,110     |       |
| Exercise of Stock  Options                                |       | 1                                                                               |       | 284                                   |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 285       |       |
| ESOP shares committed  to be released                     |       | —                                                                          |       | 566                                   |       | —                 |       | —                                                            |       | —                                               |       | —              |       | 462                                                     |       | 1,028     |       |
| Obligation of  deferred compensation plan                 |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | 551                                                  |       | —              |       | —                                                  |       | 551       |       |
| Amortization of  RRP shares                               |       | —                                                                          |       | 9                                     |       | —                 |       | —                                                            |       | —                                               |       | —              |       | 588                                                     |       | 597       |       |
| Treasury stock  acquired (155,577 shares at cost)    |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | —                                               |       | (3,146              | )          | —                                                  |       | (3,146    | )          |
| Tax benefit  related to employee stock benefit plans      |       | —                                                                          |       | 312                                   |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 312       |       |
| Cash dividends  paid—($0.44 per share)     |       | —                                                                          |       | —                                |       | (4,196                 | )          | —                                                            |       | —                                               |       | —              |       | —                                                  |       | (4,196    | )          |
| Balance at  June 30, 2005                            |       | $                                                                               | 115        |                                  | $          | 86,086                 |       | $                                                                 | 55,681     |                                                 | $          | (1,353              | )          | $                                                       | 1,076      |      | $          | (28,072 | ) | $ | (6,855 | ) | $ | 106,678 |   |
| Net income (as  restated)                                 |       | —                                                                          |       | —                                |       | 6,667                  |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 6,667     |       |
| Other  comprehensive loss                                 |       | —                                                                          |       | —                                |       | —                 |       | (1,964                                                            | )          | —                                               |       | —              |       | —                                                  |       | (1,964    | )          |
| Common stock  issued in acquisition                       |       | 50                                                                              |       | 90,966                                |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 91,016    |       |
| Exercise of Stock  Options                                |       | 1                                                                               |       | 1,274                                 |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 1,275     |       |
| Stock based  compensation                                 |       | —                                                                          |       | 306                                   |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 306       |       |
| ESOP shares  committed to be released                     |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | —                                               |       | —              |       | 462                                                     |       | 462       |       |
| Obligation of  deferred compensation plan                 |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | 182                                                  |       | —              |       | —                                                  |       | 182       |       |
| Amortization of  RRP shares                               |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | —                                               |       | —              |       | 645                                                     |       | 645       |       |
| Treasury stock  acquired (15,132 shares at cost)     |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | —                                               |       | (179                | )          | —                                                  |       | (179      | )          |
| Tax benefit  related to employee stock benefit plans |       | —                                                                          |       | 254                                   |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 254       |       |
| Cash dividends  paid—($0.46 per share)     |       | —                                                                          |       | —                                |       | (6,718                 | )          |                                                              |       | —                                               |       | —              |       | —                                                  |       | (6,718    | )          |
| Balance at  June 30, 2006, (as restated)             |       | $                                                                               | 166        |                                  | $          | 178,886                |       | $                                                                 | 55,630     |                                                 | $          | (3,317              | )          | $                                                       | 1,258      |      | $          | (28,251 | ) | $ | (5,748 | ) | $ | 198,624 |   |
| Net income (as  restated)                                 |       | —                                                                          |       | —                                |       | 7,267                  |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 7,267     |       |
| Other  comprehensive income                               |       | —                                                                          |       | —                                |       | —                 |       | 137                                                               |       | —                                               |       | —              |       | —                                                  |       | 137       |       |
| Stock dividend                                            |       | 8                                                                               |       | 9,929                                 |       | (9,937                 | )          | —                                                            |       | —                                               |       | —              |       | —                                                  |       | —    |       |
| Cash issued in  lieu of fractional shares                 |       | —                                                                          |       | —                                |       | (10                    | )          | —                                                            |       | —                                               |       | —              |       | —                                                  |       | (10       | )          |
| Exercise of Stock  Options                                |       | 1                                                                               |       | 1,391                                 |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 1,392     |       |
| Stock based  compensation                                 |       | —                                                                          |       | 756                                   |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 756       |       |
| ESOP shares  committed to be released                     |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | —                                               |       | —              |       | 329                                                     |       | 329       |       |
| Obligation of  deferred compensation plan                 |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | 19                                                   |       | —              |       | —                                                  |       | 19        |       |
| Amortization of  RRP shares                               |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | —                                               |       | —              |       | 820                                                     |       | 820       |       |
| Restricted shares  issued from Treasury                   |       | —                                                                          |       | (447                                  | )          | —                 |       | —                                                            |       | —                                               |       | 447                 |       | —                                                  |       | —    |       |
| Treasury stock  acquired (269,200 shares at cost)    |       | —                                                                          |       | —                                |       | —                 |       | —                                                            |       | —                                               |       | (3,242              | )          | —                                                  |       | (3,242    | )          |
| Tax benefit  related to employee stock benefit plans      |       | —                                                                          |       | 261                                   |       | —                 |       | —                                                            |       | —                                               |       | —              |       | —                                                  |       | 261       |       |
| Cash dividends  paid—($0.46 per share)     |       | —                                                                          |       | —                                |       | (6,920                 | )          | —                                                            |       | —                                               |       | —              |       | —                                                  |       | (6,920    | )          |
| Balance at  June 30, 2007, (as restated)             |       | $                                                                               | 175        |                                  | $          | 190,776                |       | $                                                                 | 46,030     |                                                 | $          | (3,180              | )          | $                                                       | 1,277      |      | $          | (31,046 | ) | $ | (4,599 | ) | $ | 199,433 |   |

 

56

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| ** **                                                                                            | ** ** | **For the year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                            | ** ** | **(As  restated)**                                       | ** ** | **(As  restated)** | ** ** | ** ** | ** ** |
| Net unrealized gains (losses) on securities  available for sale arising during the period, net of tax |       | $                                                        | 1,051      |   | $ | (2,937 | ) | $ | 1,061 |   |
| Reclassification adjustments for (gains)  losses included in net income, net of tax              |       | (148                                                     | )          | 597 |   | 49 |   |
| Gain on termination of interest rate  corridor, net of tax                                            |       | (523                                                     | )          | — |   | — |   |
| Net unrealized (loss) gain on cash flow  hedge, net of tax                                            |       | (243                                                     | )          | 376 |   | — |   |
| Other comprehensive income (loss)                                                                     |       | 137                                                      |       | (1,964 | ) | 1,110 |   |
| Net income                                                                                            |       | 7,267                                                    |       | 6,667 |   | 6,726 |   |
| Comprehensive income                                                                                  |       | $                                                        | 7,404      |   | $ | 4,703 |   | $ | 7,836 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

57

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**Willow Financial Bancorp, Inc.Consolidated Statements of Cash Flows**

 
| ** **                                                                              | ** ** | **For the year ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(As restated)**                                   | ** ** | **(As restated)** | ** ** | ** ** | ** ** |
| ** **                                                                              | ** ** | **(Dollars in thousands)**                     | ** ** |
| Net cash flows from operating activities:                                               |       |                                                     |       |   |   |   |   |
| Net income                                                                              |       | $                                                        | 7,267      |   | $ | 6,667 |   | $ | 6,726 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:      |       |                                                     |       |   |   |   |   |
| Depreciation                                                                            |       | 2,598                                                    |       | 1,837 |   | 955 |   |
| Amortization of premium and accretion of  discount, net                                 |       | 180                                                      |       | 347 |   | 595 |   |
| Amortization of intangible assets                                                       |       | 2,131                                                    |       | 1,928 |   | 57 |   |
| Provision for loan losses                                                               |       | 653                                                      |       | 3,380 |   | 1,232 |   |
| Gain on sale of loans available for sale                                                |       | (616                                                     | )          | (357 | ) | (597 | ) |
| (Gain) loss on sale of securities available  for sale and trading                       |       | (228                                                     | )          | 919 |   | (73 | ) |
| Gain on sale of interest rate corridor                                                  |       | (804                                                     | )          | — |   | — |   |
| Gain on sale of real estate                                                             |       | (380                                                     | )          | (17 | ) | — |   |
| Increase in loans held for sale                                                         |       | (57,313                                                  | )          | (79,068 | ) | (108,823 | ) |
| Proceeds from sale of loans held for sale                                               |       | 52,489                                                   |       | 81,911 |   | 108,761 |   |
| Purchase of trading account securities                                                  |       | (274                                                     | )          | (820 | ) | (53 | ) |
| Excess tax benefit from stock options  exercised                                        |       | (261                                                     | )          | (254 | ) | (312 | ) |
| Amortization of deferred loan fees, discounts  and premiums                             |       | (843                                                     | )          | (1,056 | ) | (124 | ) |
| (Increase) decrease in accrued interest  receivable                                     |       | (7                                                       | )          | 335 |   | (529 | ) |
| (Increase) decrease in value of bank owned  life insurance                              |       | (447                                                     | )          | (369 | ) | — |   |
| (Increase) decrease in other assets                                                     |       | (2,502                                                   | )          | 6,908 |   | (1,129 | ) |
| (Decrease) increase in other liabilities                                                |       | 7,242                                                    |       | (13,391 | ) | 3,171 |   |
| Stock based compensation                                                                |       | 1,931                                                    |       | 1,963 |   | 1,625 |   |
| Increase (decrease) in accrued interest  payable                                        |       | 18                                                       |       | (271 | ) | 78 |   |
| Net cash provided by operating activities                                               |       | 10,834                                                   |       | 10,592 |   | 11,560 |   |
| Cash flows from investing activities:                                                   |       |                                                     |       |   |   |   |   |
| Capital expenditures                                                                    |       | (5,080                                                   | )          | (3,948 | ) | (631 | ) |
| Proceeds from sale of office buildings                                                  |       | 1,914                                                    |       | 11,139 |   | — |   |
| Net decrease (increase) in loans                                                        |       | 26,419                                                   |       | (24,709 | ) | (61,029 | ) |
| Purchase of securities available for sale                                               |       | (62,737                                                  | )          | (23,027 | ) | (23,472 | ) |
| Purchase of investment securities held to  maturity                                     |       | —                                                   |       | — |   | (107,388 | ) |
| Proceeds from sales and calls of securities  available for sale                         |       | 72,768                                                   |       | 80,132 |   | 98,063 |   |
| Proceeds from maturities, payments and calls  of investment securities held to maturity |       | 17,205                                                   |       | 59,159 |   | 41,450 |   |
| Net decrease (increase) in FHLB stock                                                   |       | 5,462                                                    |       | 11,544 |   | (2,053 | ) |
| Proceeds from sale of other real estate  owned                                          |       | 2,572                                                    |       | 388 |   | 262 |   |
| Net cash used for acquisition                                                           |       | (4,433                                                   | )          | (22,936 | ) | — |   |
| Net cash provided by (used in) investing  activities                                    |       | 54,090                                                   |       | 87,742 |   | (54,798 | ) |
| Cash flows from financing activities:                                                   |       |                                                     |       |   |   |   |   |
| Net increase (decrease) in deposits                                                     |       | 76,230                                                   |       | (50,795 | ) | (437 | ) |
| Increase in securities sold under  agreements to repurchase                             |       | —                                                   |       | 20,000 |   | — |   |
| Proceeds from FHLB advances                                                             |       | 107,400                                                  |       | 215,700 |   | 109,500 |   |
| Repayment of FHLB advances                                                              |       | (200,191                                                 | )          | (293,589 | ) | (78,268 | ) |
| (Decrease) increase in advance payments  from borrowers for taxes and insurance         |       | (522                                                     | )          | 1,429 |   | (13 | ) |
| Net proceeds from the issuance of trust  preferred securities                           |       | —                                                   |       | 25,000 |   | — |   |
| Repayment of trust preferred securities                                                 |       | (10,000                                                  | )          | — |   | — |   |
| Cash dividends on common stock                                                          |       | (6,920                                                   | )          | (6,718 | ) | (4,196 | ) |
| Proceeds from stock issuance                                                            |       | —                                                   |       | — |   | 285 |   |
| Cash in lieu of fractional shares                                                       |       | (10                                                      | )          | — |   | — |   |
| Stock options exercised                                                                 |       | 1,392                                                    |       | 1,275 |   | — |   |
| Excess tax benefit from stock options  exercised                                        |       | 261                                                      |       | 254 |   | 312 |   |
| Common stock repurchased as treasury stock                                              |       | (3,242                                                   | )          | (179 | ) | (3,146 | ) |
| Net cash (used in) provided by financing  activities                                    |       | (35,602                                                  | )          | (87,623 | ) | 24,037 |   |
| Net increase (decrease) in cash and cash  equivalents                                   |       | 29,322                                                   |       | 10,711 |   | (19,201 | ) |
| Cash and cash equivalents:                                                              |       |                                                     |       |   |   |   |   |
| Beginning of year                                                                       |       | 30,955                                                   |       | 20,244 |   | 39,445 |   |
| End of year                                                                             |       | $                                                        | 60,277     |   | $ | 30,955 |   | $ | 20,244 |   |
| Supplemental disclosures of cash and cash  flow information                             |       |                                                     |       |   |   |   |   |
| Interest paid                                                                           |       | $                                                        | 41,044     |   | $ | 32,476 |   | $ | 18,671 |   |
| Income taxes paid                                                                       |       | 416                                                      |       | 2,628 |   | 2,941 |   |
| Noncash items:                                                                          |       |                                                     |       |   |   |   |   |
| Net unrealized gain (loss) on investment  securities available for sale, net of tax     |       | 1,051                                                    |       | (2,937 | ) | 1,061 |   |
| Net unrealized (loss) gain on cash flow  hedge, net of tax                              |       | (766                                                     | )          | 376 |   | — |   |
| Loans transferred to other real estate  owned                                           |       | —                                                   |       | — |   | 532 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements

 

58

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**1.           Description of Business and Basis ofFinancial Statement Presentation**

 

Effective at 11:59 p.m., September 21, 2006, Willow GroveBancorp, Inc. and Willow Grove Bank changed their names to WillowFinancial Bancorp, Inc. and Willow Financial Bank, respectively. Ascontained herein, references to the Company include both Willow FinancialBancorp, Inc. and Willow Grove Bancorp, Inc. and references to theBank include both Willow Financial Bank and Willow Grove Bank. Coincident withthe name change, the Company’s trading symbol on the NASDAQ Select GlobalMarket was changed from “WGBC” to “WFBC.”

 

Willow Financial Bancorp, Inc. (the “Company”), is a Pennsylvaniacorporation and parent holding company for Willow Financial Bank (the “Bank”).The Bank, which was originally organized in 1909, is a federally charteredsavings bank and wholly owned subsidiary of the Company. The Bank’s businessconsists primarily of making commercial business and consumer loans as well asreal estate loans, both commercial and residential, funded primarily by retailand business deposits along with borrowings obtained from the Federal Home LoanBank of Pittsburgh (“FHLB”).

 

After the close of business on August 31, 2005, the Companycompleted its acquisition of Chester Valley Bancorp Inc. (“Chester Valley”),a registered bank holding company headquartered in Downingtown, Pennsylvania,with over $654 million in assets. Chester Valley had two wholly ownedsubsidiaries, First Financial Bank, a Pennsylvania chartered commercial bank (“Chester Valley “) with 13 full-service banking offices, and WillowInvestment Services (“WIS”), formerly Philadelphia Corporation for InvestmentServices, a registered investment advisor and broker dealer (“PCIS”). Pursuantto the Agreement and Plan of Merger, dated as of January 20, 2005 (the “MergerAgreement”), Chester Valley was merged with and into the Company, with theCompany as the surviving corporation (the “Merger”), and Chester Valley wasmerged with and into the Bank with the Bank as the surviving bank (the “BankMerger”). WIS became a wholly owned subsidiary of the Company. As a result ofthe Merger, each outstanding share of Chester Valley common stock, par value$1.00 per share (the “Chester Valley Common Stock”), was converted into theright to receive, at the election of the shareholder, either $27.90 in cash or1.4823 shares of the Company common stock, par value $0.01 per share (the “CompanyCommon Stock”), subject to the allocation and pro ration provisions set forthin the Merger Agreement. The acquisition resulted in the Company’s issuance ofan aggregate of 4,977,256 shares of Company Common Stock and $51.0 millionin cash. The total merger consideration paid for the Chester Valley CommonStock was $145.3 million. This included capitalized acquisition costs and thevalue of Chester Valley vested stock options converted to options of theCompany at the average stock price of the Company on the four days surroundingthe announcement of the acquisition. The Company used general corporate fundsto pay the aggregate cash consideration of approximately $51.0 million forthe shares of Chester Valley Common Stock acquired in the Merger for cash, aswell as the approximate $3.2 million in acquisition costs.

 

The Merger has been accounted for using the purchase method ofaccounting, which requires that our financial statements include activity ofChester Valley only subsequent to the acquisition date of August 31, 2005.Accordingly, our consolidated financial statements and the information hereininclude the combined results of the former Chester Valley and its formersubsidiaries, Chester Valley and WIS, since September 1, 2005.

 

Effective February 28, 2006, the Bank completed the sale of alloutstanding shares of capital stock of PCIS to Uvest BD-A, Inc., a NorthCarolina Corporation and registered broker-dealer (“Uvest”) for considerationof $100 but providing that such shares may be repurchased for $100 at any timeafter the closing date of the stock sale. Concurrently with the execution ofthe sale of PCIS, the parties entered into a related Sub-Clearing and BrokerageServices Agreement, which provides that an affiliate of Uvest will providesecurities clearing and certain supervisory and compliance services for PCIS,and a Financial Services Agreement between PCIS and the Bank which providesthat the Bank will be entitled to 90% of the revenue generated by thesecurities brokerage activities conducted at the PCIS office and will bearsubstantially all operational and overhead expenses. Upon consummation of thesale of PCIS stock to Uvest, PCIS is no longer a

 

59

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subsidiary ofthe Company. However, under the provisions of Financial Accounting StandardsBoard Interpretation No. 46R, “Consolidation of Variable Interest Entities”,the results of PCIS, which now conducts business as Willow Investment Services(“WIS”) continue to be consolidated in the Company’s financial statements. Theaffiliation agreement with Uvest has the primary effect of relieving PCIS ofdirect responsibility for securities clearing and certain back-office andoversight obligations.

 

On March 30, 2007, the Company completed its acquisition ofBeneServ, Inc. (“BeneServ”) for a purchase price of up to $5.5million. The purchase price includes a payment of $4.2 million at closing plusan additional amount up to $1.3 million in payments through the three-yearanniversary date of the acquisition, subject to the achievement of certainperformance thresholds. BeneServ is an insurance agency serving the corporateemployee benefit market segment. BeneServ and the Company share a target marketin small businesses located in Chester, Montgomery, Bucks, Delaware, andPhiladelphia counties, Pennsylvania, thereby providing a number of cross sellingopportunities for both companies. The Company has recorded goodwill and otherintangibles of $4.5 million on the statement of financial condition at June 30,2007 as a result of this acquisition based on the preliminary purchase priceallocation.

 

References to Company include its consolidated entities, WillowFinancial Bank, the Bank’s subsidiaries, and its business segment, WIS, unlessthe context of the reference indicates otherwise.

 

The accompanying consolidated financial statements include the accountsof the Company and its wholly owned subsidiary, Willow Financial Bank. Theaccounts of the Bank include its wholly owned subsidiaries, Willow GroveInvestment Corporation, Willow Grove Insurance Agency, LLC, BeneServ, D&SService Corporation, and First Financial Investments. All material intercompanybalances and transactions have been eliminated in consolidation. The Companyfollows accounting and reporting practices which are in accordance with U.S.generally accepted accounting principles.

 

Certain amounts in prior years are reclassified for comparability tothe current year’s presentation. Such reclassifications, when applicable, haveno effect on net income. The Company reclassified collateralized customerdeposit balances at June 30, 2006 from securities sold under agreements torepurchase to interest-bearing deposits on the consolidated statements offinancial condition.

 

**2.****                                      Restatementof Consolidated Financial Statements**

 

The Company’s management along with itsindependent registered public accounting firm, during the course of the Company’sfiscal 2007 annual review of financial results and application of financialcontrols, identified deficiencies that represented material weaknesses ininternal controls over financial reporting. While a remediation plan wasimplemented to correct these material weaknesses, in finalizing its’ Form 10-Qfor the quarter ended September 30, 2007, management together with itsindependent registered public accounting firm identified the existence of anun-reconciled difference of approximately $6.2 million. This caused managementand its independent auditors to conclude that these deficiencies had not beenproperly remediated. At that time, the Company’s management began aninvestigation into the $6.2 million un-reconciled difference.  Throughout the course of the investigation,management performed a thorough review of general ledger accountreconciliations for various accounts from June 2004 through September 2007.  This investigation yielded adjustments thatwere determined by the Company’s management and its independent registeredpublic accounting firm to be material to financial statements for the yearsended June 30, 2007 and 2006.  As aresult of these adjustments, management, with the concurrence of the Audit Committeehas determined that Company’s financial statements for the fiscal years ended June 30,2007 and 2006 required restatement. The adjustments include errors in theaccounting for the following items:

 

·                  improperly performed reconciliationsthat resulted in un-reconciled differences and an aggregate reduction topre-tax income of $8.3 million ($5.5 million after tax) and a charge to fiscal2004 retained earnings of $365 thousand; and

·                  errors in the accounting for theacquisition of Chester Valley Bancorp and the related calculation of goodwillof approximately $497 thousand.

 

Management’s remediation plan to correctthese material weaknesses is detailed in Item 9Ad hereof. This remediation planhas been approved by the Audit Committee of the Board of Directors.

 

The following tables set forth theconsolidated restated financial statements for the fiscal years ended June 30,2007 and June 30, 2006 previously filed in the Company’s Annual Report on Form 10-K/Afor the fiscal year ended June 30, 2007. The changes to the June 30, 2005 and 2004 financial statements wereconsidered to be insignificant for reporting purposes in consideration of theguidance in Staff Accounting Bulletin No. 108.

 

The followingis a summary of the adjustments to our previously issued consolidatedstatements of financial condition as of June 30, 2007 and 2006:

 

60

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**Consolidated Statements of Financial Condition**

 
| ** **                                                                                                                              | ** ** | **At June 30, 2007**                                    | ** ** | **At June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **As reported**                                                   | ** ** | **Adjustments**                     | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| ** **                                                                                                                              | ** ** | **(Dollars in thousands, except share data)** | ** ** |
| Assets:                                                                                                                                 |       |                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents:                                                                                                             |       |                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Cash on hand and  non-interest-earning deposits (a)                                                                                     |       | $                                                                      | 26,253     |                                | $          | (5,129 | ) | $ | 21,124 |   | 32,930 |   | $ | (4,952 | ) | $ | 27,978 |   |
| Interest-bearing  deposits (a)                                                                                                          |       | 32,475                                                                 |       | 6,678                               |       | 39,153 |   | 4,289 |   | (1,312 | ) | 2,977 |   |
| Total cash and  cash equivalents                                                                                                        |       | 58,728                                                                 |       | 1,549                               |       | 60,277 |   | 37,219 |   | (6,264 | ) | 30,955 |   |
| Investment  securities:                                                                                                                 |       |                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Trading                                                                                                                                 |       | 1,176                                                                  |       | —                              |       | 1,176 |   | 902 |   | — |   | 902 |   |
| Available for  sale (amortized cost of $193,232 and $203,221, respectively)                                                             |       | 188,339                                                                |       | —                              |       | 188,339 |   | 196,925 |   | — |   | 196,925 |   |
| Held to maturity  (fair value of $86,488 and $102,087, respectively)                                                                    |       | 88,363                                                                 |       | —                              |       | 88,363 |   | 105,561 |   | — |   | 105,561 |   |
| Federal Home Loan  Bank Stock                                                                                                           |       | 11,394                                                                 |       | —                              |       | 11,394 |   | 16,856 |   | — |   | 16,856 |   |
| Loans (net of  allowance for loan losses of $12,210 and $16,737, respectively) (b)                                                      |       | 1,036,098                                                              |       | (805                                | )          | 1,035,293 |   | 1,063,882 |   | (281 | ) | 1,063,601 |   |
| Loans held for  sale                                                                                                                    |       | 8,075                                                                  |       | —                              |       | 8,075 |   | 2,635 |   | — |   | 2,635 |   |
| Accrued interest  receivable (c)                                                                                                        |       | 6,738                                                                  |       | (84                                 | )          | 6,654 |   | 6,647 |   | — |   | 6,647 |   |
| Property and  equipment, net (f)                                                                                                        |       | 11,307                                                                 |       | —                              |       | 11,307 |   | 10,064 |   | (77 | ) | 9,987 |   |
| Bank owned life  insurance                                                                                                              |       | 11,930                                                                 |       | —                              |       | 11,930 |   | 11,483 |   | — |   | 11,483 |   |
| Real estate owned                                                                                                                       |       | —                                                                 |       | —                              |       | — |   | 51 |   | — |   | 51 |   |
| Other intangible  assets, net (e)                                                                                                       |       | 14,432                                                                 |       | (87                                 | )          | 14,345 |   | 12,975 |   | — |   | 12,975 |   |
| Goodwill (d)                                                                                                                            |       | 95,100                                                                 |       | 497                                 |       | 95,597 |   | 94,072 |   | 497 |   | 94,569 |   |
| Other assets (h)                                                                                                                        |       | 18,664                                                                 |       | (118                                | )          | 18,546 |   | 17,788 |   | (201 | ) | 17,587 |   |
| Total assets                                                                                                                            |       | $                                                                      | 1,550,344  |                                | $          | 952 |   | $ | 1,551,296 |   | 1,577,060 |   | $ | (6,326 | ) | $ | 1,570,734 |   |
| Liabilities and  Stockholders’ Equity:                                                                                             |       |                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits (a)                                                                                                          |       | $                                                                      | 941,895    |                                | $          | 9,734 |   | $ | 951,629 |   | 855,526 |   | $ | 37,727 |   | $ | 893,253 |   |
| Non-interest-bearing  deposits (a)                                                                                                      |       | 151,160                                                                |       | (10,059                             | )          | 141,101 |   | 162,864 |   | (39,617 | ) | 123,247 |   |
| Securities sold  under agreements to repurchase                                                                                         |       | 20,000                                                                 |       | —                              |       | 20,000 |   | 20,000 |   | — |   | 20,000 |   |
| Federal Home Loan  Bank advances (g,i)                                                                                                  |       | 190,063                                                                |       | (299                                | )          | 189,764 |   | 282,717 |   | (162 | ) | 282,555 |   |
| Advance payments  from borrowers for taxes                                                                                              |       | 4,254                                                                  |       | —                              |       | 4,254 |   | 4,776 |   | — |   | 4,776 |   |
| Trust preferred  securities (i)                                                                                                         |       | 25,525                                                                 |       | 249                                 |       | 25,774 |   | 36,149 |   | 49 |   | 36,198 |   |
| Accrued interest  payable (j)                                                                                                           |       | 2,223                                                                  |       | 80                                  |       | 2,303 |   | 2,205 |   | 80 |   | 2,285 |   |
| Other liabilities  (h)                                                                                                                  |       | 9,889                                                                  |       | 7,149                               |       | 17,038 |   | 9,425 |   | 371 |   | 9,796 |   |
| Total liabilities                                                                                                                       |       | 1,345,009                                                              |       | 6,854                               |       | 1,351,683 |   | 1,373,662 |   | (1,552 | ) | 1,372,110 |   |
| Commitments and  contingencies                                                                                                          |       |                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Stockholders’  equity:                                                                                                             |       |                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Common stock,  $0.01 par value; (40,000,000 authorized; 17,487,770 and 16,584,870 issued at  June 30, 2007 and 2006, respectively) |       | 175                                                                    |       | —                              |       | 175 |   | 166 |   | — |   | 166 |   |
| Additional  paid-in capital (k)                                                                                                         |       | 191,223                                                                |       | (447                                | )          | 190,776 |   | 178,886 |   | — |   | 178,886 |   |
| Retained  earnings—substantially restricted (l)                                                                                    |       | 51,932                                                                 |       | (5,902                              | )          | 46,030 |   | 60,404 |   | (4,774 | ) | 55,630 |   |
| Accumulated other  comprehensive loss                                                                                                   |       | (3,180                                                                 | )          | —                              |       | (3,180 | ) | (3,317 | ) | — |   | (3,317 | ) |
| Obligation of  deferred compensation plan                                                                                               |       | 1,277                                                                  |       | —                              |       | 1,277 |   | 1,258 |   | — |   | 1,258 |   |
| Treasury stock at  cost, (1,920,025 and 1,665,443 shares at June 30, 2007 and 2006,  respectively) (k)                        |       | (31,493                                                                | )          | 447                                 |       | (31,046 | ) | (28,251 | ) | — |   | (28,251 | ) |
| Unallocated  common stock held by:                                                                                                      |       |                                                                   |       |                                |       |   |   |   |   |   |   |   |   |
| Employee Stock  Ownership Plan (ESOP)                                                                                                   |       | (2,733                                                                 | )          | (225                                | )          | (2,958 | ) | (3,287 | ) | — |   | (3,287 | ) |
| Recognition and  Retention Plan Trust (RRP)                                                                                             |       | (1,866                                                                 | )          | 225                                 |       | (1,641 | ) | (2,461 | ) | — |   | (2,461 | ) |
| Total stockholders’  equity                                                                                                        |       | 205,335                                                                |       | (5,902                              | )          | 199,433 |   | 203,398 |   | (4,774 | ) | 198,624 |   |
| Total liabilities  and stockholders’ equity                                                                                        |       | $                                                                      | 1,550,344  |                                | $          | 952 |   | $ | 1,551,296 |   | 1,577,060 |   | $ | (6,326 | ) | $ | 1,570,734 |   |

 

----

(a) Adjustments primarily related to thereclassification and elimination of certain internal deposit accounts as wellas the reversal of a reclass entry that had reduced cash at June 30, 2007despite settlement not occurring on the purchase of an investment securityuntil July 2007.

(b) Adjustment to properly reflect a loan in process account andclassify loan suspense account write-offs to the proper period.

(c) Adjustment related primarily to the correction of an interestaccrual on certain classified loans.

(d) Adjustment related to the correction of the valuation ofChester Valley effective at the close of business on August 31, 2005.

(e) Adjustment related to the correction of the amortization of anidentifiable intangible asset recorded with the BeneServ acquisition.

(f) Adjustment related to the reversal of a write-down of aproperty from the Chester Valley acquisition that resulted from a bookkeepingerror and should have been reflected in the fair value of Chester Valley at theacquisition date.

(g) Adjustment to correct the amortization of the premium recordedon Federal Home Loan Bank advances in connection with the acquisition ofChester Valley.

(h) Adjustment related primarily to thereclassification of current and deferred income taxes, the correction ofimproperly recorded entries to accounts payable as well as the reversal of areclass entry that had reduced cash at June 30, 2007 despite settlementnot occurring on the purchase of an investment security until July 2007.

(i) Adjustment related to reclassification between trust preferredsecurities and Federal Home Loan Bank advances to properly classify certainborrowings.

(j) Adjustment related to the reversal of an improper journalentry recorded to accrued interest payable.

(k) Adjustment related toreclassification between treasury stock and additional paid-in capital toaccount for the issuance of restricted stock out of treasury.

(l) Adjustment related primarily to the write-off of theunreconciled differences as well as a $365 thousand adjustment to June 30,2004 retained earnings relating to a cash out-of-balance condition that existedas of that date.

 

61

----

 

The following is a summary of the adjustments to our previously issuedconsolidated statements of income for the fiscal years ended June 30, 2007and 2006.

 

**Consolidated Statements of Income**

 
| ** **                                           | ** ** | **For the year ended  June 30, 2007**                  | ** ** | **For the year ended**

**June 30, 2006** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **As reported**                                                            | ** ** | **Adjustments**                                                    | ** ** | **Restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **Restated** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest and  dividend income:                       |       |                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loans (a)                                            |       | $                                                                               | 69,538     |                                                               | $          | (223 | ) | $ | 69,315 |   | $ | 65,472 |   | $ | — |   | $ | 65,472 |   |
| Investment  securities and interest-bearing deposits |       | 16,735                                                                          |       | —                                                             |       | 16,735 |   | 16,058 |   | — |   | 16,058 |   |
| Total interest  income                               |       | 86,273                                                                          |       | (223                                                               | )          | 86,050 |   | 81,530 |   | — |   | 81,530 |   |
| Interest expense:                                    |       |                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 28,698                                                                          |       | —                                                             |       | 28,698 |   | 18,476 |   | — |   | 18,476 |   |
| Securities sold  under agreements to repurchase      |       | 1,135                                                                           |       | —                                                             |       | 1,135 |   | 228 |   | — |   | 228 |   |
| Borrowings (b)                                       |       | 11,435                                                                          |       | (206                                                               | )          | 11,229 |   | 13,534 |   | (33 | ) | 13,501 |   |
| Total interest  expense                              |       | 41,268                                                                          |       | (206                                                               | )          | 41,062 |   | 32,238 |   | (33 | ) | 32,205 |   |
| Net interest  income                                 |       | 45,005                                                                          |       | (17                                                                | )          | 44,988 |   | 49,292 |   | 33 |   | 49,325 |   |
| Provision for  loan losses                           |       | 653                                                                             |       | —                                                             |       | 653 |   | 3,205 |   | 175 |   | 3,380 |   |
| Net interest  income after provision for loan losses |       | 44,352                                                                          |       | (17                                                                | )          | 44,335 |   | 46,087 |   | (142 | ) | 45,945 |   |
| Non-interest  income:                                |       |                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Investment  services income, net                     |       | 3,321                                                                           |       | —                                                             |       | 3,321 |   | 2,634 |   | — |   | 2,634 |   |
| Income from  insurance operations                    |       | 637                                                                             |       | —                                                             |       | 637 |   | — |   | — |   | — |   |
| Service charges  and fees (c)                        |       | 5,438                                                                           |       | (15                                                                | )          | 5,423 |   | 5,000 |   | (20 | ) | 4,980 |   |
| Realized gain  (loss) on sale of:                    |       |                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Loans held for  sale                                 |       | 616                                                                             |       | —                                                             |       | 616 |   | 357 |   | — |   | 357 |   |
| Investment  securities available for sale            |       | 228                                                                             |       | —                                                             |       | 228 |   | (919 | ) | — |   | (919 | ) |
| Real estate (d)                                      |       | 303                                                                             |       | 77                                                                 |       | 380 |   | 17 |   | — |   | 17 |   |
| Gain on  termination of interest rate corridor       |       | 804                                                                             |       | —                                                             |       | 804 |   | — |   | — |   | — |   |
| Other income (e)                                     |       | 1,151                                                                           |       | (293                                                               | )          | 858 |   | 558 |   | 487 |   | 1,045 |   |
| Total  non-interest income                           |       | 12,498                                                                          |       | (231                                                               | )          | 12,267 |   | 7,647 |   | 467 |   | 8,114 |   |
| Non-interest  expense:                               |       |                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Salaries and  employee benefits (f)                  |       | 24,265                                                                          |       | (168                                                               | )          | 24,097 |   | 20,106 |   | (670 | ) | 19,436 |   |
| Occupancy and  equipment                             |       | 8,059                                                                           |       | —                                                             |       | 8,059 |   | 6,011 |   | — |   | 6,011 |   |
| Data processing                                      |       | 1,504                                                                           |       | —                                                             |       | 1,504 |   | 1,220 |   | — |   | 1,220 |   |
| Advertising                                          |       | 2,041                                                                           |       | —                                                             |       | 2,041 |   | 1,504 |   | — |   | 1,504 |   |
| Deposit insurance  premiums                          |       | 120                                                                             |       | —                                                             |       | 120 |   | 124 |   | — |   | 124 |   |
| Amortization of  intangible assets (g)               |       | 2,043                                                                           |       | 88                                                                 |       | 2,131 |   | 1,928 |   | — |   | 1,928 |   |
| Professional fees                                    |       | 2,444                                                                           |       | —                                                             |       | 2,444 |   | 2,303 |   | — |   | 2,303 |   |
| Other expense (h)                                    |       | 4,583                                                                           |       | 1,470                                                              |       | 6,053 |   | 4,206 |   | 7,650 |   | 11,856 |   |
| Total  non-interest expense                          |       | 45,059                                                                          |       | 1,390                                                              |       | 46,449 |   | 37,402 |   | 6,980 |   | 44,382 |   |
| Income before  income taxes                          |       | 11,791                                                                          |       | (1,638                                                             | )          | 10,153 |   | 16,332 |   | (6,655 | ) | 9,677 |   |
| Income tax  expense (i)                              |       | 3,396                                                                           |       | (510                                                               | )          | 2,886 |   | 5,256 |   | (2,246 | ) | 3,010 |   |
| Net Income                                           |       | $                                                                               | 8,395      |                                                               | $          | (1,128 | ) | $ | 7,267 |   | $ | 11,076 |   | $ | (4,409 | ) | $ | 6,667 |   |
| Earnings per  share:                                 |       |                                                                            |       |                                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 0.55                                                                            |       | (0.07                                                              | )          | 0.48 |   | 0.79 |   | (0.32 | ) | 0.47 |   |
| Diluted                                              |       | 0.54                                                                            |       | (0.07                                                              | )          | 0.47 |   | 0.77 |   | (0.31 | ) | 0.46 |   |

 

----

(a)          Adjustment related primarily to thecorrection of an interest accrual on certain classified loans.

(b)         Adjustment to correct the amortization of apremium on Federal Home Loan Bank advances as well as the correction of anaccrual on trust preferred securities.

(c)          Adjustment for proper amortization ofmortgage servicing rights.

(d)         Adjustment related to the reversal of awrite-down of a property from the Chester Valley acquisition that resulted froma bookkeeping error and should have been reflected in the fair value of ChesterValley at the acquisition date.

(e)          Adjustment related to proper classificationof the change in the fair market value of certain interest rate swaps.

(f)            Adjustment related to correction of theaccrual for certain commissions earned but unpaid at the date of the balancesheet as well as properly recording salary expense relating to the ChesterValley acquisition.

(g)         Adjustment related to the correction of theamortization of an identifiable intangible asset recorded with the BeneServacquisition.

(h)         Adjustment related primarily to the write-offof the unidentified differences in the year ended June 30, 2006 as well asidentified reconciliation differences in the year ended June 30, 2007.

(i)             Adjustment related to the tax effect ofthe above adjustments.

 

62

----

 

The following tables present unaudited operating information for eachquarter within the two most recent years. Included herein is restated financial information for interim periods of2007 and 2006. The earnings per share amounts for periods prior to March 31,2007 have been adjusted to give retroactive effect to the 5% stock dividend. Inaddition, as a result of the matters discussed above, the amounts reported foreach quarter in the fiscal years ended June 30, 2007 and 2006 have beenrevised from previously reported amounts. The adjustments presented relate to the allocation of adjustmentsannotated above to the proper reporting period in the years ended June 30,2007 and 2006.

 
| ** **                                           | ** ** | **For the three months ended**

**June 30, 2007** | ** ** | **For the three months ended  March 31, 2007** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **As reported**                                                            | ** ** | **Adjustments**                                                              | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest and  dividend income:                       |       |                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                                                               | 17,512     |                                                                         | $          | (58 | ) | $ | 17,454 |   | $ | 17,193 |   | $ | (125 | ) | $ | 17,068 |   |
| Investment  securities and interest-bearing deposits |       | 4,200                                                                           |       | —                                                                       |       | 4,200 |   | 4,054 |   | — |   | 4,054 |   |
| Total interest  income                               |       | 21,712                                                                          |       | (58                                                                          | )          | 21,654 |   | 21,247 |   | (125 | ) | 21,122 |   |
| Interest expense:                                    |       | —                                                                          |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 7,843                                                                           |       | 31                                                                           |       | 7,874 |   | 7,247 |   | (32 | ) | 7,215 |   |
| Securities sold  under agreements to repurchase      |       | 358                                                                             |       | —                                                                       |       | 358 |   | 269 |   | — |   | 269 |   |
| Borrowings                                           |       | 2,478                                                                           |       | 24                                                                           |       | 2,502 |   | 2,874 |   | 23 |   | 2,897 |   |
| Total interest  expense                              |       | 10,679                                                                          |       | 55                                                                           |       | 10,734 |   | 10,390 |   | (9 | ) | 10,381 |   |
| Net interest  income                                 |       | 11,033                                                                          |       | (113                                                                         | )          | 10,920 |   | 10,857 |   | (116 | ) | 10,741 |   |
| Provision for  loan losses                           |       | 753                                                                             |       | —                                                                       |       | 753 |   | — |   | — |   | — |   |
| Net interest  income after provision for loan losses |       | 10,280                                                                          |       | (113                                                                         | )          | 10,167 |   | 10,857 |   | (116 | ) | 10,741 |   |
| Non-interest  income:                                |       |                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Investment  services income, net                     |       | 769                                                                             |       | —                                                                       |       | 769 |   | 946 |   | — |   | 946 |   |
| Income from  insurance operations                    |       | 637                                                                             |       | —                                                                       |       | 637 |   | — |   | — |   | — |   |
| Service charges  and fees                            |       | 1,304                                                                           |       | 3                                                                            |       | 1,307 |   | 1,380 |   | (6 | ) | 1,374 |   |
| Realized gain  (loss) on sale of:                    |       |                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Loans held for  sale                                 |       | 177                                                                             |       | —                                                                       |       | 177 |   | 192 |   | — |   | 192 |   |
| Investment  securities available for sale            |       | 14                                                                              |       | —                                                                       |       | 14 |   | 100 |   | — |   | 100 |   |
| Real estate                                          |       | 380                                                                             |       | —                                                                       |       | 380 |   | — |   | — |   | — |   |
| Gain on  termination of interest rate corridor       |       | —                                                                          |       | —                                                                       |       | — |   | — |   | — |   | — |   |
| Other income                                         |       | 225                                                                             |       | 218                                                                          |       | 443 |   | 310 |   | (24 | ) | 286 |   |
| Total  non-interest income                           |       | 3,506                                                                           |       | 221                                                                          |       | 3,727 |   | 2,928 |   | (30 | ) | 2,898 |   |
| Non-interest  expense:                               |       | —                                                                          |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Salaries and  employee benefits                      |       | 6,535                                                                           |       | (264                                                                         | )          | 6,271 |   | 6,081 |   | 95 |   | 6,176 |   |
| Occupancy and  equipment                             |       | 2,091                                                                           |       | —                                                                       |       | 2,091 |   | 2,081 |   | — |   | 2,081 |   |
| Data processing                                      |       | 428                                                                             |       | —                                                                       |       | 428 |   | 358 |   | — |   | 358 |   |
| Advertising                                          |       | 522                                                                             |       | —                                                                       |       | 522 |   | 557 |   | — |   | 557 |   |
| Deposit insurance  premiums                          |       | 30                                                                              |       | —                                                                       |       | 30 |   | 30 |   | — |   | 30 |   |
| Amortization of  intangible assets                   |       | 382                                                                             |       | 88                                                                           |       | 470 |   | 543 |   | — |   | 543 |   |
| Professional fees                                    |       | 770                                                                             |       | —                                                                       |       | 770 |   | 593 |   | — |   | 593 |   |
| Other expense                                        |       | 1,533                                                                           |       | 1,058                                                                        |       | 2,591 |   | 1,008 |   | 87 |   | 1,095 |   |
| Total  non-interest expense                          |       | 12,291                                                                          |       | 882                                                                          |       | 13,173 |   | 11,251 |   | 182 |   | 11,433 |   |
| Income before  income taxes                          |       | 1,495                                                                           |       | (774                                                                         | )          | 721 |   | 2,534 |   | (328 | ) | 2,206 |   |
| Income tax  expense                                  |       | 178                                                                             |       | (221                                                                         | )          | (43 | ) | 812 |   | (108 | ) | 704 |   |
| Net Income                                           |       | $                                                                               | 1,317      |                                                                         | $          | (553 | ) | $ | 764 |   | $ | 1,722 |   | $ | (220 | ) | $ | 1,502 |   |
| Earnings per  share:                                 |       |                                                                            |       |                                                                         |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 0.09                                                                            |       | (0.04                                                                        | )          | 0.05 |   | 0.12 |   | (0.02 | ) | 0.10 |   |
| Diluted                                              |       | 0.09                                                                            |       | (0.04                                                                        | )          | 0.05 |   | 0.11 |   | (0.01 | ) | 0.10 |   |

 

See accompanying notes to the annualrestatement tables

 

63

----

 
| ** **                                           | ** ** | **For the three months ended  December 31, 2006** | ** ** | **For the three months ended  September 30, 2006** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **As reported**                                                            | ** ** | **Adjustments**                                                                  | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest and  dividend income:                       |       |                                                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                                                               | 17,150     |                                                                             | $          | (40 | ) | $ | 17,110 |   | $ | 17,683 |   | $ | — |   | $ | 17,683 |   |
| Investment  securities and interest-bearing deposits |       | 4,274                                                                           |       | -                                                                                |       | 4,274 |   | 4,207 |   | — |   | 4,207 |   |
| Total interest  income                               |       | 21,424                                                                          |       | (40                                                                              | )          | 21,384 |   | 21,890 |   | — |   | 21,890 |   |
| Interest expense:                                    |       |                                                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 7,113                                                                           |       | —                                                                           |       | 7,113 |   | 6,495 |   | — |   | 6,495 |   |
| Securities sold  under agreements to repurchase      |       | 253                                                                             |       | —                                                                           |       | 253 |   | 255 |   | — |   | 255 |   |
| Borrowings                                           |       | 3,075                                                                           |       | (45                                                                              | )          | 3,030 |   | 3,008 |   | (207 | ) | 2,801 |   |
| Total interest  expense                              |       | 10,441                                                                          |       | (45                                                                              | )          | 10,396 |   | 9,758 |   | (207 | ) | 9,551 |   |
| Net interest  income                                 |       | 10,983                                                                          |       | 5                                                                                |       | 10,988 |   | 12,132 |   | 207 |   | 12,339 |   |
| Provision for  loan losses                           |       | —                                                                          |       | —                                                                           |       | — |   | (100 | ) | — |   | (100 | ) |
| Net interest  income after provision for loan losses |       | 10,983                                                                          |       | 5                                                                                |       | 10,988 |   | 12,232 |   | 207 |   | 12,439 |   |
| Non-interest  income:                                |       |                                                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Investment  services income, net                     |       | 858                                                                             |       | —                                                                           |       | 858 |   | 748 |   | — |   | 748 |   |
| Income from  insurance operations                    |       | —                                                                          |       | —                                                                           |       | — |   | — |   | — |   | — |   |
| Service charges  and fees                            |       | 1,311                                                                           |       | (6                                                                               | )          | 1,305 |   | 1,443 |   | (6 | ) | 1,437 |   |
| Realized gain  (loss) on sale of:                    |       |                                                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Loans held for  sale                                 |       | 94                                                                              |       | —                                                                           |       | 94 |   | 153 |   | — |   | 153 |   |
| Investment  securities available for sale            |       | 114                                                                             |       | —                                                                           |       | 114 |   | — |   | — |   | — |   |
| Real estate                                          |       | —                                                                          |       | —                                                                           |       | — |   | (77 | ) | 77 |   | — |   |
| Gain on  termination of interest rate corridor       |       | 804                                                                             |       | —                                                                           |       | 804 |   | — |   | — |   | — |   |
| Other income                                         |       | 157                                                                             |       | —                                                                           |       | 157 |   | 459 |   | (487 | ) | (28 | ) |
| Total  non-interest income                           |       | 3,338                                                                           |       | (6                                                                               | )          | 3,332 |   | 2,726 |   | (416 | ) | 2,310 |   |
| Non-interest  expense:                               |       |                                                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Salaries and  employee benefits                      |       | 5,779                                                                           |       | —                                                                           |       | 5,779 |   | 5,871 |   | — |   | 5,871 |   |
| Occupancy and  equipment                             |       | 1,979                                                                           |       | —                                                                           |       | 1,979 |   | 1,908 |   | — |   | 1,908 |   |
| Data processing                                      |       | 369                                                                             |       | —                                                                           |       | 369 |   | 349 |   | — |   | 349 |   |
| Advertising                                          |       | 568                                                                             |       | —                                                                           |       | 568 |   | 394 |   | — |   | 394 |   |
| Deposit insurance  premiums                          |       | 30                                                                              |       | —                                                                           |       | 30 |   | 30 |   | — |   | 30 |   |
| Amortization of  intangible assets                   |       | 543                                                                             |       | —                                                                           |       | 543 |   | 575 |   | — |   | 575 |   |
| Professional fees                                    |       | 549                                                                             |       | —                                                                           |       | 549 |   | 532 |   | — |   | 532 |   |
| Other expense                                        |       | 1,030                                                                           |       | 40                                                                               |       | 1,070 |   | 1,011 |   | 286 |   | 1,297 |   |
| Total  non-interest expense                          |       | 10,847                                                                          |       | 40                                                                               |       | 10,887 |   | 10,670 |   | 286 |   | 10,956 |   |
| Income before  income taxes                          |       | 3,474                                                                           |       | (41                                                                              | )          | 3,433 |   | 4,288 |   | (495 | ) | 3,793 |   |
| Income tax  expense                                  |       | 1,039                                                                           |       | (14                                                                              | )          | 1,025 |   | 1,367 |   | (167 | ) | 1,200 |   |
| Net Income                                           |       | $                                                                               | 2,435      |                                                                             | $          | (27 | ) | $ | 2,408 |   | $ | 2,921 |   | $ | (328 | ) | $ | 2,593 |   |
| Earnings per  share:                                 |       |                                                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 0.16                                                                            |       | (0.00                                                                            | )          | 0.16 |   | 0.19 |   | (0.02 | ) | 0.17 |   |
| Diluted                                              |       | 0.16                                                                            |       | (0.00                                                                            | )          | 0.16 |   | 0.19 |   | (0.02 | ) | 0.17 |   |

 

See accompanying notes to the annualrestatement tables

 

64

----

 
| ** **                                           | ** ** | **For the three months ended**                              | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **June 30, 2006**                                                     | ** ** | **March 31, 2006**                       | ** ** |
| ** **                                           | ** ** | **As reported**                                                            | ** ** | **Adjustments**                                    | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest and dividend income:                        |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                                                               | 18,271     |                                               | $          | — |   | $ | 18,271 |   | $ | 17,957 |   | $ | — |   | $ | 17,957 |   |
| Investment securities and interest-bearing  deposits |       | 4,290                                                                           |       | —                                             |       | 4,290 |   | 3,835 |   | — |   | 3,835 |   |
| Total interest income                                |       | 22,561                                                                          |       | —                                             |       | 22,561 |   | 21,792 |   | — |   | 21,792 |   |
| Interest expense:                                    |       | —                                                                          |       |                                               |       |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 5,678                                                                           |       | —                                             |       | 5,678 |   | 4,999 |   | — |   | 4,999 |   |
| Securities sold under agreements to  repurchase      |       | (15                                                                             | )          | —                                             |       | (15 | ) | — |   | — |   | — |   |
| Borrowings                                           |       | 3,663                                                                           |       | 3                                                  |       | 3,666 |   | 3,587 |   | (5 | ) | 3,582 |   |
| Total interest expense                               |       | 9,326                                                                           |       | 3                                                  |       | 9,329 |   | 8,586 |   | (5 | ) | 8,581 |   |
| Net interest income                                  |       | 13,235                                                                          |       | (3                                                 | )          | 13,232 |   | 13,206 |   | 5 |   | 13,211 |   |
| Provision for loan losses                            |       | 2,485                                                                           |       | 175                                                |       | 2,660 |   | — |   | — |   | — |   |
| Net interest income after provision for  loan losses |       | 10,750                                                                          |       | (178                                               | )          | 10,572 |   | 13,206 |   | 5 |   | 13,211 |   |
| Non-interest income:                                 |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Investment services income, net                      |       | 899                                                                             |       | —                                             |       | 899 |   | 705 |   | — |   | 705 |   |
| Income from insurance operations                     |       | —                                                                          |       | —                                             |       | — |   | — |   | — |   | — |   |
| Service charges and fees                             |       | 1,746                                                                           |       | (6                                                 | )          | 1,740 |   | 1,126 |   | (7 | ) | 1,119 |   |
| Realized gain (loss) on sale of:                     |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Loans held for sale                                  |       | 26                                                                              |       | —                                             |       | 26 |   | 77 |   | — |   | 77 |   |
| Investment securities available for sale             |       | 38                                                                              |       | —                                             |       | 38 |   | 19 |   | — |   | 19 |   |
| Real estate                                          |       | 17                                                                              |       | —                                             |       | 17 |   | — |   | — |   | — |   |
| Gain on termination of interest rate  corridor       |       | —                                                                          |       | —                                             |       | — |   | — |   | — |   | — |   |
| Other income                                         |       | 154                                                                             |       | 157                                                |       | 311 |   | 151 |   | 198 |   | 349 |   |
| Total non-interest income                            |       | 2,880                                                                           |       | 151                                                |       | 3,031 |   | 2,078 |   | 191 |   | 2,269 |   |
| Non-interest expense:                                |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                       |       | 5,097                                                                           |       | —                                             |       | 5,097 |   | 5,039 |   | — |   | 5,039 |   |
| Occupancy and equipment                              |       | 1,977                                                                           |       | —                                             |       | 1,977 |   | 1,753 |   | — |   | 1,753 |   |
| Data processing                                      |       | 238                                                                             |       | —                                             |       | 238 |   | 304 |   | — |   | 304 |   |
| Advertising                                          |       | 729                                                                             |       | —                                             |       | 729 |   | 264 |   | — |   | 264 |   |
| Deposit insurance premiums                           |       | 31                                                                              |       | —                                             |       | 31 |   | 33 |   | — |   | 33 |   |
| Amortization of intangible assets                    |       | 576                                                                             |       | —                                             |       | 576 |   | 587 |   | — |   | 587 |   |
| Professional fees                                    |       | 641                                                                             |       | —                                             |       | 641 |   | 443 |   | — |   | 443 |   |
| Other expense                                        |       | 1,001                                                                           |       | 497                                                |       | 1,498 |   | 1,080 |   | — |   | 1,080 |   |
| Total non-interest expense                           |       | 10,290                                                                          |       | 497                                                |       | 10,787 |   | 9,503 |   | — |   | 9,503 |   |
| Income before income taxes                           |       | 3,340                                                                           |       | (524                                               | )          | 2,816 |   | 5,781 |   | 196 |   | 5,977 |   |
| Income tax expense                                   |       | 991                                                                             |       | (178                                               | )          | 813 |   | 1,857 |   | 67 |   | 1,924 |   |
| Net Income                                           |       | $                                                                               | 2,349      |                                               | $          | (346 | ) | $ | 2,003 |   | $ | 3,924 |   | $ | 129 |   | $ | 4,053 |   |
| Earnings per share:                                  |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 0.16                                                                            |       | (0.03                                              | )          | 0.13 |   | 0.25 |   | 0.02 |   | 0.27 |   |
| Diluted                                              |       | 0.15                                                                            |       | (0.02                                              | )          | 0.13 |   | 0.25 |   | 0.02 |   | 0.27 |   |

 

See accompanying notes to the annual restatement tables

 

65

----

 
| ** **                                           | ** ** | **For the three months ended**                              | ** ** | **For the three months ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                           | ** ** | **December 31, 2005**                                                 | ** ** | **September 30, 2005**                   | ** ** |
| ** **                                           | ** ** | **As reported**                                                            | ** ** | **Adjustments**                                    | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest and dividend income:                        |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Loans                                                |       | $                                                                               | 17,495     |                                               | $          | — |   | $ | 17,495 |   | $ | 11,749 |   | — |   | $ | 11,749 |   |
| Investment securities and interest-bearing  deposits |       | 4,110                                                                           |       | —                                             |       | 4,110 |   | 3,823 |   | — |   | 3,823 |   |
| Total interest income                                |       | 21,605                                                                          |       | —                                             |       | 21,605 |   | 15,572 |   | — |   | 15,572 |   |
| Interest expense:                                    |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Deposits                                             |       | 4,424                                                                           |       | —                                             |       | 4,424 |   | 3,375 |   | — |   | 3,375 |   |
| Securities sold under agreements to  repurchase      |       | 243                                                                             |       | —                                             |       | 243 |   | — |   | — |   | — |   |
| Borrowings                                           |       | 3,304                                                                           |       | (31                                                | )          | 3,273 |   | 2,980 |   | — |   | 2,980 |   |
| Total interest expense                               |       | 7,971                                                                           |       | (31                                                | )          | 7,940 |   | 6,355 |   | — |   | 6,355 |   |
| Net interest income                                  |       | 13,634                                                                          |       | 31                                                 |       | 13,665 |   | 9,217 |   | — |   | 9,217 |   |
| Provision for loan losses                            |       | 207                                                                             |       | —                                             |       | 207 |   | 513 |   | — |   | 513 |   |
| Net interest income after provision for  loan losses |       | 13,427                                                                          |       | 31                                                 |       | 13,458 |   | 8,704 |   | — |   | 8,704 |   |
| Non-interest income:                                 |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Investment services income, net                      |       | 681                                                                             |       | —                                             |       | 681 |   | 349 |   | — |   | 349 |   |
| Income from insurance operations                     |       | —                                                                          |       | —                                             |       | — |   | — |   | — |   | — |   |
| Service charges and fees                             |       | 1,301                                                                           |       | (7                                                 | )          | 1,294 |   | 827 |   | — |   | 827 |   |
| Realized gain (loss) on sale of:                     |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Loans held for sale                                  |       | 140                                                                             |       | —                                             |       | 140 |   | 114 |   | — |   | 114 |   |
| Investment securities available for sale             |       | 45                                                                              |       | —                                             |       | 45 |   | (1,021 | ) | — |   | (1,021 | ) |
| Real estate                                          |       | —                                                                          |       | —                                             |       | — |   | — |   | — |   | — |   |
| Gain on termination of interest rate  corridor       |       | —                                                                          |       | —                                             |       | — |   | — |   | — |   | — |   |
| Other income                                         |       | 159                                                                             |       | 53                                                 |       | 212 |   | 94 |   | 79 |   | 173 |   |
| Total non-interest income                            |       | 2,326                                                                           |       | 46                                                 |       | 2,372 |   | 363 |   | 79 |   | 442 |   |
| Non-interest expense:                                |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Salaries and employee benefits                       |       | 5,560                                                                           |       | (167                                               | )          | 5,393 |   | 4,410 |   | (503 | ) | 3,907 |   |
| Occupancy and equipment                              |       | 1,372                                                                           |       | —                                             |       | 1,372 |   | 909 |   | — |   | 909 |   |
| Data processing                                      |       | 343                                                                             |       | —                                             |       | 343 |   | 335 |   | — |   | 335 |   |
| Advertising                                          |       | 358                                                                             |       | —                                             |       | 358 |   | 153 |   | — |   | 153 |   |
| Deposit insurance premiums                           |       | 35                                                                              |       | —                                             |       | 35 |   | 25 |   | — |   | 25 |   |
| Amortization of intangible assets                    |       | 587                                                                             |       | —                                             |       | 587 |   | 178 |   | — |   | 178 |   |
| Professional fees                                    |       | 510                                                                             |       | —                                             |       | 510 |   | 709 |   | — |   | 709 |   |
| Other expense                                        |       | 1,002                                                                           |       | 2,736                                              |       | 3,738 |   | 1,123 |   | 4,417 |   | 5,540 |   |
| Total non-interest expense                           |       | 9,767                                                                           |       | 2,569                                              |       | 12,336 |   | 7,842 |   | 3,914 |   | 11,756 |   |
| Income before income taxes                           |       | 5,986                                                                           |       | (2,492                                             | )          | 3,494 |   | 1,225 |   | (3,835 | ) | (2,610 | ) |
| Income tax expense                                   |       | 2,109                                                                           |       | (849                                               | )          | 1,260 |   | 299 |   | (1,286 | ) | (987 | ) |
| Net Income                                           |       | $                                                                               | 3,877      |                                               | $          | (1,643 | ) | $ | 2,234 |   | $ | 926 |   | (2,549 | ) | $ | (1,623 | ) |
| Earnings per share:                                  |       |                                                                            |       |                                               |       |   |   |   |   |   |   |   |   |
| Basic                                                |       | 0.26                                                                            |       | (0.11                                              | )          | 0.15 |   | 0.08 |   | (0.23 | ) | (0.15 | ) |
| Diluted                                              |       | 0.26                                                                            |       | (0.11                                              | )          | 0.15 |   | 0.08 |   | (0.22 | ) | (0.14 | ) |

 

See accompanying notes to the annual restatement tables

 

66

----

 

The followingtables present a reconciliation of the effects of adjustments made to theCompany’s previously reported interim statements of financial condition for2007 and 2006:

 
| ** **                                                                      | ** ** | **March 31, 2007**         | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                      | ** ** | **As reported**                 | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                                                                         |       |                                 |       |   |   |   |   |
| Cash and cash equivalents:                                                      |       |                                 |       |   |   |   |   |
| Cash on hand and non-interest-earning  deposits                                 |       | $                                    | 28,464     |   | $ | (5,240 | ) | $ | 23,224 |   |
| Interest-bearing deposits                                                       |       | 35,774                               |       | (1,388 | ) | 34,386 |   |
| Total cash and cash equivalents                                                 |       | 64,238                               |       | (6,628 | ) | 57,610 |   |
| Investment securities:                                                          |       |                                 |       |   |   |   |   |
| Trading                                                                         |       | 1,116                                |       | — |   | 1,116 |   |
| Available for sale (amortized cost of  $169,373)                                |       | 167,236                              |       | — |   | 167,236 |   |
| Held to maturity (fair value of $91,736)                                        |       | 93,107                               |       | — |   | 93,107 |   |
| Federal Home Loan Bank Stock                                                    |       | 13,298                               |       | — |   | 13,298 |   |
| Loans (net of allowance for loan losses)                                        |       | 1,028,731                            |       | (446 | ) | 1,028,285 |   |
| Loans held for sale                                                             |       | 5,926                                |       | — |   | 5,926 |   |
| Accrued interest receivable                                                     |       | 6,599                                |       | — |   | 6,599 |   |
| Property and equipment, net                                                     |       | 11,075                               |       | — |   | 11,075 |   |
| Bank owned life insurance                                                       |       | 11,814                               |       | — |   | 11,814 |   |
| Real estate owned                                                               |       | 1,991                                |       | — |   | 1,991 |   |
| Other intangible assets, net                                                    |       | 11,315                               |       | — |   | 11,315 |   |
| Goodwill                                                                        |       | 98,595                               |       | 497 |   | 99,092 |   |
| Other assets                                                                    |       | 18,256                               |       | (717 | ) | 17,539 |   |
| Total assets                                                                    |       | $                                    | 1,533,297  |   | $ | (7,294 | ) | $ | 1,526,003 |   |
| Liabilities and Stockholders’ Equity:                                      |       |                                 |       |   |   |   |   |
| Interest-bearing deposits                                                       |       | $                                    | 898,460    |   | $ | 14,132 |   | $ | 912,592 |   |
| Non-interest-bearing deposits                                                   |       | 161,643                              |       | (16,494 | ) | 145,149 |   |
| Securities sold under agreements to  repurchase                                 |       | 30,000                               |       | — |   | 30,000 |   |
| Federal Home Loan Bank advances                                                 |       | 195,073                              |       | (208 | ) | 194,865 |   |
| Advance payments from borrowers for taxes                                       |       | 3,208                                |       | — |   | 3,208 |   |
| Trust preferred securities                                                      |       | 25,694                               |       | — |   | 25,694 |   |
| Accrued interest payable                                                        |       | 2,316                                |       | 80 |   | 2,396 |   |
| Other liabilities                                                               |       | 8,064                                |       | 534 |   | 8,598 |   |
| Total liabilities                                                               |       | 1,324,458                            |       | (1,956 | ) | 1,322,502 |   |
| Commitments and contingencies                                                   |       |                                 |       |   |   |   |   |
| Stockholders’ equity:                                                      |       |                                 |       |   |   |   |   |
| Common stock, $0.01 par value; 40,000,000  shares authorized; 17,417,278 issued |       | 174                                  |       | — |   | 174 |   |
| Additional paid-in capital                                                      |       | 180,563                              |       | (426 | ) | 180,137 |   |
| Retained earnings—substantially restricted                                 |       | 62,226                               |       | (5,338 | ) | 56,888 |   |
| Accumulated other comprehensive loss                                            |       | (1,409                               | )          | — |   | (1,409 | ) |
| Obligation of deferred compensation plan                                        |       | 1,241                                |       | — |   | 1,241 |   |
| Treasury stock at cost (1,705,452 shares at  March 31, 2007)               |       | (29,060                              | )          | 426 |   | (28,634 | ) |
| Unallocated common stock held by:                                               |       |                                 |       |   |   |   |   |
| Employee Stock Ownership Plan (ESOP)                                            |       | (2,759                               | )          | — |   | (2,759 | ) |
| Recognition and Retention Plan Trust (RRP)                                      |       | (2,137                               | )          | — |   | (2,137 | ) |
| Total stockholders’ equity                                                 |       | 208,839                              |       | (5,338 | ) | 203,501 |   |
| Total liabilities and stockholders’ equity                                 |       | $                                    | 1,533,297  |   | $ | (7,294 | ) | $ | 1,526,003 |   |

 

See accompanying notes to the annual restatement tables

 

67

----

 
| ** **                                                                                                                                                                 | ** ** | **December 31, 2006**      | ** ** | **September 30, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                 | ** ** | **As reported**                 | ** ** | **Adjustments**                  | ** ** | **As Restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                                                                                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                                                                                                                                                                    |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents:                                                                                                                                                 |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Cash on hand and non-interest-earning  deposits                                                                                                                            |       | $                                    | 24,840     |                             | $          | (2,312 | ) | $ | 22,528 |   | $ | 27,306 |   | $ | (779 | ) | $ | 26,527 |   |
| Interest-bearing deposits                                                                                                                                                  |       | 27,414                               |       | (2,971                           | )          | 24,443 |   | 17,429 |   | (250 | ) | 17,179 |   |
| Total cash and cash equivalents                                                                                                                                            |       | 52,254                               |       | (5,283                           | )          | 46,971 |   | 44,735 |   | (1,029 | ) | 43,706 |   |
| Investment securities:                                                                                                                                                     |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Trading                                                                                                                                                                    |       | 1,012                                |       | —                           |       | 1,012 |   | 1,012 |   | — |   | 1,012 |   |
| Available for sale (amortized cost of  $181,940 and $206,471, respectively)                                                                                                |       | 179,324                              |       | —                           |       | 179,324 |   | 203,567 |   | — |   | 203,567 |   |
| Held to maturity (fair value of $95,513 and  $102,087, respectively)                                                                                                       |       | 97,384                               |       | —                           |       | 97,384 |   | 101,455 |   | — |   | 101,455 |   |
| Federal Home Loan Bank Stock                                                                                                                                               |       | 13,551                               |       | —                           |       | 13,551 |   | 14,580 |   | — |   | 14,580 |   |
| Loans (net of allowance for loan losses)                                                                                                                                   |       | 1,035,671                            |       | (321                             | )          | 1,035,350 |   | 1,029,281 |   | (281 | ) | 1,029,000 |   |
| Loans held for sale                                                                                                                                                        |       | 5,052                                |       | —                           |       | 5,052 |   | 3,829 |   | — |   | 3,829 |   |
| Accrued interest receivable                                                                                                                                                |       | 6,323                                |       | —                           |       | 6,323 |   | 6,474 |   | — |   | 6,474 |   |
| Property and equipment, net                                                                                                                                                |       | 11,494                               |       | (452                             | )          | 11,042 |   | 10,743 |   | — |   | 10,743 |   |
| Bank owned life insurance                                                                                                                                                  |       | 11,695                               |       | —                           |       | 11,695 |   | 11,591 |   | — |   | 11,591 |   |
| Real estate owned                                                                                                                                                          |       | 2,016                                |       | —                           |       | 2,016 |   | 2,003 |   | — |   | 2,003 |   |
| Other intangible assets, net                                                                                                                                               |       | 11,858                               |       | —                           |       | 11,858 |   | 12,401 |   | — |   | 12,401 |   |
| Goodwill                                                                                                                                                                   |       | 94,072                               |       | 497                              |       | 94,569 |   | 94,072 |   | 497 |   | 94,569 |   |
| Other assets                                                                                                                                                               |       | 17,861                               |       | 163                              |       | 18,024 |   | 17,413 |   | (748 | ) | 16,665 |   |
| Total assets                                                                                                                                                               |       | $                                    | 1,539,567  |                             | $          | (5,396 | ) | $ | 1,534,171 |   | $ | 1,553,156 |   | $ | (1,561 | ) | $ | 1,551,595 |   |
| Liabilities and Stockholders’ Equity:                                                                                                                                 |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                                                                                                                                  |       | $                                    | 876,924    |                             | $          | 12,022 |   | $ | 888,946 |   | $ | 870,441 |   | $ | 39,531 |   | $ | 909,972 |   |
| Non-interest-bearing deposits                                                                                                                                              |       | 160,302                              |       | (13,203                          | )          | 147,099 |   | 158,195 |   | (37,944 | ) | 120,251 |   |
| Securities sold under agreements to  repurchase                                                                                                                            |       | 20,000                               |       | —                           |       | 20,000 |   | 20,000 |   | — |   | 20,000 |   |
| Federal Home Loan Bank advances                                                                                                                                            |       | 220,816                              |       | (231                             | )          | 220,585 |   | 245,664 |   | (185 | ) | 245,479 |   |
| Advance payments from borrowers for taxes                                                                                                                                  |       | 3,396                                |       | —                           |       | 3,396 |   | 2,414 |   | — |   | 2,414 |   |
| Trust preferred securities                                                                                                                                                 |       | 36,065                               |       | —                           |       | 36,065 |   | 36,101 |   | — |   | 36,101 |   |
| Accrued interest payable                                                                                                                                                   |       | 2,529                                |       | 81                               |       | 2,610 |   | 2,229 |   | 80 |   | 2,309 |   |
| Other liabilities                                                                                                                                                          |       | 10,905                               |       | 1,063                            |       | 11,968 |   | 10,600 |   | 2,058 |   | 12,658 |   |
| Total liabilities                                                                                                                                                          |       | 1,330,937                            |       | (268                             | )          | 1,330,669 |   | 1,345,644 |   | 3,540 |   | 1,349,184 |   |
| Commitments and contingencies                                                                                                                                              |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                 |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Common stock, $0.01 par value; 40,000,000  shares authorized; 16,633,575 and 16,612,445 shares issued at  December 31, 2006, and September 30 2006, respectively |       | 166                                  |       | —                           |       | 166 |   | 166 |   | — |   | 166 |   |
| Additional paid-in capital                                                                                                                                                 |       | 179,855                              |       | —                           |       | 179,855 |   | 179,344 |   | — |   | 179,344 |   |
| Retained earnings—substantially restricted                                                                                                                            |       | 62,367                               |       | (5,128                           | )          | 57,239 |   | 61,656 |   | (5,101 | ) | 56,555 |   |
| Accumulated other comprehensive loss                                                                                                                                       |       | (1,714                               | )          | —                           |       | (1,714 | ) | (1,333 | ) | — |   | (1,333 | ) |
| Obligation of deferred compensation plan                                                                                                                                   |       | 1,369                                |       | —                           |       | 1,369 |   | 1,369 |   | — |   | 1,369 |   |
| Treasury stock at cost (1,665,443 shares at  both December 31, and September 30, 2006)                                                                           |       | (28,251                              | )          | —                           |       | (28,251 | ) | (28,251 | ) | — |   | (28,251 | ) |
| Unallocated common stock held by:                                                                                                                                          |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Employee Stock Ownership Plan (ESOP)                                                                                                                                       |       | (2,839                               | )          | —                           |       | (2,839 | ) | (2,949 | ) | — |   | (2,949 | ) |
| Recognition and Retention Plan Trust (RRP)                                                                                                                                 |       | (2,323                               | )          | —                           |       | (2,323 | ) | (2,490 | ) | — |   | (2,490 | ) |
| Total stockholders’ equity                                                                                                                                            |       | 208,630                              |       | (5,128                           | )          | 203,502 |   | 207,512 |   | (5,101 | ) | 202,411 |   |
| Total liabilities and stockholders’ equity                                                                                                                            |       | $                                    | 1,539,567  |                             | $          | (5,396 | ) | $ | 1,534,171 |   | $ | 1,553,156 |   | $ | (1,561 | ) | $ | 1,551,595 |   |

 

See accompanying notes to the annual restatement tables

 

68

----

 
| ** **                                                                                                  | ** ** | **March 31, 2006**         | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                  | ** ** | **As reported**                 | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                                                  | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets:                                                                                                     |       |                                 |       |   |   |   |   |
| Cash and cash equivalents:                                                                                  |       |                                 |       |   |   |   |   |
| Cash on hand and non-interest-earning  deposits                                                             |       | $                                    | 19,808     |   | $ | (6,043 | ) | $ | 13,765 |   |
| Interest-bearing deposits                                                                                   |       | 13,650                               |       | (1,664 | ) | 11,986 |   |
| Total cash and cash equivalents                                                                             |       | 33,458                               |       | (7,707 | ) | 25,751 |   |
| Investment securities:                                                                                      |       |                                 |       |   |   |   |   |
| Trading                                                                                                     |       | 885                                  |       | — |   | 885 |   |
| Available for sale (amortized cost of  $210,603)                                                            |       | 205,317                              |       | — |   | 205,317 |   |
| Held to maturity (fair value of $106,814)                                                                   |       | 110,268                              |       | — |   | 110,268 |   |
| Federal Home Loan Bank Stock                                                                                |       | 19,507                               |       | — |   | 19,507 |   |
| Loans (net of allowance for loan losses)                                                                    |       | 1,081,848                            |       | (118 | ) | 1,081,730 |   |
| Loans held for sale                                                                                         |       | 3,035                                |       | — |   | 3,035 |   |
| Accrued interest receivable                                                                                 |       | 6,182                                |       | — |   | 6,182 |   |
| Property and equipment, net                                                                                 |       | 10,418                               |       | (77 | ) | 10,341 |   |
| Bank owned life insurance                                                                                   |       | 11,379                               |       | — |   | 11,379 |   |
| Real estate owned                                                                                           |       | 50                                   |       | — |   | 50 |   |
| Other intangible assets, net                                                                                |       | 13,649                               |       | — |   | 13,649 |   |
| Goodwill                                                                                                    |       | 91,481                               |       | 497 |   | 91,978 |   |
| Other assets                                                                                                |       | 16,176                               |       | 131 |   | 16,307 |   |
| Total assets                                                                                                |       | $                                    | 1,603,653  |   | $ | (7,274 | ) | $ | 1,596,379 |   |
| Liabilities and Stockholders’ Equity:                                                                  |       |                                 |       |   |   |   |   |
| Deposits                                                                                                    |       | $                                    | 974,648    |   | $ | (5,762 | ) | $ | 968,886 |   |
| Securities sold under agreements to  repurchase                                                             |       | 32,555                               |       | — |   | 32,555 |   |
| Federal Home Loan Bank advances                                                                             |       | 338,703                              |       | (117 | ) | 338,586 |   |
| Advance payments from borrowers for taxes                                                                   |       | 3,936                                |       | — |   | 3,936 |   |
| Trust preferred securities                                                                                  |       | 36,234                               |       | — |   | 36,234 |   |
| Accrued interest payable                                                                                    |       | 1,956                                |       | 80 |   | 2,036 |   |
| Other liabilities                                                                                           |       | 13,573                               |       | 2,953 |   | 16,526 |   |
| Total liabilities                                                                                           |       | 1,401,605                            |       | (2,846 | ) | 1,398,759 |   |
| Commitments and contingencies                                                                               |       |                                 |       |   |   |   |   |
| Stockholders’ equity:                                                                                  |       |                                 |       |   |   |   |   |
| Common stock, $0.01 par value; 40,000,000  shares authorized; and 1,748,715 shares issued at March 31, 2006 |       | 165                                  |       | — |   | 165 |   |
| Additional paid-in capital                                                                                  |       | 176,908                              |       | — |   | 176,908 |   |
| Retained earnings—substantially restricted                                                             |       | 59,764                               |       | (4,428 | ) | 55,336 |   |
| Accumulated other comprehensive loss                                                                        |       | (3,091                               | )          | — |   | (3,091 | ) |
| Obligation of deferred compensation plan                                                                    |       | 1,242                                |       | — |   | 1,242 |   |
| Treasury stock at cost, 1,665,443 shares at  March 31, 2006                                                 |       | (28,251                              | )          | — |   | (28,251 | ) |
| Unallocated common stock held by:                                                                           |       |                                 |       |   |   |   |   |
| Employee Stock Ownership Plan (ESOP)                                                                        |       | (4,689                               | )          | — |   | (4,689 | ) |
| Recognition and Retention Plan Trust (RRP)                                                                  |       | —                               |       | — |   | — |   |
| Total stockholders’ equity                                                                             |       | 202,048                              |       | (4,428 | ) | 197,620 |   |
| Total liabilities and stockholders’ equity                                                             |       | $                                    | 1,603,653  |   | $ | (7,274 | ) | $ | 1,596,379 |   |

 

See accompanying notes to the annual restatement tables

 

69

----

 
| ** **                                                                                                                                                                     | ** ** | **December 31, 2005**      | ** ** | **September 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **As reported**                 | ** ** | **Adjustments**                  | ** ** | **As Restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As Restated** | ** ** |
| ** **                                                                                                                                                                     | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                                                                                                                                                                     | ** ** | ** **                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Assets:                                                                                                                                                                        |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents:                                                                                                                                                     |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Cash on hand and non-interest-earning  deposits                                                                                                                                |       | $                                    | 22,318     |                             | $          | (1,753 | ) | $ | 20,565 |   | $ | 16,771 |   | $ | — |   | $ | 16,771 |   |
| Interest-bearing deposits                                                                                                                                                      |       | 12,666                               |       | (1,664                           | )          | 11,002 |   | 26,866 |   | (364 | ) | 26,502 |   |
| Total cash and cash equivalents                                                                                                                                                |       | 34,984                               |       | (3,417                           | )          | 31,567 |   | 43,637 |   | (364 | ) | 43,273 |   |
| Investment securities:                                                                                                                                                         |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Trading                                                                                                                                                                        |       | 885                                  |       | —                           |       | 885 |   | 82 |   | — |   | 82 |   |
| Available for sale (amortized cost of  $196,254 and $233,304, respectively)                                                                                                    |       | 192,881                              |       | —                           |       | 192,881 |   | 231,252 |   | — |   | 231,252 |   |
| Held to maturity (fair value of $112,787  and $119,434, respectively)                                                                                                          |       | 114,605                              |       | —                           |       | 114,605 |   | 120,335 |   | — |   | 120,335 |   |
| Federal Home Loan Bank Stock                                                                                                                                                   |       | 16,997                               |       | —                           |       | 16,997 |   | — |   | — |   | — |   |
| Loans (net of allowance for loan losses)                                                                                                                                       |       | 1,053,160                            |       | (118                             | )          | 1,053,042 |   | 1,045,704 |   | — |   | 1,045,704 |   |
| Loans held for sale                                                                                                                                                            |       | 3,614                                |       | —                           |       | 3,614 |   | 5,592 |   | — |   | 5,592 |   |
| Accrued interest receivable                                                                                                                                                    |       | 6,265                                |       | —                           |       | 6,265 |   | 6,227 |   | — |   | 6,227 |   |
| Property and equipment, net                                                                                                                                                    |       | 20,427                               |       | (77                              | )          | 20,350 |   | 19,639 |   | (77 | ) | 19,562 |   |
| Bank owned life insurance                                                                                                                                                      |       | 11,280                               |       | —                           |       | 11,280 |   | 11,178 |   | — |   | 11,178 |   |
| Real estate owned                                                                                                                                                              |       | 284                                  |       | —                           |       | 284 |   | 437 |   | — |   | 437 |   |
| Other intangible assets, net                                                                                                                                                   |       | 14,224                               |       | —                           |       | 14,224 |   | — |   | — |   | — |   |
| Goodwill                                                                                                                                                                       |       | 91,686                               |       | 497                              |       | 92,183 |   | 106,164 |   | 497 |   | 106,661 |   |
| Other assets                                                                                                                                                                   |       | 16,662                               |       | (59                              | )          | 16,603 |   | 15,360 |   | (151 | ) | 15,209 |   |
| Total assets                                                                                                                                                                   |       | $                                    | 1,577,954  |                             | $          | (3,174 | ) | $ | 1,574,780 |   | $ | 1,605,607 |   | $ | (95 | ) | $ | 1,605,512 |   |
| Liabilities and Stockholders’ Equity:                                                                                                                                     |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Deposits                                                                                                                                                                       |       | $                                    | 1,007,555  |                             | $          | (1,472 | ) | $ | 1,006,083 |   | $ | 1,030,711 |   | $ | — |   | $ | 1,030,711 |   |
| Securities sold under agreements to repurchase                                                                                                                                 |       | 28,025                               |       | —                           |       | 28,025 |   | 24,436 |   | — |   | 24,436 |   |
| Federal Home Loan Bank advances                                                                                                                                                |       | 312,117                              |       | (50                              | )          | 312,067 |   | 328,144 |   | — |   | 328,144 |   |
| Advance payments from borrowers for taxes                                                                                                                                      |       | 3,649                                |       | —                           |       | 3,649 |   | 2,040 |   | — |   | 2,040 |   |
| Trust preferred securities                                                                                                                                                     |       | 10,496                               |       | —                           |       | 10,496 |   | 10,532 |   | — |   | 10,532 |   |
| Accrued interest payable                                                                                                                                                       |       | 2,153                                |       | 18                               |       | 2,171 |   | 1,708 |   | — |   | 1,708 |   |
| Other liabilities                                                                                                                                                              |       | 12,773                               |       | 2,887                            |       | 15,660 |   | 9,966 |   | 2,819 |   | 12,785 |   |
| Total liabilities                                                                                                                                                              |       | 1,376,768                            |       | 1,383                            |       | 1,378,151 |   | 1,407,537 |   | 2,819 |   | 1,410,356 |   |
| Commitments and contingencies                                                                                                                                                  |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                     |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Common stock, $0.01 par value; 40,000,000  shares authorized; and 16,517,973 and 16,465,922 shares issued at  December 31, 2005 and September 30, 2005, respectively |       | 165                                  |       | —                           |       | 165 |   | 165 |   | — |   | 165 |   |
| Additional paid-in capital                                                                                                                                                     |       | 176,786                              |       | —                           |       | 176,786 |   | 176,741 |   | — |   | 176,741 |   |
| Retained earnings—substantially restricted                                                                                                                                |       | 57,978                               |       | (4,557                           | )          | 53,421 |   | 55,794 |   | (2,914 | ) | 52,880 |   |
| Accumulated other comprehensive loss                                                                                                                                           |       | (1,929                               | )          | —                           |       | (1,929 | ) | (1,134 | ) | — |   | (1,134 | ) |
| Obligation of deferred compensation plan                                                                                                                                       |       | 1,242                                |       | —                           |       | 1,242 |   | 1,076 |   | — |   | 1,076 |   |
| Treasury stock at cost, (1,665,443 shares  at both December 31, and September 30, 2005)                                                                              |       | (28,251                              | )          | —                           |       | (28,251 | ) | (28,085 | ) | — |   | (28,085 | ) |
| Unallocated common stock held by:                                                                                                                                              |       |                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Employee Stock Ownership Plan (ESOP)                                                                                                                                           |       | (4,805                               | )          | —                           |       | (4,805 | ) | (4,795 | ) | — |   | (4,795 | ) |
| Recognition and Retention Plan Trust (RRP)                                                                                                                                     |       | —                               |       | —                           |       | — |   | (1,692 | ) | — |   | (1,692 | ) |
| Total stockholders’ equity                                                                                                                                                |       | 201,186                              |       | (4,557                           | )          | 196,629 |   | 198,070 |   | (2,914 | ) | 195,156 |   |
| Total liabilities and stockholders’ equity                                                                                                                                |       | $                                    | 1,577,954  |                             | $          | (3,174 | ) | $ | 1,574,780 |   | $ | 1,605,607 |   | $ | (95 | ) | $ | 1,605,512 |   |

 

See accompanying notes to the annual restatement tables

 

70

----

 

The followingtable presents a reconciliation of the effects of adjustments made to theCompany’s previously reported consolidated statements of changes in stockholder’sequity and comprehensive income for 2007 and 2006:

 
| ** **                                         | ** ** | ** **                           | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | **Obligation of** | ** ** | ** **   | ** ** | **Common**             | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------|------------|--------------|------------|------------------------|------------|------------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                         | ** ** | ** **                           | ** ** | **Additional**   | ** ** | ** **   | ** ** | **other**              | ** ** | **deferred**           | ** ** | ** **   | ** ** | **stock**              | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Common**                           | ** ** | **paid in** | ** ** | **Retained** | ** ** | **comprehensive**      | ** ** | **compensation**       | ** ** | **Treasury** | ** ** | **acquired by**   | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **stock**                            | ** ** | **capital**      | ** ** | **earnings** | ** ** | **income (loss)** | ** ** | **plan**               | ** ** | **stock**    | ** ** | **benefit plans** | ** ** | **Total**  | ** ** |
| ** **                                         | ** ** | **(Dollars in thousands)** | ** ** |
|                                               |       |                                 |       |             |       |         |       |                   |       |                   |       |         |       |                   |       |       |       |
| Balance at June 30, 2006, as reported         |       | $                                    | 166        |             | $          | 178,886      |       | $                      | 60,404     |                   | $          | (3,317       | )          | $                      | 1,258      |       | $          | (28,251 | ) | $ | (5,748 | ) | $ | 203,398 |   |
| Restatement adjustments:                           |       |                                 |       |             |       |         |       |                   |       |                   |       |         |       |                   |       |       |       |
| Net income                                         |       | —                               |       | —           |       | (4,409       | )          | —                 |       | —                 |       | —       |       | —                 |       | (4,409     | )          |
| Cumulative effect of restatement                   |       | —                               |       | —           |       | (365         | )          | —                 |       | —                 |       | —       |       | —                 |       | (365       | )          |
|                                               |       |                                 |       |             |       |         |       |                   |       |                   |       |         |       |                   |       |       |       |
| Balance at June 30, 2006, as restated         |       | $                                    | 166        |             | $          | 178,886      |       | $                      | 55,630     |                   | $          | (3,317       | )          | $                      | 1,258      |       | $          | (28,251 | ) | $ | (5,748 | ) | $ | 198,624 |   |
|                                               |       |                                 |       |             |       |         |       |                   |       |                   |       |         |       |                   |       |       |       |
| Balance at June 30, 2007, as reported         |       | $                                    | 175        |             | $          | 191,223      |       | $                      | 51,932     |                   | $          | (3,180       | )          | $                      | 1,277      |       | $          | (31,493 | ) | $ | (4,599 | ) | $ | 205,335 |   |
| Restatement adjustments:                           |       |                                 |       |             |       |         |       |                   |       |                   |       |         |       |                   |       |       |       |
| Net income                                         |       | —                               |       | —           |       | (1,128       | )          | —                 |       | —                 |       | —       |       | —                 |       | (1,128     | )          |
| Issuance of restricted shares from Treasury  Stock |       | —                               |       | (447             | )          | —       |       | —                 |       | —                 |       | 447          |       | —                 |       | —     |       |
| Cumulative effect of restatement                   |       | —                               |       | —           |       | (4,774       | )          | —                 |       | —                 |       | —       |       | —                 |       | (4,774     | )          |
|                                               |       |                                 |       |             |       |         |       |                   |       |                   |       |         |       |                   |       |       |       |
| Balance at June 30, 2007, as restated         |       | $                                    | 175        |             | $          | 190,776      |       | $                      | 46,030     |                   | $          | (3,180       | )          | $                      | 1,277      |       | $          | (31,046 | ) | $ | (4,599 | ) | $ | 199,433 |   |

 

71

----

 

The following table presents a reconciliation of the effects ofadjustments made to the Company’s previously reported consolidated statementsof cash flows for 2007 and 2006:

 
| ** **                                                                              | ** ** | **For the year ended June 30, 2007** | ** ** | **For the year ended June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **As reported**                                               | ** ** | **Adjustments**                                                    | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustments** | ** ** | **As restated** | ** ** |
| ** **                                                                              | ** ** | **(Dollars in thousands)**                               | ** ** |
|                                                                                    |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net cash flows from operating activities:                                               |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net income                                                                              |       | $                                                                  | 8,395      |                                                               | $          | (1,128 | ) | $ | 7,267 |   | $ | 11,076 |   | $ | (4,409 | ) | $ | 6,667 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:      |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Depreciation                                                                            |       | 2,598                                                              |       | —                                                             |       | 2,598 |   | 1,837 |   | — |   | 1,837 |   |
| Amortization of premium and accretion of  discount, net                                 |       | 180                                                                |       | —                                                             |       | 180 |   | 347 |   | — |   | 347 |   |
| Amortization of intangible assets                                                       |       | 2,043                                                              |       | 88                                                                 |       | 2,131 |   | 1,928 |   | — |   | 1,928 |   |
| Provision for loan losses                                                               |       | 653                                                                |       | —                                                             |       | 653 |   | 3,205 |   | 175 |   | 3,380 |   |
| Gain on sale of loans available for sale                                                |       | (616                                                               | )          | —                                                             |       | (616 | ) | (370 | ) | 13 |   | (357 | ) |
| (Gain) loss on sale of securities available  for sale and trading                       |       | (228                                                               | )          | —                                                             |       | (228 | ) | 936 |   | (17 | ) | 919 |   |
| Gain on sale of interest rate corridor                                                  |       | (804                                                               | )          | —                                                             |       | (804 | ) | — |   | — |   | — |   |
| Gain on sale of real estate                                                             |       | (303                                                               | )          | (77                                                                | )          | (380 | ) | — |   | (17 | ) | (17 | ) |
| Increase in loans held for sale                                                         |       | (57,313                                                            | )          | —                                                             |       | (57,313 | ) | (76,020 | ) | (3,048 | ) | (79,068 | ) |
| Proceeds from sale of loans held for sale                                               |       | 52,489                                                             |       | —                                                             |       | 52,489 |   | 81,911 |   | — |   | 81,911 |   |
| Purchase of trading account securities                                                  |       | (274                                                               | )          | —                                                             |       | (274 | ) | (820 | ) | — |   | (820 | ) |
| Excess tax benefit from stock options  exercised                                        |       | (261                                                               | )          | —                                                             |       | (261 | ) | (198 | ) | (56 | ) | (254 | ) |
| Amortization of deferred loan fees,  discounts and premiums                             |       | (1,266                                                             | )          | 423                                                                |       | (843 | ) | (1,442 | ) | 386 |   | (1,056 | ) |
| (Increase) decrease in accrued interest  receivable                                     |       | (91                                                                | )          | 84                                                                 |       | (7 | ) | 335 |   | — |   | 335 |   |
| (Increase) decrease in value of bank owned  life insurance                              |       | (447                                                               | )          | —                                                             |       | (447 | ) | 6,036 |   | (6,405 | ) | (369 | ) |
| (Increase) decrease in other assets                                                     |       | (2,434                                                             | )          | (68                                                                | )          | (2,502 | ) | 3,225 |   | 3,683 |   | 6,908 |   |
| Increase (decrease) in other liabilities                                                |       | 479                                                                |       | 6,763                                                              |       | 7,242 |   | (8,455 | ) | (4,936 | ) | (13,391 | ) |
| Stock based compensation                                                                |       | 1,931                                                              |       | —                                                             |       | 1,931 |   | 1,963 |   | — |   | 1,963 |   |
| Increase (decrease) in accrued interest  payable                                        |       | 18                                                                 |       | —                                                             |       | 18 |   | (351 | ) | 80 |   | (271 | ) |
| Net cash provided by operating activities                                               |       | 4,749                                                              |       | 6,085                                                              |       | 10,834 |   | 25,143 |   | (14,551 | ) | 10,592 |   |
| Cash flows from investing activities:                                                   |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Capital expenditures                                                                    |       | (5,080                                                             | )          | —                                                             |       | (5,080 | ) | (3,287 | ) | (661 | ) | (3,948 | ) |
| Proceeds from sale of office buildings                                                  |       | 1,649                                                              |       | 265                                                                |       | 1,914 |   | 11,139 |   | — |   | 11,139 |   |
| Net decrease (increase) in loans                                                        |       | 26,118                                                             |       | 301                                                                |       | 26,419 |   | (25,825 | ) | 1,116 |   | (24,709 | ) |
| Purchase of securities available for sale                                               |       | (62,737                                                            | )          | —                                                             |       | (62,737 | ) | (23,027 | ) | — |   | (23,027 | ) |
| Proceeds from sales and calls of securities  available for sale                         |       | 72,768                                                             |       | —                                                             |       | 72,768 |   | 80,132 |   | — |   | 80,132 |   |
| Proceeds from maturities, payments and  calls of investment securities held to maturity |       | 17,205                                                             |       | —                                                             |       | 17,205 |   | 59,159 |   | — |   | 59,159 |   |
| Net decrease (increase) in FHLB stock                                                   |       | 5,462                                                              |       | —                                                             |       | 5,462 |   | 11,544 |   | — |   | 11,544 |   |
| Proceeds from sale of other real estate  owned                                          |       | 2,572                                                              |       | —                                                             |       | 2,572 |   | 388 |   | — |   | 388 |   |
| Net cash used for acquisition                                                           |       | (4,433                                                             | )          | —                                                             |       | (4,433 | ) | (35,032 | ) | 12,096 |   | (22,936 | ) |
| Net cash provided by (used in) investing  activities                                    |       | 53,524                                                             |       | 566                                                                |       | 54,090 |   | 75,191 |   | 12,551 |   | 87,742 |   |
| Cash flows from financing activities:                                                   |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net increase (decrease) in deposits                                                     |       | 74,932                                                             |       | 1,298                                                              |       | 76,230 |   | (55,519 | ) | 4,724 |   | (50,795 | ) |
| Increase in securities sold under  agreements to repurchase                             |       | —                                                             |       | —                                                             |       | — |   | 26,636 |   | (6,636 | ) | 20,000 |   |
| Proceeds from FHLB advances                                                             |       | 107,400                                                            |       | —                                                             |       | 107,400 |   | 215,700 |   | — |   | 215,700 |   |
| Repayment of FHLB advances                                                              |       | (200,054                                                           | )          | (137                                                               | )          | (200,191 | ) | (291,724 | ) | (1,865 | ) | (293,589 | ) |
| (Decrease) increase in advance payments  from borrowers for taxes and insurance         |       | (522                                                               | )          | —                                                             |       | (522 | ) | 1,428 |   | 1 |   | 1,429 |   |
| Net proceeds from the issuance of trust  preferred securities                           |       | —                                                             |       | —                                                             |       | — |   | 25,000 |   | — |   | 25,000 |   |
| Repayment of trust preferred securities                                                 |       | (10,000                                                            | )          | —                                                             |       | (10,000 | ) | — |   | — |   | — |   |
| Cash dividends on common stock                                                          |       | (6,920                                                             | )          | —                                                             |       | (6,920 | ) | (6,718 | ) | — |   | (6,718 | ) |
| Proceeds from stock issuance                                                            |       | —                                                             |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Cash in lieu of fractional shares                                                       |       | (10                                                                | )          | —                                                             |       | (10 | ) | — |   | — |   | — |   |
| Stock options exercised                                                                 |       | 1,392                                                              |       | —                                                             |       | 1,392 |   | 1,275 |   | — |   | 1,275 |   |
| Excess tax benefit from stock options  exercised                                        |       | 261                                                                |       | —                                                             |       | 261 |   | 198 |   | 56 |   | 254 |   |
| Common stock repurchased as treasury stock                                              |       | (3,242                                                             | )          | —                                                             |       | (3,242 | ) | — |   | (179 | ) | (179 | ) |
| Net cash (used in) provided by financing  activities                                    |       | (36,763                                                            | )          | 1,161                                                              |       | (35,602 | ) | (83,724 | ) | (3,899 | ) | (87,623 | ) |
| Net increase (decrease) in cash and cash  equivalents                                   |       | 21,510                                                             |       | 7,812                                                              |       | 29,322 |   | 16,610 |   | (5,899 | ) | 10,711 |   |
|                                                                                    |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents:                                                              |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Beginning of year                                                                       |       | 37,219                                                             |       | (6,264                                                             | )          | 30,955 |   | 20,609 |   | (365 | ) | 20,244 |   |
| End of year                                                                             |       | $                                                                  | 58,729     |                                                               | $          | 1,548 |   | $ | 60,277 |   | $ | 37,219 |   | $ | (6,264 | ) | $ | 30,955 |   |
| Supplemental disclosures of cash and cash  flow information                             |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Interest paid                                                                           |       | $                                                                  | 41,126     |                                                               | $          | (82 | ) | $ | 41,044 |   | $ | 32,589 |   | $ | (113 | ) | $ | 32,476 |   |
| Income taxes paid                                                                       |       | 416                                                                |       | —                                                             |       | 416 |   | 2,628 |   | — |   | 2,628 |   |
| Noncash items:                                                                          |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net unrealized gain (loss) on investment  securities available for sale, net of tax     |       | 1,051                                                              |       | —                                                             |       | 1,051 |   | (3,424 | ) | 487 |   | (2,937 | ) |
| Net unrealized (loss) gain on cash flow  hedge, net of tax                              |       | (766                                                               | )          | —                                                             |       | (766 | ) | 505 |   | (129 | ) | 376 |   |

 

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**3.             Risks and Uncertainties**

 

In the normalcourse of its business, the Company encounters two significant types of risk:economic and regulatory. There are three main components of economic risk:interest rate risk, credit risk and market risk. The Company is subject tointerest rate risk to the degree that its interest-bearing liabilities matureor re-price at different speeds, or on a different basis, from itsinterest-earning assets. The Company’s primary credit risk is the risk ofdefault on the Company’s loan portfolio that results from the borrower’sinability to make contractually required payments. The Company’s lendingactivities are concentrated in Pennsylvania. The largest concentration of theCompany’s loan portfolio is located in southeastern Pennsylvania. The abilityof the Company’s borrowers to repay amounts owed is dependent on severalfactors, including the economic conditions in the borrower’s geographic regionand the borrower’s financial condition. Market risk reflects changes in thevalue of collateral underlying loans, the valuation of real estate held by theCompany, the valuation of loans held for sale, securities available for saleand mortgage servicing assets. The Company is subject to certain Federalbanking laws and regulations as further described herein and in note 19.Compliance with regulations causes the Company to incur significant costs. Inaddition, the possibility of future changes to such regulations presents therisk that future additional costs will be incurred that may impact the Company.

 

**4.****                                      Acquisitionof Chester Valley Bancorp**

 

The abovenoted Chester Valley acquisition cost was approximately $145.3 million,comprised of $88.5 million related to 4,977,256 shares of common stockissued by the Company, $54.2 million in cash, consisting of $51.0 millionpaid to shareholders of Chester Valley and $3.2 million in capitalizedacquisition costs along with $2.6 million related to the conversion of formerstock options of Chester Valley to options of the Company. As a result of theMerger, the Company recorded an approximate $108.6 million intangibleasset, including a $14.9 million core deposit intangible asset with theremainder recorded as goodwill. The Company’s statement of operations for thetwelve months ended June 30, 2006 includes the results of operations ofthe former Chester Valley Bancorp and subsidiaries only for the periodbeginning on September 1, 2005. The fair values used in computing thepurchase accounting adjustments were finalized at June 30, 2006.

 

The followingtable summarizes the purchase accounting adjustments resulting from the Merger:

 

**Chester Valley Acquisition Summary(Dollars in Thousands)**

 

| ** **                                                   | ** ** | **(As  restated)** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|
| Total acquisition price                                      |       | $                  | 145,334    |   |
| Book value of Chester Valley                                 |       | 48,391             |       |
| Adjustments to record assets and  liabilities at fair value: |       |               |       |
| Loan discount                                                |       | (1,181             | )          |
| FHLB advance discount                                        |       | (1,747             | )          |
| Certificate of deposit premium                               |       | (1,036             | )          |
| Trust preferred premium                                      |       | (277               | )          |
| Write-off existing intangibles                               |       | (3,193             | )          |
| Other liabilities                                            |       | (3,505             | )          |
| Market value adjustment on premises and  equipment           |       | (738               | )          |
| Core deposit intangible                                      |       | 14,883             |       |
| Resulting goodwill                                           |       | 93,737             |       |
|                                                              |            |                    |            |  |

 

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The followingtable summarizes the pro forma operating results of Willow Financial Bancorp, Inc.had the acquisition of Chester Valley occurred on July 1, 2005.

 

**Willow Financial Bancorp, Inc.Pro-forma Operating Results with Chester Valley AcquisitionFor year ended June 30, 2006(Dollars in thousands, except per share amounts)**

 

| ** **                | ** ** | **(As  restated)** | ** ** |
|---------------------------|------------|--------------------|------------|
| Total interest income     |       | $                  | 87,506     |   |
| Total interest expense    |       | 34,390             |       |
| Provision for loan losses |       | 3,824              |       |
| Other income              |       | 8,620              |       |
| Other expense             |       | 53,955             |       |
| Income before tax         |       | 3,957              |       |
| Income tax                |       | 1,000              |       |
| Net income                |       | 2,957              |       |
| Non-recurring items(a)    |       | 5,492              |       |
| Adjusted net income(b)    |       | $                  | 8,449      |   |
| Earnings per Share:       |       |               |       |
| Basic                     |       | $                  | 0.21       |   |
| Diluted                   |       | $                  | 0.20       |   |

 

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(a)                    Reflectsgross losses on securities sales ($1.8 million), professional fees ($1.8million) and stock option compensation payments to holders of certain ChesterValley options ($4.7 million).

 

(b)                   Adjustedfor non-recurring items at an effective tax rate of 34%.

 

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The Companydoes not believe the pro-forma operating results for the year ended June 30,2005 would provide meaningful information to the reader of the financialstatements as the change in interest rates occurring during the fiscal yearended June 30, 2006 resulted in significant changes in the purchaseaccounting adjustments resulting from the Merger. Additionally, the Merger waseffective on the close of business on August 31, 2005 and was thereforeclose to the beginning of the fiscal year ending on June 30, 2006.

 

The Companyhas deemed the acquisition of BeneServ, Inc. to be immaterial to theconsolidated financial statements.

 

**5.****                                      Summaryof Significant Accounting Policies**

 

***Use of Estimates***

 

In preparingthe consolidated financial statements, the Company is required to makeestimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the statement of financial condition and revenueand expense for the period. Actual results could differ significantly fromthose estimates. Material estimates that are particularly susceptible tosignificant change in the near-term include the determination of the allowancefor loan losses and income taxes. Management believes that the allowance forloan losses and the balances in income tax accounts are adequate. Variousregulatory agencies, as an integral part of their examination process,periodically review the Bank’s allowance for loan losses and valuations of realestate owned. Such agencies may require the Bank to recognize additions to theallowance or adjustments to the valuations based on their judgments aboutinformation available to them at the time of their examination.

 

***Cash and Cash Equivalents***

 

For purposesof the consolidated statements of cash flows, cash and cash equivalents includecash and interest-bearing deposits with original maturities of three months orless.

 

***Loans Held for Sale***

 

Mortgage loansoriginated and intended for sale in the secondary market are carried at thelower of cost or market calculated on an aggregate basis, with any unrealizedlosses reflected in the consolidated statements of income. Loans transferredfrom loans held for sale to loans receivable are transferred at the lower ofcost or market value at the date of transfer. Gains are recognized upondelivery to the purchaser of said loans.

 

***Investment Securities***

 

The Companydivides its securities portfolio into three segments: (a) held tomaturity, (b) available for sale and (c) trading. Securities in theheld to maturity category are carried at cost, adjusted for amortization ofpremiums and accretion of discounts, using the level yield method, based on theCompany’s intent and ability to hold the securities until maturity. Marketablesecurities included in the available for sale category are carried at fairvalue, with unrealized gains or losses that are temporary in nature, net oftaxes, reflected as an adjustment to equity. Trading securities consist ofmutual funds related to the Company’s deferred compensation plan for certainexecutive level employees. Changes in the fair value of trading securities arerecorded through earnings. There is a corresponding liability in otherliabilities on the consolidated statements of financial condition. Securitiesheld to maturity and available for sale are evaluated periodically to determinewhether a decline in their fair value is other than temporary. Managementutilizes criteria such as the magnitude and duration of the decline, inaddition to the reasons underlying the decline, to determine whether the lossin value is other than temporary. The term “other than temporary” is notintended to indicate that the decline is permanent, but indicates that theprospects for a near-term recovery of value is not necessarily favorable,

 

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or that thereis a lack of evidence to support realizable value equal to or greater thancarrying value of the investment. Once a decline in fair value is determined tobe other than temporary, the fair value of the security is reduced andreflected in the consolidated statements of income.

 

The fair valueof marketable securities is determined from publicly quoted market prices.Securities available for sale that are not readily marketable, which includeFederal Home Loan Bank of Pittsburgh stock, are carried at cost, whichapproximates liquidation value. Premiums and discounts on securities areamortized/accreted using the level yield method. Trading account securities arecarried at fair value, with unrealized gains and losses reflected in theconsolidated statements of income.

 

At the time ofpurchase, the Company makes a determination of whether or not it will hold thesecurities to maturity, based upon an evaluation of the probability of futureevents. Those securities that the Company believes may not be held to maturity,due to interest rate risk, liquidity needs, or other asset/liability decisions,are classified as available for sale. If securities are sold, a gain or loss isdetermined by the specific identification method and is reflected in theoperating results in the period the sale occurs.

 

***Allowance for Loan Losses***

 

The allowancefor loan losses is maintained at a level that management believes is adequateto cover known and inherent losses in the loan portfolio that are both probableand reasonable to estimate at each reporting date. Management establishes theloan loss allowance in accordance with guidance provided by the Securities andExchange Commission’s Staff Accounting Bulletin 102 (SAB 102). Thedetermination of the adequacy of the allowance is based upon an evaluation ofthe portfolio, loss experience, current economic conditions, volume, growth,composition of the portfolio, and other relevant factors. The Company useshistorical loss factors for each loan type and, for loans that we considerhigher risk for all but single-family mortgage loans and guaranteed consumerloans, qualitative factors are also considered. This component establishes arange for factors such as, but not limited to, delinquency trends, assetclassification trends and current economic conditions. Management then assessesthese conditions and establishes, to the best of its ability, the allowance forloan losses from within the range calculated, based upon the facts known atthat time. The methodology does not imply that any portion of the allowance forloan loss is restricted, but the allowance for loan loss applies to the entireloan portfolio.

 

***Loans***

 

Loans arerecorded at cost, net of unearned discounts, deferred fees, and allowances.Discounts or premiums on purchased loans are amortized using the level yieldmethod over the remaining contractual life of each loan, adjusted for actualprepayments. Loan origination fees and certain direct origination costs aredeferred and amortized over the contractual life of the related loans using thelevel yield method.

 

Interestreceivable on loans is accrued to income as earned. Non-accrual loans are loanson which the accrual of interest has ceased because the collection of principalor interest payments is determined to be doubtful by management. It is thepolicy of the Company to discontinue the accrual of interest and reverse anyaccrued interest when principal or interest payments are delinquent more than90 days (unless the loan principal and interest are determined bymanagement to be fully secured and in the process of collection), or earlier ifthe financial condition of the borrower raises significant concern with regardto the ability of the borrower to service the debt in accordance with the termsof the loan. Interest income on such loans is not accrued until the financialcondition and payment record of the borrower demonstrates the ability toservice the debt. Subsequent cash receipts are applied either to theoutstanding principal or recorded as interest income, depending on management’sassessment of ultimate collectibility of principal and interest.

 

Loans areconsidered past due after one payment has been missed. Loans are charged offwhen they reach “loss” status in accordance with the Bank’s assetclassification policy. There are three classifications for problem assets: “substandard,”“doubtful,” and “loss.”

 

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Substandardassets have one or more defined weaknesses and are characterized by thedistinct possibility that the Bank will sustain some loss if the deficienciesare not corrected. Doubtful assets have weaknesses of substandard assets withthe additional characteristic that the weaknesses make collection orliquidation in full on the basis of current existing facts, conditions andvalues, questionable, and there is a high probability of loss. An assetclassified as loss is considered uncollectible and of such little value thatcontinuance as an asset of the institution is not warranted.

 

***Property and Equipment***

 

Property andequipment are stated at cost, less accumulated depreciation and amortization.The Company computes depreciation and amortization using the straight-linemethod over the estimated useful lives of the assets, which range from three to40 years. Significant renovations and additions are capitalized. Leaseholdimprovements are depreciated over the shorter of the useful lives of the assetsor the related lease term. When assets are retired or otherwise disposed of,the cost and related accumulated depreciation are removed from the accounts andany resulting gain or loss is reflected in income for the period. The cost ofmaintenance and repairs is charged to expense as incurred.

 

***Goodwill and Other Intangibles***

 

Goodwillrepresents the excess cost over fair value of assets acquired over liabilitiesas a result of the Merger and earlier branch acquisitions. Included in otherintangibles are core deposit intangibles, a measure of the value of checkingand savings deposits acquired in the Merger accounted for under the purchasemethod. The core deposit intangible is being amortized to expense over afourteen-year life using a method that approximates a level yield method. Acustomer intangible recorded as a result of the acquisition of BeneServ isbeing amortized to expense over a ten-year life using a straight line basis.The Company follows the provisions of Statements of Financial AccountingStandards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” andperforms impairment tests of the intangible assets at least annually andismpairment losses are recognized if the carrying value of the intangibleexceeds its fair value. As discussed in Note 26 of the Notes to theConsolidated Financial Statements, the Company expects to record an impairmentcharge to goodwill for the quarter ended December 31, 2007.

 

***Income Taxes***

 

Deferred taxassets and liabilities are recognized for future tax consequences attributableto differences between the financial statement carrying amounts of existingassets and liabilities and their respective tax bases. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.

 

***Earnings Per Share***

 

Earnings pershare (“EPS”) consists of two separate components, basic EPS and diluted EPS.Basic EPS is computed by dividing net income by the weighted average number ofcommon shares outstanding for each period presented, see Note 7. DilutedEPS is calculated by dividing net income by the weighted average number ofcommon shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEsconsist of dilutive stock options granted through the Company’s stock optionplans and unvested common stock awards.

 

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***Stock Based Compensation***

 

On July 1,2005, the Company adopted SFAS No. 123R, “Share-based Payment.” ThisStatement establishes the standards for accounting for share-based paymenttransactions in which an enterprise receives employee services in exchange forequity instruments of the enterprise or liabilities that are based on the fairvalue of the enterprise’s equity instruments or that may be settled by theissuance of such equity instruments. SFAS No. 123R requires an entity torecognize the grant-date fair-value of stock options and other equity-basedcompensation issued to employees in the statement of operations. The revisedStatement generally requires that an entity account for those transactionsusing the fair-value based method and eliminates an entity’s ability to accountfor share-based compensation transactions using the intrinsic value method ofaccounting provided in Accounting Principles Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees,” which was permitted under Statement No. 123,as originally issued. Prior to July 1, 2005, the Company did not recognizeemployee equity-based compensation costs in net income. The adoption ofSFAS No. 123R had the following impact on reported amounts comparedwith amounts that would have been reported using the intrinsic value methodunder previous accounting:

 
| ** **                                  | ** ** | **Year ended June 30, 2005**                            | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **As  Reported**                                                            | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma  if under  SFAS 123R** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands,  except per share data)** | ** ** |
| Income before taxes                         |       | $                                                                           | 9,778      |   | $ | (350 | ) | $ | 9,428 |   |
| Income taxes                                |       | 3,052                                                                       |       | (118 | ) | 2,934 |   |
| Net Income                                  |       | $                                                                           | 6,726      |   | $ | (232 | ) | $ | 6,494 |   |
|                                        |       |                                                                        |       |   |   |   |   |
| Net income available to common stockholders |       | $                                                                           | 6,627      |   | $ | (232 | ) | $ | 6,395 |   |
|                                        |       |                                                                        |       |   |   |   |   |
| Basic earnings per share                    |       | $                                                                           | 0.70       |   | $ | (0.02 | ) | $ | 0.68 |   |
| Diluted earnings per share                  |       | $                                                                           | 0.67       |   | $ | (0.02 | ) | $ | 0.65 |   |

 

***Recent Accounting Pronouncements***

 

*FASB Statement No, 159, The Fair Value Option for Financial Assets andFinancial Liabilities*

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).This Statement permits entities to choose to measure many financial instrumentsand certain other items at fair value. SFAS 159 provides entities with theopportunity to reduce volatility in reported earnings caused by measuringrelated assets and liabilities differently. SFAS 159 is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of a fiscal year thatbegins on or before November 15, 2007, provided the entity also elects toapply the provisions of FASB Statement No. 157, “Fair Value Measurements.”The Company did not elect early adoption and is currently assessing theimplications of this Statement on its financial statements.

 

*FASB Statement No, 157, Fair Value Measurements*

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 establishes a framework for measuring fair value in accordance with U.S.generally accepted accounting principles, and enhances disclosures about fairvalue measurements. SFAS 157 applies when other accounting pronouncementsrequire fair value measurements; it does not require new fair valuemeasurements. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and for interim periods withinthose years. The Company is currently assessing the implications of thisStatement on its financial statements.

 

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*StaffAccounting Bulletin No. 108, Considering the Effects of Prior YearMisstatements When Quantifying Misstatements in Current Year FinancialStatements*

 

In September 2006,the Securities and Exchange Commission (“SEC”) published Staff AccountingBulletin No. 108, “Considering the Effects of Prior Year MisstatementsWhen Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”).SAB 108 expresses the SEC staff’s views regarding the process of quantifyingfinancial statement misstatements. The SEC staff suggests that registrantselecting not to restate prior periods should reflect the effects of applyingthe guidance in this interpretation in the annual financial statements coveringthe first fiscal year ending after November 15, 2006. This interpretationdid not have a material impact on the Company’s consolidated financialstatements.

 

*FASB Interpretation 48, Accounting for Uncertainty in Income TaxPositions*

 

Effective July 1, 2007 theCompany adopted Financial Interpretation No. 48, “Accounting forUncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN48”). FIN 48 provides guidance on financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.According to FIN 48, a tax position is recognized if it ismore-likely-than-not that the tax position will be sustained upon examination,including resolution of any related appeals or litigation processes, based onthe technical merits of the position. If the tax position meets themore-likely-than-not recognition threshold, the position is measured todetermine the amount of benefit to recognize and should be measured at thelargest amount of benefit that is greater than 50 percent likely of beingrealized upon ultimate settlement. FIN 48 also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition.

 

As of July 1, 2007, the Company had nomaterial unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in non-interest expense in the year they are assessedand are treated as a non-deductible expense for tax purposes. Interest isrecorded in non-interest expense in the year it is assessed and is treated as adeductible expense for tax purposes. As of July 1, 2007, tax years 2004through 2007 remain subject to Federal examination as well as examination bystate taxing jurisdictions.

 

*FASB Statement No, 155, Accounting for Certain Hybrid FinancialInstruments*

 

In February 2006,the FASB issued SFAS No. 155, *Accounting for CertainHybrid Financial Instruments* . Under this new statement, an entitymay re-measure at fair value a hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation from the host, ifthe holder irrevocably elects to account for the whole instrument on a fairvalue basis. Subsequent changes in the fair value of the instrument would berecognized in earnings. This statement is effective for all financial instrumentsthat the Company acquires or issues after July 1, 2007. The adoption ofthis statement will not have a material impact on the Company’s financialposition or results of operations.

 

*EITF 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects ofEndorsement Split-Dollar Life Insurance Arrangements*

 

In June 2006,the Emerging Issues Task Force reached a consensus that, for endorsementsplit-dollar life insurance arrangements, an employer should recognize theliability for future benefits based on the substantive agreement with theemployee, since the postretirement benefit obligation is not effectivelysettled. An entity is permitted to apply the consensus by retrospectiveapplication to all prior periods in accordance with FASB Statement No. 154,including its required disclosures. The consensus is effective for fiscal yearsbeginning after December 15, 2007, with early adoption permitted as of thebeginning of an entity’s fiscal year. The Bank has recorded a liability of $246thousand within other liabilities on the consolidated statements of financialcondition to account for the settlement of the future benefit obligation.

 

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**6.****                                      StockCompensation Plans**

 

Thestockholders of the Company approved a stock option plan in fiscal 2000 (the “1999Plan”) for officers, directors and certain employees of the Company and itssubsidiaries. Pursuant to the terms of the 1999 Plan, the number of commonshares reserved for issuance was a total of 536,509, of which 53,544 optionswere unawarded at June 30, 2007. Included in this amount are 9,405 sharesforfeited during the year ended June 30, 2007. Additionally, thestockholders of the Company approved a stock option plan in fiscal 2003 (the “2002Plan”) for officers, directors and certain employees of the Company and itssubsidiaries. Pursuant to the terms of the 2002 Plan, the number of commonshares reserved for issuance was 673,483 of which 187,985 were available forfuture grants at June 30, 2007. Included in this amount are 64,268 sharesforfeited during the year ended June 30, 2007. Generally, options weregranted with an exercise price equal to fair market value at the date of grantand expire in 10 years from the date of grant. Generally, stock optionsgranted vest over a five-year period commencing on the first anniversary of thedate of grant. In addition, as part of the Merger, options previously grantedunder plans of Chester Valley were converted into options to acquire 383,945shares of Company common stock. Unrecognized compensation cost on unvestedoption awards and weighted average period to be recognized are $292 thousandand 3.3 years, respectively at June 30, 2007. Compensation expense relatedto option awards was $208 thousand, $306 thousand, and $350 thousand for theyears ended June 30, 2007, 2006 and 2005, respectively.

 

The followingtable provides information about options outstanding for the year ended June 30,2007:

 
| ** **                               | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|------------------------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|
| Options outstanding, beginning of period |       | 1,063,382  |       | $                                      | 9.91       |                                                    | $          | 3.61 |   |
| Granted                                  |       | 70,025     |       | 12.90                                  |       | 2.61                                                    |       |
| Forfeited                                |       | (73,673    | )          | 11.89                                  |       | 2.59                                                    |       |
| Exercised                                |       | (157,241   | )          | 8.84                                   |       | 3.22                                                    |       |
| Options outstanding, end of period       |       | 902,493    |       | 10.39                                  |       | 3.68                                                    |       |
| Options exercisable end of period        |       | 751,299    |       | 9.92                                   |       | 3.9                                                     |       |
|                                          |            |            |            |                                        |            |                                                         |            |  |  |

 

The Companyexpects approximately 7,500 of unvested options to be forfeited.

 

Proceeds,related tax benefits realized from options exercised and intrinsic value ofoptions exercised were as follows:

 
| ** **                           | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Proceeds of options exercised        |       | $                                      | 1,390,643  |   | $ | 1,275,040 |   | $ | 288,171 |   |
| Related tax benefit recognized       |       | $                                      | 234,024    |   | $ | 198,851 |   | $ | — |   |
| Intrinsic value of options exercised |       | $                                      | 687,451    |   | $ | 1,134,995 |   | $ | 245,762 |   |

 

The followingtable provides information about options outstanding and exercisable options atJune 30, 2007:

 
| ** **                        | ** ** | **Options  Outstanding** | ** ** | **Exercisable  Options** | ** ** |
|-----------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Number                            |       | 902,493                  |       | 751,299                  |       |
| Weighted average exercise price   |       | $                        | 10.39      |                     | $          | 9.92 |   |
| Aggregate intrinsic value         |       | $                        | 2,355,507  |                     | $          | 2,314,001 |   |
| Weighted average contractual term |       | 5.1                      |       | 4.5                      |       |

 

80

----

 

The weightedaverage remaining contractual life for options outstanding and weighted averageexercise price per share for exercisable options at June 30, 2007 were asfollows:

 
| ** **              | ** ** | **Options Outstanding** | ** ** | **Exercisable Options**                               | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Shares**                   | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in Years)** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** |
| $3.50- $5.00            |       | 106,255                      |       | $                                                          | 3.79       |   | 2.3 |   | 106,255 |   | $ | 3.79 |   |
| $7.50- $9.50            |       | 221,765                      |       | 8.29                                                       |       | 4.2 |   | 221,765 |   | 8.29 |   |
| $9.51- $14.00           |       | 509,817                      |       | 12.15                                                      |       | 5.8 |   | 374,373 |   | 12.05 |   |
| $14.01- $16.50          |       | 64,656                       |       | 14.55                                                      |       | 7.0 |   | 48,906 |   | 14.24 |   |
| Total                   |       | 902,493                      |       | $                                                          | 10.39      |   | 5.1 |   | 751,299 |   | 9.92 |   |
|                         |            |                              |            |                                                            |            |  |  |  |  |  |  |  |  |

 

The Companygranted 70,025, 22,096 and zero stock options during the years ended June 30,2007, 2006 and 2005, respectively. The weighted average grant date fair valueof options granted was $2.61 and $2.89 for the years ended June 30, 2007and 2006, respectively. The fair value for stock options granted during theyear ended June 30, 2007 was determined at the date of grant using aBlack-Scholes options-pricing model. The fair value of option awards under theOption Plans is estimated on the date of grant using the Black-Scholesvaluation methodology, which is dependent upon certain assumptions, assummarized in the following table:

 
| ** **                               | ** ** | **Year Ended  June 30** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| **Assumption**                           | ** ** | **2007**                          | ** ** | **2006** | ** ** |
| Expected average risk-free interest rate |       | 4.63                              | %          | 4.37 | % |
| Expected average life (in years)         |       | 5.50                              |       | 5.51 |   |
| Expected volatility                      |       | 25.03                             | %          | 17.7 | % |
| Expected dividend yield                  |       | 3.72                              | %          | 3.37 | % |

 

The expectedaverage risk-free rate is based on the U.S. Treasury yield curve on the day ofgrant. The expected average life represents the weighted average period of timethat options granted are expected to be outstanding giving consideration tovesting schedules and historical option exercise experience. Expectedvolatility is based on historical volatilities of the Company’s common stock.The expected dividend yield is based on historical information.

 

The fair valueof options vested was $241,918 and $333,799 for the years ended June 30,2007 and 2006, respectively.

 

**RRP**

 

Pursuant to the1999 Recognition and Retention Plan and Trust Agreement (the “1999 RRP”), theCompany acquired 214,603 shares at a cost of $929 thousand. Pursuant to theterms of the agreement, all 214,603 shares have been awarded to directors andmanagement from the 1999 RRP Trust. As of June 30, 2007, 207,503 grantedshares were vested pursuant to the terms of the 1999 Plan. In fiscal 2003, theCompany adopted the 2002 Recognition and Retention Plan and Trust Agreement(the “2002 RRP”), and acquired 269,393 shares at a cost of $3.2 million.Pursuant to the terms of the 2002 RRP, 227,711 shares have been awarded todirectors and management; however 20,160 shares have been forfeited. As of June 30,2007, 197,128 granted shares were vested pursuant to the terms of the 2002 RRP.At the November 9, 2005 Annual Meeting, shareholders approved the 2005Recognition and Retention Plan and Trust Agreement (the “2005 RRP”). Under the2005 RRP, the Trust can purchase 367,500 shares of common stock for futureawards of restricted stock to certain officers and directors of the Company.

 

81

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Coincidentwith the approval of the 2005 RRP, the Company terminated its DirectorsRetirement Plan and the Directors Incentive Compensation Plan, at which timethe directors became fully vested in their accrued benefit under the DirectorsRetirement Plan. As of June 30, 2007, 175,511 shares were granted underthe 2005 RRP; however, 12,167 shares were forfeited.

 

Compensationexpense related to the RRP shares was $833 thousand, $701 thousand and $597thousand for the years ended June 30, 2007, 2006 and 2005, respectively.Unrecognized compensation cost on unvested RRP shares and weighted averageperiod to be recognized are $1.8 million and 2.0 years, respectively.

 

Activity inissued but unvested RRP shares under the three plans during the year ended June 30,2007 was as follows:

 
| **RRP Shares**                 | ** ** | **RRP Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|---------------------|------------|---------------------------------------------------------|------------|
| Unvested awards beginning of period |       | 150,605             |       | $                                                       | 13.28      |   |
| Granted                             |       | 88,736              |       | 13.86                                                   |       |
| Vested                              |       | (54,774             | )          | 13.41                                                   |       |
| Forfeited                           |       | (18,047             | )          | 13.93                                                   |       |
| Unvested awards period end          |       | 166,520             |       | $                                                       | 13.85      |   |

 

The aggregateintrinsic value of unvested RRP awards under the three plans at June 30,2007 was $2,164,760.

 

**7.****                                      EarningsPer Share**

 

For the yearsended June 30, 2007, 2006 and 2005 earnings per share, basic and diluted,were $0.48 and $0.47, $0.47 and $0.46, and $0.70 and $0.67, respectively.

 

The followingis a reconciliation of the numerators and denominators of the basic and dilutedearnings per share calculations.

 
| ** **                                                                    | ** ** | **Year Ended June 30,**                                 | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | ** ** | ** ** |
| ** **                                                                    | ** ** | **(As restated)**                                                 | ** ** | **(As restated)** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | **Basic**                                                              | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands, except share data)** | ** ** |
| Net income                                                                    |       | $                                                                      | 7,267      |   | $ | 7,267 |   | $ | 6,667 |   | $ | 6,667 |   | $ | 6,726 |   | $ | 6,726 |   |
| Dividends on unvested stock awards                                            |       | (56                                                                    | )          | (56 | ) | (76 | ) | (76 | ) | (99 | ) | (99 | ) |
| Income available to common stock holders                                      |       | $                                                                      | 7,211      |   | $ | 7,211 |   | $ | 6,591 |   | $ | 6,591 |   | $ | 6,627 |   | $ | 6,627 |   |
| Weighted average shares outstanding                                           |       | 15,117,871                                                             |       | 15,117,871 |   | 13,934,631 |   | 13,934,631 |   | 9,409,145 |   | 9,409,145 |   |
| Effect of dilutive securities                                                 |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Common stock equivalents                                                      |       | —                                                                 |       | 226,283 |   | — |   | 338,155 |   | — |   | 304,147 |   |
| Unvested stock awards                                                         |       | —                                                                 |       | 6,705 |   | — |   | 18,915 |   | — |   | 144,752 |   |
| Adjusted weighted average shares used  in earnings per share calculation |       | 15,117,871                                                             |       | 15,350,859 |   | 13,934,631 |   | 14,291,701 |   | 9,409,145 |   | 9,858,044 |   |
| Earnings per share                                                            |       | $                                                                      | 0.48       |   | $ | 0.47 |   | $ | 0.47 |   | $ | 0.46 |   | $ | 0.70 |   | $ | 0.67 |   |

 

82

----

 

**8.****                                      InvestmentSecurities**

 

HTM and AFSinvestment securities at June 30, 2007 and 2006 consisted of thefollowing:

 
| ** **                      | ** ** | **June 30, 2007**          | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **Amortized  cost**                  | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| Held to maturity:               |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed securities:     |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | $                                    | 16,253     |   | $ | 4 |   | $ | (414 | ) | $ | 15,843 |   |
| FHLMC                           |       | 11,839                               |       | — |   | (455 | ) | 11,384 |   |
| CMOs                            |       | 60,271                               |       | — |   | (1,010 | ) | 59,261 |   |
| Total held to maturity          |       | 88,363                               |       | 4 |   | (1,879 | ) | 86,488 |   |
| Available for sale:             |       |                                 |       |   |   |   |   |   |   |
| US government agency securities |       | 35,285                               |       | — |   | (1,077 | ) | 34,208 |   |
| Municipal bonds                 |       | 30,585                               |       | 55 |   | (635 | ) | 30,005 |   |
| Mortgage-backed securities:     |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | 38,007                               |       | 5 |   | (1,050 | ) | 36,962 |   |
| FHLMC                           |       | 35,833                               |       | 2 |   | (1,028 | ) | 34,807 |   |
| GNMA                            |       | —                               |       | — |   | — |   | — |   |
| CMOs                            |       | 22,080                               |       | 20 |   | (331 | ) | 21,769 |   |
| Corporate debt securities       |       | 19,978                               |       | 73 |   | (625 | ) | 19,426 |   |
| Equities                        |       | 11,464                               |       | 69 |   | (371 | ) | 11,162 |   |
| Total available for sale        |       | 193,232                              |       | 224 |   | (5,117 | ) | 188,339 |   |
| Total securities                |       | $                                    | 281,595    |   | $ | 228 |   | $ | (6,996 | ) | $ | 274,827 |   |

 
| ** **                      | ** ** | **June 30, 2006**          | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **Amortized  cost**                  | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| Held to maturity:               |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed securities:     |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | $                                    | 18,639     |   | $ | — |   | $ | (779 | ) | $ | 17,860 |   |
| FHLMC                           |       | 14,567                               |       | — |   | (765 | ) | 13,802 |   |
| CMOs                            |       | 72,355                               |       | — |   | (1,930 | ) | 70,425 |   |
| Total held to maturity          |       | 105,561                              |       | — |   | (3,474 | ) | 102,087 |   |
| Available for sale:             |       |                                 |       |   |   |   |   |   |   |
| US government agency securities |       | 35,473                               |       | — |   | (1,176 | ) | 34,297 |   |
| Municipal bonds                 |       | 9,105                                |       | 90 |   | (68 | ) | 9,127 |   |
| Mortgage-backed securities:     |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | 52,181                               |       | 13 |   | (2,054 | ) | 50,140 |   |
| FHLMC                           |       | 47,153                               |       | 6 |   | (1,988 | ) | 45,171 |   |
| GNMA                            |       | 4,189                                |       | 4 |   | (35 | ) | 4,158 |   |
| CMOs                            |       | 29,059                               |       | — |   | (561 | ) | 28,498 |   |
| Corporate debt securities       |       | 14,419                               |       | 24 |   | (235 | ) | 14,208 |   |
| Equities                        |       | 11,642                               |       | 69 |   | (385 | ) | 11,326 |   |
| Total available for sale        |       | 203,221                              |       | 206 |   | (6,502 | ) | 196,925 |   |
| Total securities                |       | $                                    | 308,782    |   | $ | 206 |   | $ | (9,976 | ) | $ | 299,012 |   |

 

83

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Proceeds fromthe sales of securities available for sale for the years ended June 30,2007, 2006, and 2005 were $47.8 million, $103.3 million, and$51.3 million, respectively. Gross gains of $279 thousand,$533 thousand, and $415 thousand were realized in fiscal 2007, 2006,and 2005, respectively. There were gross losses of $51 thousand, $1.5 million,and $342 thousand for fiscal 2007, 2006 and 2005, respectively. Additionally,there were no recognized losses in fiscal 2007, 2006 or fiscal 2005 resultingfrom other than temporary declines in values of certain equity securities.

 

As a result ofthe Company’s de-leveraging strategy implemented as a result of the Merger,$34.9 million in held-to-maturity (HTM) securities were liquidated. This wasperformed in accordance with the provisions of SFAS No. 115, which allowsfor a sale of HTM securities coincident with a merger to allow the Company tomaintain its interest rate sensitivity immediately prior to the merger. TheCompany realized a net gain of approximately $181 thousand on the sale of thesecurities in fiscal year 2006. This gain is reflected in loss (gain) on saleof securities available for sale and trading on the consolidated statements ofcash flow.

 

At June 30,2007, securities with a total carrying value of $23.7 million are held ascollateral for the Company’s reverse repurchase arrangements. Accrued interestreceivable on securities amounted to $1.5 million at June 30, 2007and 2006.

 

The amortizedcost and estimated fair value of investment securities held to maturity,investment securities and available for sale at June 30, 2007, bycontractual maturity, are shown below.

 
| ** **                          | ** ** | **1 year  or less**        | ** ** | **After 1 year  but less than  5 years** | ** ** | **After 5 years  but less than  10 years** | ** ** | **After 10 years  or with  no stated  maturity** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------|------------|
| ** **                          | ** ** | **(Dollars in thousands)** | ** ** |
| US government agency securities     |       | $                                    | —     |                                                              | $          | 4,446                                                               |       | $                                                                    | 9,752      |      | $          | 20,010 |   | $ | 34,208 |   |
| Mortgage-backed securities and CMOs |       | 6,392                                |       | 81,913                                                            |       | 23,742                                                              |       | 67,979                                                               |       | 180,026   |       |
| Municipal bonds                     |       | 1,645                                |       | 576                                                               |       | 3,476                                                               |       | 24,308                                                               |       | 30,005    |       |
| Corporate bonds                     |       | —                               |       | —                                                            |       | 1,193                                                               |       | 18,233                                                               |       | 19,426    |       |
| Equity securities                   |       | —                               |       | —                                                            |       | —                                                              |       | 11,162                                                               |       | 11,162    |       |
| Total securities at fair value      |       | $                                    | 8,037      |                                                              | $          | 86,935                                                              |       | $                                                                    | 38,163     |      | $          | 141,692 |   | $ | 274,827 |   |
| Total securities at amortized cost  |       | $                                    | 8,150      |                                                              | $          | 88,778                                                              |       | $                                                                    | 39,626     |      | $          | 145,041 |   | $ | 281,595 |   |

 

The Companymust maintain ownership of specified amounts of stock as a member of the FHLB.The Company’s ownership of FHLB stock was $11.4 million and $16.9 millionas of June 30, 2007 and 2006, respectively.

 

Formortgage-backed securities, expected maturities will differ from contractualmaturities because borrowers may have the right to prepay the obligation. Ofthe Company’s $34.2 million of U.S. Government and Government agencysecurities at June 30, 2007, none are callable within one year.

 

As describedin note 13, certain investment securities available for sale aremaintained to collateralize advances from the FHLB. Provided below is a summaryof investment securities classified as held to maturity and available-for-sale whichwere in an unrealized loss position at June 30, 2007 and 2006.Approximately $3.4 million, or 66.0%, of the unrealized loss at June 30,2007 was comprised of securities in a continuous loss position for twelvemonths or more, which included certain equity securities. This aggregate losscompares to an aggregate loss of $255 thousand, or 4.1%, at June 30, 2006.

 

84

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| ** **                      | ** ** | **June 30, 2007**          | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **Under One Year**         | ** ** | **One Year or More** | ** ** |
| ** **                      | ** ** | **Estimated  Fair Value**       | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated   Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| Held to maturity:               |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed securities      |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | $                                    | —     |   | $ | — |   | $ | 15,007 |   | $ | (414 | ) |
| FHLMC                           |       | —                               |       | — |   | 11,384 |   | (455 | ) |
| CMOs                            |       | —                               |       | — |   | 59,261 |   | (1,010 | ) |
| Total held to maturity          |       | —                               |       | — |   | 85,652 |   | (1,879 | ) |
| Available for sale:             |       |                                 |       |   |   |   |   |   |   |
| US government agency securities |       | 18,625                               |       | (777 | ) | 15,583 |   | (300 | ) |
| Mortgage-backed securities      |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | 1,077                                |       | (8 | ) | 35,105 |   | (1,042 | ) |
| FHLMC                           |       | —                               |       | — |   | 34,053 |   | (1,027 | ) |
| CMOs                            |       | 7,727                                |       | (83 | ) | 11,731 |   | (249 | ) |
| Corporate debt securities       |       | 8,257                                |       | (238 | ) | 3,036 |   | (386 | ) |
| Municipal bonds                 |       | 15,795                               |       | (636 | ) | — |   | — |   |
| Equity securities               |       | —                               |       | — |   | 10,511 |   | (371 | ) |
| Total available for sale        |       | 51,481                               |       | (1,742 | ) | 110,019 |   | (3,375 | ) |
| Total securities                |       | $                                    | 51,481     |   | $ | (1,742 | ) | $ | 195,671 |   | $ | (5,254 | ) |

 

| ** **                      | ** ** | **June 30, 2006**          | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| ** **                      | ** ** | **Under One Year**         | ** ** | **One Year or More** | ** ** |
| ** **                      | ** ** | **Estimated  Fair Value**       | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| Held to maturity:               |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed securities      |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | $                                    | 17,860     |   | $ | (779 | ) | $ | — |   | $ | — |   |
| FHLMC                           |       | 13,802                               |       | (765 | ) | — |   | — |   |
| CMOs                            |       | 70,425                               |       | (1,930 | ) | — |   | — |   |
| Total held to maturity          |       | 102,087                              |       | (3,474 | ) | — |   | — |   |
| Available for sale:             |       |                                 |       |   |   |   |   |   |   |
| US government agency securities |       | 34,297                               |       | (1,176 | ) | — |   | — |   |
| Mortgage-backed securities      |       |                                 |       |   |   |   |   |   |   |
| FNMA                            |       | 49,317                               |       | (2,054 | ) | — |   | — |   |
| FHLMC                           |       | 43,962                               |       | (1,988 | ) | — |   | — |   |
| GNMA                            |       | 4,158                                |       | (35 | ) | — |   | — |   |
| CMOs                            |       | 28,480                               |       | (561 | ) | — |   | — |   |
| Corporate debt securities       |       | 7,916                                |       | (235 | ) | — |   | — |   |
| Municipal bonds                 |       | 5,656                                |       | (68 | ) | — |   | — |   |
| Equity securities               |       | 2,320                                |       | (130 | ) | 8,304 |   | (255 | ) |
| Total available for sale        |       | 176,106                              |       | (6,247 | ) | 8,304 |   | (255 | ) |
| Total securities                |       | $                                    | 278,193    |   | $ | (9,721 | ) | $ | 8,304 |   | $ | (255 | ) |

 

85

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Approximately$10.0 million of the investment in equity securities is an investment in mutualfunds, which are comprised of adjustable rate mortgage securities and thus thefair values are directly correlated to movements in interest rates.Additionally, the Company has both the ability and the intent to hold fixedincome securities until such time as the value recovers or the security maturesand for the equity securities, management believes that the unrealized losses aretemporary and overall not significant to the value of equity securities.

 

Managementdoes not believe any individual unrealized loss as of June 30, 2007represents an other-than-temporary impairment. The temporary impairment isdirectly related to changes in market interest rates and/or rating downgrades.In general, as interest rates rise, the fair value of fixed-rate securitieswill decrease and, as interest rates fall, the fair value of fixed-ratesecurities will increase. The severity of the impairment as a percent of thetotal investment position is nominal and the duration of the impairment to dateis short. The impairments are deemed temporary based on the direct relationshipof the decline in fair value to movements in interest rates, as well as therelatively short duration of the investments and their high credit quality. Inevaluating the securities portfolio for impairment, the Company has consideredanalyst reports and sector credit ratings. None of the bonds in the Company’ssecurities portfolio are below investment grade. Additionally, the Company hasthe ability and intent to hold these securities until such time as the valuerecovers or the securities mature.

 

**9.****                                      Loans**

 

Loansreceivable as of June 30, 2007 and 2006 consisted of the following (asrestated):

 
| ** **                                      | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage loans:                                 |       |                                 |       |                        |       |
| Single-family                                   |       | $                                    | 273,247    |                        | $          | 298,509 |   |
| Multi-family & commercial real  estate |       | 316,099                              |       | 325,987                     |       |
| Construction                                    |       | 93,180                               |       | 112,774                     |       |
| Home equity                                     |       | 272,295                              |       | 259,119                     |       |
| Total mortgage loans                            |       | 954,821                              |       | 996,389                     |       |
| Consumer loans                                  |       | 3,917                                |       | 4,304                       |       |
| Commercial business loans                       |       | 88,274                               |       | 80,815                      |       |
| Total loans receivable                          |       | 1,047,012                            |       | 1,081,508                   |       |
| Allowance for loan losses                       |       | (12,210                              | )          | (16,737                     | )          |
| Deferred loan costs (fees), net                 |       | 491                                  |       | (1,170                      | )          |
| Loans receivable, net                           |       | $                                    | 1,035,293  |                        | $          | 1,063,601 |   |

 

Included inloans receivable are loans on non-accrual status in the amounts of $3.9million, $15.5 million and $666 thousand at June 30, 2007, 2006 and2005, respectively. Interest income that would have been recognized on suchnon-accrual loans during the years ended June 30, 2007, 2006 and 2005, hadthey been current in accordance with their original terms, was $224 thousand,$1.4 million, and $34 thousand, respectively. There were no loans thatwere 90 days or more delinquent for which the Company continued to accrueinterest at June 30, 2007.

 

As of June 30,2007, 2006 and 2005, the Company had impaired loans with a total recordedinvestment of $1.4 million, $12.8 million, and $121 thousand, respectively.Average impaired loans were $7.0 million, $5.0 million and $414thousand for the years ended June 30, 2007, 2006 and 2005, respectively.Cash of $116 thousand, $281 thousand and $77 thousand was collectedon these impaired loans during the years ended June 30, 2007, 2006 and2005, respectively. Interest income of $0, $196 thousand, and $0 was recognizedon such loans during the years ended June 20, 2007, 2006 and 2005,respectively. As of June 30, 2007, 2006 and 2005, there were no recordedinvestments in impaired loans for which there was a related specific allowancefor credit losses.

 

86

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The followingis a summary of the activity in the allowance for loan losses for the yearsended June 30, 2007, 2006 and 2005:

 
| ** **                       | ** ** | **For the year ended June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)**                     | ** ** |
| Balance, beginning of the period |       | $                                                        | 16,737     |   | $ | 6,113 |   | $ | 5,220 |   |
| Plus: Provisions for loan losses |       | 653                                                      |       | 3,380 |   | 1,232 |   |
| Less charge-offs for:            |       |                                                     |       |   |   |   |   |
| Mortgage loans                   |       | (76                                                      | )          | (24 | ) | (7 | ) |
| Consumer loans                   |       | (277                                                     | )          | (237 | ) | (22 | ) |
| Commercial real estate loans     |       | (1,848                                                   | )          | — |   | — |   |
| Commercial business loans        |       | (3,185                                                   | )          | (47 | ) | (316 | ) |
| Total Charge-offs                |       | (5,386                                                   | )          | (308 | ) | (345 | ) |
| Plus: Recoveries                 |       | 206                                                      |       | 615 |   | 6 |   |
| Allowance acquired in the Merger |       | —                                                   |       | 6,937 |   | — |   |
| Balance, end of the period       |       | $                                                        | 12,210     |   | $ | 16,737 |   | $ | 6,113 |   |

 

**10.****                               Goodwilland Other Intangible Assets (as restated)**

 

The Companyrecorded goodwill of $1.0 million during 2007 relating to the acquisition ofBeneServ and $93.7 million in 2006 that resulted from the Merger. Theremaining goodwill balance, which approximates $836 thousand at June 30,2007, relates to a branch acquisition in 1994. The net other intangible balanceof $14.3 million at June 30, 2007 primarily resulted from the Merger aswell as the customer intangible from the acquisition of BeneServ. Theamortization expense of the other intangible assets for the fiscal year ended June 30,2007 was $2.1 million.

 

The estimatedaggregate amortization expense related to other intangibles for each of thefive succeeding calendar years is:

 

| **Year ending** | ** ** | **(Dollars in  thousands)** | ** ** |
|----------------------|------------|----------------------------------|------------|
| June 30, 2008   |       | $                                | 2,063      |   |
| June 30, 2009   |       | 1,917                            |       |
| June 30, 2010   |       | 1,771                            |       |
| June 30, 2011   |       | 1,625                            |       |
| June 30, 2012   |       | 1,480                            |       |
|                 |       | $                                | 8,856      |   |

 

As discussedin Note 26 to the Consolidated Financial Statements, we expect to record animpairment charge to goodwill for the quarter ended December 31, 2007.

 

**11.****                               Propertyand Equipment (as restated)**

 

Property andequipment by major classification are summarized as follows:

 
| ** **                        | ** ** | ** **                           | ** ** | **For the year ended  June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **Depreciable life**            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)** | ** ** |
| Land                              |       |                                 |       | $                                                    | 1,129      |   | $ | 1,129 |   |
| Buildings                         |       | 15 to  40 years                 |       | 6,849                                                |       | 5,710 |   |
| Furniture, fixtures and equipment |       | 3 to  7 years                   |       | 10,806                                               |       | 6,572 |   |
| Total                             |       |                                 |       | 18,784                                               |       | 13,411 |   |
| Accumulated depreciation          |       |                                 |       | (7,477                                               | )          | (3,424 | ) |
| Property and equipment, net       |       |                                 |       | $                                                    | 11,307     |   | $ | 9,987 |   |

 

87

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Depreciationexpense for the years ended June 30, 2007, 2006 and 2005 amounted to $2.6million, $1.8 million, and $955 thousand, respectively.

 

In February 2006,the Bank completed a sale-leaseback of eight of its branch offices resulting inthe receipt of approximately $11.1 million in cash and an excess over bookvalue of approximately $722 thousand. The premium attributed to the formerFirst Financial branches of $194 thousand reduced goodwill while the balanceof such premium of $528 thousand is deferred and amortized as a reduction ofrent expense over the term of the leases.

 

**12.****                               Deposits(as restated)**

 

Depositbalances by type consisted of the following at June 30, 2007, and 2006 (asrestated):

 
| ** **                                            | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **Amount**                           | ** ** | **Percent of  total**  | ** ** | **Amount** | ** ** | **Percent of  total** | ** ** |
| ** **                                            | ** ** | **(Dollars in thousands)** | ** ** |
| Savings accounts (passbooks, statements,  clubs)      |       | $                                    | 87,565     |                        | 8.0        | % | $ | 101,119 |   | 9.9 | % |
| Money market accounts                                 |       | 403,487                              |       | 36.9                        |       | 338,451 |   | 33.3 |   |
| Certificates of deposit less than $100,000            |       | 239,967                              |       | 22.0                        |       | 238,603 |   | 23.5 |   |
| Certificates of deposit greater or equal to  $100,000 |       | 94,705                               |       | 8.7                         |       | 63,024 |   | 6.2 |   |
| Interest-bearing checking accounts                    |       | 125,905                              |       | 11.5                        |       | 152,056 |   | 15.0 |   |
| Non-interest-bearing checking accounts                |       | 141,101                              |       | 12.9                        |       | 123,247 |   | 12.1 |   |
| Total                                                 |       | $                                    | 1,092,730  |                        | 100.0      | % | $ | 1,016,500 |   | 100.0 | % |

 

Whilecertificates of deposit are frequently renewed at maturity rather than paidout, a summary of certificates of deposit by contractual maturity and rate at June 30,2007 is as follows:

 
| ** **               | ** ** | **Amounts maturing in**    | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| **Interest rates:** | ** ** | **Six months  or less**    | ** ** | **Over six  months  through one  year** | ** ** | **Over one  year through  two years** | ** ** | **Over two  years through  three years** | ** ** | **Over three  years** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)** | ** ** |
| 0.00% to 2.99%           |       | $                                    | 10,405     |   | $ | 3,920 |   | $ | 2,592 |   | $ | 567 |   | $ | 1,063 |   |
| 3.00% to 3.99%           |       | 8,711                                |       | 3,805 |   | 2,020 |   | 1,275 |   | 985 |   |
| 4.00% to 4.99%           |       | 97,353                               |       | 55,253 |   | 23,587 |   | 16,026 |   | 4,486 |   |
| 5.00% to 5.99%           |       | 51,140                               |       | 41,575 |   | 4,976 |   | 2,932 |   | 1,176 |   |
| 6.00% and over           |       | 204                                  |       | 15 |   | 41 |   | 303 |   | 262 |   |
| Total                    |       | $                                    | 167,813    |   | $ | 104,568 |   | $ | 33,216 |   | $ | 21,103 |   | $ | 7,972 |   |

 

As of June 30,2007 certificates of deposit contractual maturities are:

 

| **Year ending** | ** ** | **(Dollars in thousands)** | ** ** |
|----------------------|------------|--------------------------------------|------------|
| June 30, 2008   |       | $                                    | 272,382    |   |
| June 30, 2009   |       | 33,215                               |       |
| June 30, 2010   |       | 21,104                               |       |
| June 30, 2011   |       | 3,246                                |       |
| June 30, 2012   |       | 3,177                                |       |
| Thereafter           |       | 1,548                                |       |
|                 |       | $                                    | 334,672    |   |

 

88

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Interestexpense on deposits for the years ended June 30, 2007, 2006 and 2005consisted of the following:

 
| ** **              | ** ** | **For the year ended June 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)**                     | ** ** |
| Savings accounts        |       | $                                                        | 15,460     |   | $ | 6,808 |   | $ | 411 |   |
| Checking accounts       |       | 349                                                      |       | 1,962 |   | 2,687 |   |
| Certificates of deposit |       | 12,889                                                   |       | 9,706 |   | 6,833 |   |
| Total                   |       | $                                                        | 28,698     |   | $ | 18,476 |   | $ | 9,931 |   |

 

**13.****                               FederalHome Loan Bank Advances (as restated)**

 

Under terms ofits collateral agreement with the FHLB, the Company maintains otherwiseunencumbered qualifying assets (principally qualifying 1-4 family residentialmortgage loans and U.S. government agency, and mortgage-backed securities) inthe amount of at least as much as its advances from the FHLB. The Company’sFHLB stock is also pledged to secure these advances.

 

At June 30,2007, the Company’s FHLB advances have contractual maturities as follows (asrestated):

 

| ** **         | ** ** | **Amount  outstanding**              | ** ** | **Weighted  average rate** | ** ** |
|--------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **(dollars in thousands)** | ** ** |
| Due by:            |       |                                 |       |                            |       |
| June 30, 2008 |       | $                                    | 17,677     |                            | 3.8        | % |
| June 30, 2009 |       | 24,443                               |       | 3.7                             |       |
| June 30, 2010 |       | 10,273                               |       | 4.7                             |       |
| June 30, 2011 |       | 22,675                               |       | 5.4                             |       |
| June 30, 2012 |       | 29,053                               |       | 4.5                             |       |
| Thereafter         |       | 85,643                               |       | 4.0                             |       |
| Total              |       | $                                    | 189,764    |                            | 4.2        | % |

 

At June 30,2007, $152.5 million of the above advances were callable at the directionof the FHLB within certain parameters, of which $107.5 million could becalled within one year. Included in the $152.5 million are $47.5 million inadvances which could only be called if an index reaches a certain strike rate.At June 30, 2007, these advances were between approximately 2.13 % and4.25% from the strike rate.

 

**14.****                               TrustPreferred Securities and Other Borrowings**

 

Effective withthe acquisition of Chester Valley, the Company assumed the liability for $10.5million of Junior Subordinated Debentures to the Chester Valley StatutoryTrust, a Pennsylvania Business Trust, in which the Company owned all of thecommon equity as a result of the acquisition of Chester Valley. The Trustissued $10.0 million of Trust Preferred Securities to investors, which weresecured by the Junior Subordinated Debentures and the guarantee of the Company.These Trust Preferred Securities were redeemed by the Company on March 26,2007 in accordance with the Trust Agreement.

 

On March 31,2006, the Company issued $25.8 million of Junior Subordinated Debentures toWillow Grove Statutory Trust I, a Connecticut Statutory Trust, in which theCompany owns all of the common equity. The Trust then issued $25.0 million ofTrust Preferred Securities, which pay interest quarterly at three-month Liborplus 1.31% to investors, which are secured by the Junior SubordinatedDebentures and the guarantee of the Company. The Junior Subordinated Debenturesare treated as debt of the Company but qualify as Tier I capital of the Bank tothe extent of the amount of the proceeds, which are invested in the Bank. TheTrust Preferred Securities are callable by the Company on or after September 30,2011. The Trust Preferred Securities must be redeemed by the Company upon theirmaturity in the year 2036.

 

89

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The Bankutilizes outside borrowings to supplement its funding needs. At June 30,2007, the Bank had $20.0 million outstanding in repurchase agreements with aweighted average interest rate of 4.50%. The underlying securitiescollateralizing these repurchase agreements had a market value of$23.7 million at June 30, 2007.

 

**15.****                               IncomeTaxes (as restated)**

 

Income taxexpense for the years ended June 30, 2007, 2006 and 2005 consisted of thefollowing:

 
| ** **                            | ** ** | ** ** | ** ** | **Current**                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------------|------------|--------------|------------|-----------|------------|
| ** **                            | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** |
| For the year ended June 30, 2007 |       | Federal    |       | $                                    | 1,150      |         | $          | 1,718     |       | $ | 2,868 |   |
|                                  |       | State      |       | 18                                   |       | —       |       | 18        |       |
|                                  |       | Total      |       | $                                    | 1,168      |         | $          | 1,718     |       | $ | 2,886 |   |
| For the year ended June 30, 2006 |       | Federal    |       | $                                    | 697        |         | $          | 2,289     |       | $ | 2,986 |   |
|                                  |       | State      |       | 24                                   |       | —       |       | 24        |       |
|                                  |       | Total      |       | $                                    | 721        |         | $          | 2,289     |       | $ | 3,010 |   |
| For the year ended June 30, 2005 |       | Federal    |       | $                                    | 3,050      |         | $          | 2         |       | $ | 3,052 |   |
|                                  |       | State      |       | —                               |       | —       |       | —    |       |
|                                  |       | Total      |       | $                                    | 3,050      |         | $          | 2         |       | $ | 3,052 |   |

 

The expense(benefit) for income taxes differed from that computed at the statutory federalcorporate rate for the years ended June 30, 2007, 2006 and 2005 as follows:

 
| ** **                            | ** ** | **For the year ended June 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **Amount**                                               | ** ** | **Percent of  pretax  income** | ** ** | **Amount** | ** ** | **Percent of  pretax  income** | ** ** | **Amount** | ** ** | **Percent of  pretax  income** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**                     | ** ** |
| At statutory rate                     |       | $                                                        | 3,554      |   | 35.0 | % | $ | 3,387 |   | 35.0 | % | $ | 3,324 |   | 34.0 | % |
| State tax, net of federal tax benefit |       | 12                                                       |       | 0.1 |   | 15 |   | 0.2 |   | — |   | — |   |
| Low income housing credits            |       | (162                                                     | )          | (1.6 | ) | (154 | ) | (1.6 | ) | (29 | ) | (0.3 | ) |
| Tax-exempt interest                   |       | (601                                                     | )          | (5.9 | ) | (269 | ) | (2.8 | ) | (280 | ) | (2.9 | ) |
| Meals and entertainment               |       | 11                                                       |       | 0.1 |   | 6 |   | 0.1 |   | 6 |   | 0.1 |   |
| BOLI                                  |       | (152                                                     | )          | (1.5 | ) | (130 | ) | (1.3 | ) | (65 | ) | (0.7 | ) |
| Dividends on ESOP shares              |       | (93                                                      | )          | (0.9 | ) | (106 | ) | (1.1 | ) | (108 | ) | (1.1 | ) |
| ESOP compensation expense             |       | 138                                                      |       | 1.4 |   | 174 |   | 1.8 |   | 196 |   | 2.0 |   |
| Stock based compensation              |       | 16                                                       |       | 0.1 |   | 107 |   | 1.1 |   | — |   | — |   |
| Change in statutory federal tax rate  |       | —                                                   |       | — |   | (93 | ) | (1.0 | ) | — |   | — |   |
| Other                                 |       | 163                                                      |       | 1.6 |   | 73 |   | 0.7 |   | 8 |   | 0.1 |   |
| Income tax expense                    |       | $                                                        | 2,886      |   | 28.4 | % | $ | 3,010 |   | 31.1 | % | $ | 3,052 |   | 31.2 | % |

 

90

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Significantdeferred tax assets and liabilities included in other assets and liabilities ofthe Company as of June 30, 2007 and 2006 are as follows:

 
| ** **                                        | ** ** | **June 30,**                    | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)** | ** ** |
| Deferred loan fees                                |       | $                                    | 84         |   | $ | 115 |   |
| Retirement plan reserves                          |       | 488                                  |       | 586 |   |
| Employee benefits                                 |       | 234                                  |       | 222 |   |
| Uncollected interest                              |       | 78                                   |       | 274 |   |
| Book bad debt reserves                            |       | 4,274                                |       | 6,024 |   |
| Unrealized loss on available for sale  securities |       | 1,712                                |       | 1,966 |   |
| Investment impairment reserves                    |       | 1,360                                |       | 1,504 |   |
| Loan discounts                                    |       | 66                                   |       | 325 |   |
| Sale/Leaseback                                    |       | 159                                  |       | 167 |   |
| Purchase accounting fair value adjustments        |       | 88                                   |       | 292 |   |
| Fixed asset write-downs                           |       | —                               |       | 326 |   |
| Investment in joint venture                       |       | 236                                  |       | 188 |   |
| Net operating loss carryover                      |       | —                               |       | 196 |   |
| Low income housing credit carryover               |       | 686                                  |       | 289 |   |
| AMT credit carryover                              |       | 691                                  |       | 272 |   |
| Other, net                                        |       | 222                                  |       | 207 |   |
| Gross deferred tax assets                         |       | 10,378                               |       | 12,953 |   |
| Intangible asset amortization                     |       | (3,022                               | )          | (3,534 | ) |
| Depreciation                                      |       | (372                                 | )          | (411 | ) |
| Other                                             |       | (99                                  | )          | (151 | ) |
| Gross deferred tax liabilities                    |       | (3,493                               | )          | (4,096 | ) |
| Net tax deferred asset                            |       | $                                    | 6,885      |   | $ | 8,857 |   |
|                                                   |            |                                      |            |  |  |  |  |  |  |

 

Therealizability of deferred tax assets is dependent upon a variety of factors,including the generation of future taxable income, the existence of taxes paidand recoverable, the reversal of deferred tax liabilities and tax planningstrategies. Based upon these and other factors, management believes it is morelikely than not that the Company will realize the benefits of these deferredtax assets.

 

At June 30,2007, the Company had $686 thousand in low income housing tax creditcarry-forwards. These carry-forwards expire after June 30, 2026 if notutilized. In addition, the Company has $691 thousand of alternative minimum taxcredit carry-forwards that have an indefinite life.

 

The SmallBusiness Job Protection Act of 1996 (the “1996 Act”) eliminated the use of thereserve method of accounting for bad debt reserves by savings institutions,effective for taxable years beginning after 1995. Prior to the 1996 Act, baddebt reserves created prior to January 1, 1988 were subject to recaptureinto taxable income if the Bank failed to meet certain thrift asset anddefinitional tests. New federal legislation eliminated these thrift relatedrecapture rules. However, under current law, pre-1988 reserves remain subjectto recapture should the Bank make certain non-dividend distributions or ceasesto maintain a bank charter.

 

At June 30,2007, the Bank’s total federal pre-1988 tax bad debt reserve was approximately$8.9 million. The reserve reflects the cumulative effects of federal tax deductionsfor which no federal income tax provisions have been made.

 

91

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**16.****                               BenefitPlans (as restated)**

 

*401(k) Plan*

 

The Bank’sbenefit plans cover all eligible employees and permits them to make certain contributionsto their 401(k) accounts in the plan on a pretax basis. Effective January 1,2006, employees are permitted to contribute up to 25% of their salary to thisplan. The Company matches every dollar contributed up to 4% of salary, plus 50%of the amount of an employees’ salary reductions in excess of 4% of salary, butnot in excess of 6% of salary. The expense related to the 401(k) portionof this plan was $628 thousand, $255 thousand, and $70 thousand for the yearsended June 30, 2007, 2006 and 2005, respectively.

 

*Employee Stock Ownership Plan*

 

On December 23,1998, the Company adopted an Employee Stock Ownership Plan (“ESOP”). The ESOPborrowed $1.8 million from the Company and used the funds to purchase429,207 shares (179,270 shares pre-exchange) of the Company’s common stock. Theloan has an interest rate of 7.75% and has an amortization schedule of15 years. In April 2002, an additional ESOP loan was made of$5.1 million to purchase an additional 538,787 shares of the Company’scommon stock issued in its “second step” reorganization. This loan has aninterest rate of 4.75% and an amortization schedule of 15 years. Sharespurchased are held in a suspense account for allocation among the participantsas the loans are repaid. Effective January 31, 2000, the Company mergedthe 401(k) Plan and ESOP. Contributions to the ESOP portion of the401(k)/ESOP and shares released from the loan collateral will be in an amountproportional to repayment of the original ESOP loans. Shares are allocated toparticipants based on compensation as described in the 401(k)/ESOP PlanDocuments, in the year of allocation. At June 30, 2007, there were 431,791ESOP shares allocated to participants, representing a fair value of$2.8 million, in addition, there were 32,267 shares committed to bereleased. The Company recorded compensation expense of $890 thousand, $955thousand and $1.0 million for the ESOP for the years ended June 30,2007, 2006 and 2005, respectively.

 

*Supplemental Retirement Plans*

 

Effective June 30,1998, the Company adopted non-qualified supplemental retirement plans for theCompany’s Board of Directors (the “Directors’ Plan”) and for the Company’sformer president (the “President’s Plan”). The Directors’ Plan provided forfixed annual payments to qualified directors for a period of ten years fromretirement. Benefits to be paid accrued at the rate of 20% per year oncompletion of six full years of service, with full benefit accrual at ten yearsof service. At the time these plans were adopted credit was given for pastservice. The President’s Plan provides for payments for a period of ten yearsbeginning at retirement based on a percentage of annual compensation not toexceed an established cap. Full benefits become accrued at age 68 withpartial vesting prior thereto. Both plans provide for full payments in theevent of a change in control of the Company. The Directors’ Plan and President’sPlan are intended to be, and are, unfunded. The accrued liability of theDirectors’ Plan and the President’s Plan were $801 thousand and $648 thousandand $965 thousand and $710 thousand at June 30, 2007 and 2006,respectively.

 

In November 2005,the Company terminated its Directors Retirement Plan and the DirectorsIncentive Compensation Plan, at which time the directors became fully vested intheir accrued benefit as of October 31, 2005, under the DirectorsRetirement Plan. The Company’s former President has retired and is fully vestedin the President’s Plan.

 

92

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**17.****                               Commitmentsand Contingencies**

 

At June 30,2007 and 2006, the Company was committed to fund loans as follows:

 

| ** **                         | ** ** | **June 30,**                    | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Loans with fixed interest rates    |       | $                                    | 21,316     |   | $ | 5,923 |   |
| Loans with variable interest rates |       | 6,041                                |       | 8,824 |   |
| Total commitments to fund loans    |       | $                                    | 27,357     |   | $ | 14,747 |   |

 

**Financial Instruments With Off-Balance Sheet Risk**

 

The Company isa party to financial instruments with off-balance-sheet risk in the normalcourse of business to meet the financing needs of its customers. Thesefinancial instruments include commitments to extend credit and standby lettersof credit. Those instruments involve, to varying degrees, elements of creditrisk in excess of the amount recognized in the balance sheet. The Company’sexposure to credit loss in the event of non-performance by the other party tothe financial instrument for commitments to extend credit and standby lettersof credit is represented by the contractual notional amount of thoseinstruments. The Company uses the same credit policies in making commitmentsand conditional obligations as it does for on-balance-sheet instruments (seeNote 5 above). At June 30, 2007 and June 30, 2006, respectively,the Company was committed to the funding of first mortgage loans of $15.3million and $9.9 million, respectively, construction loans of $48.7million and $61.6 million, respectively, commercial real estate loans of$1.8 million and $5.7 million, respectively, lines of credit of $164.8million and $146.0 million, respectively, and standby letters of credit of$16.8 million and $9.0 million, respectively.

 

**Guarantees**

 

In the normalcourse of business, the Company sells loans in the secondary market. As iscustomary in such sales, the Company provides indemnification to the buyerunder certain circumstances. This indemnification may include the obligation torepurchase loans by the Company, under certain circumstances. In most casesrepurchases and losses are rare, and no provision is made for losses at thetime of sale. When repurchases and losses are probable and reasonablyestimable, a provision is made in the financial statements for such estimatedlosses.

 

On May 12,2003, the Company entered into a sales and servicing master agreement with theFederal Home Loan Bank of Pittsburgh (“FHLB”). The agreement allows the Companyto sell loans to the FHLB while retaining servicing and providing for a creditenhancement. Under the terms of the agreement, the Company receives a ten basispoint annual fee in exchange for assuming the credit risk on losses in excessof its contractual obligation up to a maximum of $605 thousand. The Company hassold $16.6 million in loans under this agreement and had a maximum credit riskexposure of $461 thousand at June 30, 2007. The fair value of theseguarantees was determined to be $0 at June 30, 2007.

 

**Concentration of Credit Risk**

 

The Companyoffers residential and construction real estate loans as well as commercial andconsumer loans. The Company’s lending activities are concentrated in Pennsylvania.The largest concentration of the Company’s loan portfolio is located in easternPennsylvania. The ability of the Company’s borrowers to repay amounts owed isdependent on several factors, including the economic conditions in the borrower’sgeographic region and the borrower’s financial condition.

 

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**Legal Proceedings**

 

As previouslydescribed in the company’s prospectus/joint proxy statement dated April 27,2005 and included in its registration statement on Form S-4 (file No. 333-123622)filed in connection with the Merger, FFB previously received a subpoena fromthe Regional Municipal Securities Counsel in the Philadelphia Office of theSecurities and Exchange Commission (the “SEC”). The subpoena arose out of anon-public SEC investigation titled “Hummelstown General Authority,” whichAuthority issued non-rated revenue bonds now in default, underwritten by thefirm of a former director of Chester Valley and FFB. The SEC subpoena requestedthe production of certain documents concerning FFB’s involvement with non-ratedmunicipal securities, including those issued to finance the Whitetail GolfCourse by the Dauphin County General Authority and the Hummelstown GeneralAuthority, through the former director’s firm, and related matters. FFBpreviously produced documents to the SEC and certain officers of FFB providedtestimony to the SEC in response to the SEC’s voluntary request for assistancein this matter. On August 3, 2006, the SEC filed a complaint in federalcourt against the former director, his wife, and the former director’s firm.The Bank is not named as a defendant in the complaint filed by the SEC.

 

FFB is a partyto three civil actions relating to some of the revenue bonds which are thesubject of the SEC investigation described above. On August 30, 2005, awrit of summons was filed by the Boyertown Area School District (“Boyertown”)in the Court of Common Pleas, Montgomery County, Pennsylvania commencing acivil action against, *inter alia,*FFB. *Boyertown Area School District v. First FinancialBank et. al.* , No. 05­21799. A complaint was filed onNovember 9, 2005, asserting the following claims against FFB: Breach ofTrust Indenture and Fiduciary Duties (Count 1), Breach of Fiduciary Duties(Count 2), Civil Conspiracy (Count 3), and Concerted Action (Count 4). On September 19,2005, Red Lion Area School District (“Red Lion”) filed a complaint in theCourt of Common Pleas, York County, Pennsylvania, against *inter alia* , FFB. *Red Lion Area SchoolDistrict v. Bradbury et. al.* , No. 2005-SU­1656­Y01; No. 2005­SU­2544­Y01.This case has been transferred to the Court of Common Pleas of MontgomeryCounty, Pennsylvania, and an amended complaint was filed on October 18,2006. The amended complaint asserts the following claims against FFB:Declaratory Judgment (Count 15), Breach of Trust Indenture (Count 16), CivilConspiracy (Count 17), Civil Conspiracy—Alternative Legal Basis (Count 18),Breach of Common Law Duties as Trustee (Count 19), Tortious Action inConcert/Aiding and Abetting Fraud (Count 20), Breach of Trust Indenture (Count21), Breach of Fiduciary Duties (Count 22), Vicarious Liability andRespondeat Superior (Count 23), Unjust Enrichment (Count 24), and UnjustEnrichment (Count 25). On March 16, 2006, Perkiomen Valley School District(“Perkiomen”) filed a complaint in the Court of Common Pleas, MontgomeryCounty, Pennsylvania, against, *inter alia* ,FFB  *Perkiomen Valley School District v. First FinancialBank et.al.* , No. 06­06533. The complaint asserts the followingclaims against FFB: Breach of Trust Indenture (Count 1), Breach of FiduciaryDuties (Count 2), Vicarious Liability and Respondeat Superior (Count 3), CivilConspiracy (Count 4), and Concert of Action (Count 5). The actions havebeen consolidated for discovery and case management purposes, but not fortrial. The Bank’s answers were provided on September 6, 2007, withrespect to the Red Lion matter, and September 10, 2007, with respect tothe Boyertown and Perkiomen matters. Discovery is in its initial stages. TheCompany believes the above noted lawsuits are without merit and intends to vigorouslydefend itself in the suits.

 

On June 16,2007, Cincinnati Insurance Company (“Cincinnati”) commenced a declaratoryjudgment action in federal court against the Bank, Red Lion, Boyertown, andPerkiomen seeking a declaration that Cincinnati is not obligated to provideinsurance coverage to the Bank in connection with the SEC subpoena and thelitigation brought by Red Lion, Boyertown, and Perkiomen: *CincinnatiInsurance Company v. First Financial Bank et al*., 07-02389 (E.D.Pa.). The Bank’s answer was provided on September 20, 2007.

 

In the normalcourse of business, the Company is involved in various legal proceedings.Management of the Company, based on discussions with legal counsel, believesthat such proceedings will not have a material adverse effect on the financialcondition or operations

 

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of theCompany. There can be no assurance that any of the outstanding legalproceedings to which the Company is a party will not be decided adversely to theCompany’s interests and have a material adverse effect on the financialcondition and operations of the Company.

 

**Other Commitments**

 

In connectionwith the operation of 29 of its banking offices and an operations center, theCompany leases certain office space. The leases are classified as operatingleases, with rent expense of $2.9 million, $2.0 million, and $837 thousand forthe years ended June 30, 2007, 2006 and 2005, respectively. Minimumpayments over the remainder of the leases are summarized as follows:

 

| ** **         | ** ** | **Minimum lease  payments**     | ** ** |
|--------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **(Dollars in thousands)** | ** ** |
| Year ended:        |       |                                 |       |
| June 30, 2008 |       | $                                    | 2,791      |   |
| June 30, 2009 |       | 2,644                                |       |
| June 30, 2010 |       | 2,282                                |       |
| June 30, 2011 |       | 2,145                                |       |
| June 30, 2012 |       | 1,914                                |       |
| Thereafter         |       | 17,394                               |       |
| Total              |       | $                                    | 29,170     |   |

 

**18.         Accounting forDerivative Instruments and Hedging (as restated)**

 

The Companymay from time to time utilize derivative instruments such as interest rateswaps, interest rate collars, interest rate floors, interest rate swaptions orcombinations thereof to assist in its asset/liability management. In accordancewith SFAS No. 133, “Accounting for Derivative Instruments,” the Companydocuments its hedge relationships, including identification of the hedginginstruments and the hedged items, as well as its risk management objectives andstrategies for undertaking the hedge. The Company also assesses, both atinception and at least quarterly thereafter, whether the derivative instrumentsthat are used in hedging transactions are highly effective in offsetting thechanges in either the fair value or cash flows of the hedged item. For fairvalue hedges, both the effective and ineffective portions of the changes in thefair value of the derivative, along with the gain or loss on the hedged itemthat is attributable to the hedged risk, are recorded in the statement ofoperations within interest income or interest expense. For cash flow hedges,the effective portion of the change in the fair value of the derivative isrecorded in accumulated other comprehensive income. When the hedged itemimpacts the statement of operations, the gain or loss included in accumulatedother comprehensive income is reported on the same line in the statement ofoperations as the hedged item. In addition, the ineffective portion of the changesin the fair value of derivatives used as cash flow hedges is reported in thestatement of operations.

 

As part of theMerger, the Company assumed the responsibility for a $20 million notionalinterest rate swap whereby the Company paid a variable rate and received afixed rate. The interest rate swap had been used to hedge certain Federal HomeLoan Bank borrowings of the former Chester Valley. On the date of the Merger,the interest rate swap and the hedged borrowings were marked to fair value inpurchase accounting. In September 2005, the hedged borrowings were repaidand $10 million notional amount of the interest rate swap was unwound with thecounter-party. After performing the appropriate documentation of the derivativeinstrument, the Company designated the remaining $10 million notional amountinterest rate swap as a fair value hedge of certain existing borrowings ofWillow Financial Bank. The swap had the effect of converting a fixed rateborrowing to an adjustable rate borrowing. During the quarter ended December 31,2005, the derivative

 

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instrumentceased to be a highly effective hedge; therefore, the Company discontinuedhedge accounting resulting in a pre-tax charge of $47 thousand. The interestrate swap was unwound in February 2006 without resulting in any additionalimpact to the statement of operations. The basis adjustment that was previouslyrecorded on the hedged borrowing that is recorded in the statement of financialcondition is amortized as an increase in interest expense over the remaininglife of the borrowing using the interest method.

 

Additionally,in August 2003, Chester Valley purchased a $30.0 million notional amount3.50% six month LIBOR interest rate cap while simultaneously selling a $30.0million notional amount 6.00% six-month LIBOR interest rate cap (“Interest RateCorridor”) which was to expire in August 2008. Chester Valley paid a netpremium, which entitled it to receive the difference between six-month LIBORfrom 3.50% up to 6.00% applied to the $30.0 million notional amount. Uponconsummation of the Merger, the Company assumed the Interest Rate Corridor anddesignated it to hedge certain borrowings of Willow Financial Bank, which werevariable in nature and indexed to six-month LIBOR. The Interest Rate Corridorwas being used to hedge the cash flows of this borrowing. Prior to October 23,2006, the Interest Rate Corridor reduced the negative impact on earnings of theborrowings in a rising interest rate environment. The fair market value of theInterest Rate Corridor had two components: the intrinsic value and the timevalue of the option. The Interest Rate Corridor was marked-to-market quarterly,with changes in the intrinsic value of the Interest Rate Corridor, net of tax,included as a separate component of other comprehensive income, and the changein the time value of the option included directly as interest expense asrequired under SFAS 133. In addition, the ineffective portion, if any, wouldhave been expensed in the period in which ineffectiveness was determined.

 

On October 23,2006, the Company unwound the Interest Rate Corridor and recognized a gain of$804 thousand in the statement of operations upon repayment of the $30 millionFHLB advance.

 

At June 30,2007, the Company had five interest rate swap arrangements used to hedgespecific loans originated by the Bank for which the transactions wereeconomically beneficial to the Bank in passing along the interest rate risk tothe borrower. The swaps effectively convert the rates from a floating ratebased on LIBOR to a fixed rate throughout the life of the underlying loans. At June 30,2007, the total outstanding notional amount on these swaps was $9.3 million.The weighted average floating and fixed rates on these transactions were 4.6%and 5.3%, respectively at June 30, 2007. The Company lacked sufficientdocumentation for these transactions to receive hedge accounting treatment. Assuch, the Bank has recorded a net receivable of $196 thousand and $480thousand, respectively, at June 30, 2007 and 2006. The change in the fairvalue of the interest rate swaps is included as a component of other income onthe consolidated statements of income.

 

**19.         Regulatory Matters**

 

The Bank issubject to various regulatory capital requirements administered by the federalbanking agencies. Failure to meet minimum capital requirements can initiatecertain mandatory, and possibly additional discretionary actions by regulatorsthat if undertaken, could have a direct material effect on the Company’sfinancial statements. Under capital adequacy guidelines and the regulatoryframework for prompt corrective action, the Bank must meet specific capitalguidelines that involve quantitative measures of the Bank’s assets,liabilities, and certain off-balance sheet items as calculated under accountingpractices. The Bank’s capital amounts and classifications are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors.

 

96

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At June 30, 2007, the Bank had regulatory capital, which was wellin excess of regulatory limits set by the Office of Thrift Supervision. Thecurrent requirements and the Bank’s actual capital levels are detailed below(as restated):

 
| ** **                                                      | ** ** | **Actual Capital**              | ** ** | **Required for Capital  Adequacy Purposes** | ** ** | **Required to Be Well  Capitalized under  Prompt Corrective  Action Provision** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                      | ** ** | **Amount**                           | ** ** | **Ratio**                                                  | ** ** | **Amount**                                                                                                    | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| ** **                                                      | ** ** | **(Dollars in thousands)** | ** ** |
| *As of June 30, 2007*                                      |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| Tangible capital (to tangible assets)                           |       | $                                    | 117,703    |                                                       | 8.2        | %                                                                                                             | $          | 21,580 |   | 1.5 | % | $ | 28,773 |   | 2.0 | % |
| Core capital (to adjusted tangible assets)                      |       | 117,703                              |       | 8.2                                                        | %          | 57,547                                                                                                        |       | 4.0 | % | 71,933 |   | 5.0 | % |
| Tier I capital (to risk-weighted assets)                        |       | 117,703                              |       | 12.2                                                       | %          | N/A                                                                                                           |       | N/A |   | 57,682 |   | 6.0 | % |
| Risk-based capital (to risk-weighted  assets)                   |       | 127,983                              |       | 13.3                                                       | %          | 76,909                                                                                                        |       | 8.0 | % | 96,136 |   | 10.0 | % |
| *As of June 30, 2006*Tangible capital (to tangible assets) |       | $                                    | 108,354    |                                                       | 7.4        | %                                                                                                             | $          | 21,910 |   | 1.5 | % | $ | 29,214 |   | 2.0 | % |
| Core capital (to adjusted tangible assets)                      |       | 108,354                              |       | 7.4                                                        | %          | 58,428                                                                                                        |       | 4.0 | % | 73,035 |   | 5.0 | % |
| Tier I capital (to risk-weighted assets)                        |       | 108,354                              |       | 11.3                                                       | %          | N/A                                                                                                           |       | N/A |   | 57,091 |   | 6.0 | % |
| Risk-based capital (to risk-weighted  assets)                   |       | 119,875                              |       | 12.6                                                       | %          | 76,121                                                                                                        |       | 8.0 | % | 95,151 |   | 10.0 | % |

 

In its letterapproving the merger of Willow Financial Bank and First Financial Bank, theOffice of Thrift Supervision (“OTS”), as one of the conditions for approval,indicated that, for the periods ending December 31, 2005, 2006, and 2007,Willow Financial Bank must have tier one core capital ratios at least equal to6.50%, 6.75%, and 7.25%, respectively, and total risk-based capital equal to11.97%, 12.02% and 12.40%, respectively. Willow Financial Bank must also submitto the Office of Thrift Supervision, quarterly status reports detailing itscompliance with the conditions on regulatory capital outlined in its approvalletter. The Office of Thrift Supervision’s conditions for approval of the BankMerger also indicated that, for the periods ending December 31, 2005,2006, and 2007, Willow Financial Bancorp must have consolidated tangiblecapital ratios at least equal to 5.14%, 5.59% and 6.12%, respectively. The Bankand the Company currently exceed all of these requirements.

 

**20.       Fair Valueof Financial Instruments**

 

The Company’smethods for determining the fair value of its financial instruments as well assignificant assumptions and limitations are set forth below.

 

**Limitations**

 

Estimates offair value are made at a specific point in time, based upon, where available,relevant market prices and information about the financial instrument. Suchestimates do not include any premium or discount that could result fromoffering for sale at one time the Company’s entire holdings of a particularfinancial instrument. For a substantial portion of the Company’s financialinstruments, no quoted market price exists. Therefore, estimates of fair valueare necessarily based on a number of significant assumptions (many of which

 

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involve eventsoutside the control of management). Such assumptions include assessments ofcurrent economic condition, perceived risks associated with these financialinstruments and their counterparties, future expected loss experience, andother factors. Given the uncertainties surrounding these assumptions, thereported fair values represent estimates only and, therefore, cannot becompared to the historical accounting model. Use of different assumptions ormethodologies is likely to result in significantly different fair valueestimates.

 

The estimatedfair values presented neither include nor give effect to the values associatedwith the Company’s banking or other businesses, existing customerrelationships, branch banking network, property, equipment, goodwill, orcertain tax implications related to the realization of unrealized gains orlosses. The fair value of non-interest-bearing demand deposits, savings and NOWaccounts, and money market deposit accounts is equal to the carrying amountbecause these deposits have no stated maturity. This approach to estimatingfair value excludes the significant benefit that results from the low-costfunding provided by such deposit liabilities, as compared to alternativesources of funding. As a consequence, this presentation may distort the actualfair value of a banking organization that is a going concern.

 

The followingmethods and assumptions were used to estimate the fair value of each majorclassification of financial instruments at June 30, 2007 and 2006:

*** ***

***Cash and Cash Equivalents, Accrued Interest Receivable, Deposits withNo Stated Maturities, Accrued Interest Payable, and Certificates of Deposit***

 

Thesefinancial instruments have carrying values that approximate fair value.

 

***Securities Available for Sale, Trading andHeld to Maturity***

 

Current quotedmarket prices were used to determine fair value.

 

***Loans***

 

Fair valueswere estimated for portfolios of loans with similar financial characteristics.Loans were segregated by type and each loan category was further segmented byfixed and adjustable-rate interest terms. The estimated fair value of thesegregated portfolios was calculated by discounting cash flows based onestimated maturity and prepayment speeds using estimated market discountedrates that reflected credit and interest risk inherent in the loans. Theestimate of the maturities and prepayment speeds was based on the Company’shistorical experience. Cash flows were discounted using market rates adjustedfor portfolio differences.

 

***Loans Available for Sale***

 

The fair valueof mortgage loans originated and intended for sale in the secondary market isbased on contractual cash flows using current market rates, calculated on anaggregate basis.

 

***FHLB Advances***

 

Fair value wasestimated using discounted cash flow analysis based on the Company’s currentincremental borrowing rate for similar types of borrowing arrangements.

 

***Trust Preferred Securities***

 

Fair value wasdetermined using discounted cash flow analysis based on changes in the marketrates since date of issuance.

 

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***Commitments to Extend Credit***

 

The majorityof the Company’s commitments to extend credit carry current interest rates ifconverted to loans. Because commitments to extend credit are generally notassignable by the borrower, they only have value to the Company and theborrower. The estimated fair value approximates the recorded deferred feeamounts.

 

The carrying amounts and estimated fair values of the Company’sfinancial instruments, including off-balance sheet financial instruments, at June 30,2007 and 2006, are as follows (as restated):

 
| ** **                         | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **Carrying  Amount**                 | ** ** | **Fair  Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                            |       |                                 |       |                        |       |   |   |   |   |
| Cash and cash equivalents          |       | $                                    | 60,277     |                        | $          | 60,277 |   | $ | 30,955 |   | $ | 30,955 |   |
| Trading securities                 |       | 1,176                                |       | 1,176                       |       | 902 |   | 902 |   |
| Securities available for sale      |       | 188,339                              |       | 188,339                     |       | 196,925 |   | 196,925 |   |
| Securities held to maturity        |       | 88,363                               |       | 86,488                      |       | 105,561 |   | 102,087 |   |
| Loans available for sale           |       | 8,075                                |       | 8,075                       |       | 2,635 |   | 2,635 |   |
| Loans, net                         |       | 1,035,293                            |       | 1,020,289                   |       | 1,063,601 |   | 1,056,425 |   |
| Accrued interest receivable        |       | 6,654                                |       | 6,654                       |       | 6,647 |   | 6,647 |   |
| Liabilities:                       |       |                                 |       |                        |       |   |   |   |   |
| Deposits with no stated maturities |       | 758,058                              |       | 758,058                     |       | 714,873 |   | 714,873 |   |
| Certificates of deposit            |       | 334,672                              |       | 315,561                     |       | 301,627 |   | 297,959 |   |
| FHLB Advances                      |       | 189,764                              |       | 183,429                     |       | 282,555 |   | 275,970 |   |
| Trust preferred securities         |       | 25,774                               |       | 24,537                      |       | 36,198 |   | 36,198 |   |
| Accrued interest payable           |       | 2,303                                |       | 2,303                       |       | 2,285 |   | 2,285 |   |
|                                    |            |                                      |            |                             |            |  |  |  |  |  |  |  |  |

 

**21.      Comprehensive Income (Loss)**

 

The tax effects allocated to each component of other comprehensiveincome (loss) are as follows:

 
| ** **                                                         | ** ** | **Year ended June 30, 2007** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                         | ** ** | **Before tax  amount**                      | ** ** | **Tax Effect** | ** ** | **After tax  Amount** | ** ** |
| ** **                                                         | ** ** | **(Dollars in thousands)**             | ** ** |
| Other comprehensive income:                                        |       |                                             |       |   |   |   |   |
| Unrealized holding gains during the period                         |       | $                                                | 1,638      |   | $ | (587 | ) | $ | 1,051 |   |
| Reclassification adjustment for gains  included in net income |       | (228                                             | )          | 80 |   | (148 | ) |
| Gain on termination of interest rate  corridor                     |       | (804                                             | )          | 281 |   | (523 | ) |
| Net unrealized loss on cash flow hedge                             |       | (376                                             | )          | 133 |   | (243 | ) |
| Total other comprehensive income                                   |       | $                                                | 230        |   | $ | (93 | ) | $ | 137 |   |

 

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| ** **                                                          | ** ** | **Year ended June 30, 2006** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                          | ** ** | **Before tax  amount**                      | ** ** | **Tax Effect** | ** ** | **After tax  Amount** | ** ** |
| ** **                                                          | ** ** | **(Dollars in thousands)**             | ** ** |
| Other comprehensive loss:                                           |       |                                             |       |   |   |   |   |
| Unrealized holding losses during the period                         |       | $                                                | (4,549     | ) | $ | 1,612 |   | $ | (2,937 | ) |
| Reclassification adjustment for losses  included in net income |       | 919                                              |       | (322 | ) | 597 |   |
| Net unrealized gain on cash flow hedge                              |       | 579                                              |       | (203 | ) | 376 |   |
| Total other comprehensive loss                                      |       | $                                                | (3,051     | ) | $ | 1,087 |   | $ | (1,964 | ) |

 

 
| ** **                                                    | ** ** | **Year ended June 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                    | ** ** | **Before tax  amount**                      | ** ** | **Tax Effect** | ** ** | **After tax  Amount** | ** ** |
| ** **                                                    | ** ** | **(Dollars in thousands)**             | ** ** |
| Other comprehensive income:                                   |       |                                             |       |   |   |   |   |
| Unrealized (losses) gains on securities  available for sale:  |       |                                             |       |   |   |   |   |
| Unrealized holding gains during the period                    |       | $                                                | 1,749      |   | $ | (688 | ) | $ | 1,061 |   |
| Reclassification adjustment for gains  included in net income |       | 73                                               |       | (24 | ) | 49 |   |
| Total other comprehensive income                              |       | $                                                | 1,822      |   | $ | (712 | ) | $ | 1,110 |   |

 

**22.       SegmentInformation**

 

Under thedefinition of SFAS No. 131, “Disclosures About Segments of an Enterpriseand Related  Information,”  the Company has two operating segments atJune 30, 2007 and 2006; Willow Financial Bank and WIS. The WillowFinancial Bank segment primarily provides loan and deposit services tocommercial and retail customers through its network of 29 branchlocations. The WIS segment, which was acquired on August 31, 2005 inconnection with the Merger, operates a full service investment advisory andsecurities brokerage firm.

 

Segment information for the twelve months ended June 30, 2007 and2006 is as follows (as restated):

 
| ** **           | ** ** | **Year ended June 30,** | ** ** |
|----------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **           | ** ** | **Bank**                               | ** ** | **WIS** | ** ** | **Total** | ** ** | **Bank** | ** ** | **WIS** | ** ** | **Total** | ** ** |
| ** **           | ** ** | **(Dollars in thousands)**   | ** ** |
| Interest income      |       | $                                      | 86,050     |   | $ | — |   | $ | 86,050 |   | $ | 81,530 |   | $ | — |   | $ | 81,530 |   |
| Interest expense     |       | 41,062                                 |       | — |   | 41,062 |   | 32,205 |   | — |   | 32,205 |   |
| Net interest income  |       | 44,988                                 |       | — |   | 44,988 |   | 49,325 |   | — |   | 49,325 |   |
| Non-interest income  |       | 9,958                                  |       | 2,309 |   | 12,267 |   | 6,025 |   | 2,089 |   | 8,114 |   |
| Depreciation expense |       | 2,598                                  |       | — |   | 2,598 |   | 1,837 |   | — |   | 1,837 |   |
| Income tax expense   |       | 2,752                                  |       | 134 |   | 2,886 |   | 2,840 |   | 170 |   | 3,010 |   |
| Total net income     |       | 6,988                                  |       | 279 |   | 7,267 |   | 6,352 |   | 315 |   | 6,667 |   |
| Total assets         |       | 1,550,343                              |       | 953 |   | 1,551,296 |   | 1,568,820 |   | 1,914 |   | 1,570,734 |   |
|                      |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**23.          Parent Company Financial Information (Willow Financial Bancorp, Inc.)**

 

*Condensed Statements of Financial Condition*

 

| ** **                                                             | ** ** | **At  June 30, 2007  (As restated)** | ** ** | **At  June 30, 2006  (As restated)** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                             | ** ** | **(Dollars in thousands)**                | ** ** |
| Assets:                                                                |       |                                                |       |                                                |       |
| Cash                                                                   |       | $                                                   | 440        |                                                | $          | 3,883 |   |
| Note receivable from subsidiary                                        |       | 4,770                                               |       | 5,182                                               |       |
| Investment in subsidiaries                                             |       | 213,742                                             |       | 202,772                                             |       |
| Investment securities                                                  |       |                                                |       |                                                |       |
| Trading                                                                |       | 1,176                                               |       | 902                                                 |       |
| Available for sale (amortized cost of $789  and $10,967, respectively) |       | 827                                                 |       | 10,881                                              |       |
| Goodwill                                                               |       | 6,526                                               |       | 6,526                                               |       |
| Other assets                                                           |       | 1,963                                               |       | 4,835                                               |       |
| Total assets                                                           |       | $                                                   | 229,444    |                                                | $          | 234,981 |   |
| Liabilities and stockholders’ equity:                             |       |                                                |       |                                                |       |
| Subordinated debentures                                                |       | $                                                   | 25,744     |                                                | $          | 36,198 |   |
| Other liabilities                                                      |       | 4,267                                               |       | 159                                                 |       |
| Total liabilities                                                      |       | 30,011                                              |       | 36,357                                              |       |
| Total stockholders’ equity                                        |       | 199,433                                             |       | 198,624                                             |       |
| Total liabilities and stockholders’ equity                        |       | $                                                   | 229,444    |                                                | $          | 234,981 |   |

 

*Condensed Statements of Income*

 

| ** **                                  | ** ** | **For the year ended June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007  (As  restated)**                                 | ** ** | **2006  (As  restated)** | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**                     | ** ** |
| Interest income:                            |       |                                                     |       |   |   |   |   |
| Interest and dividend income                |       | $                                                        | 542        |   | $ | 401 |   | $ | 182 |   |
| Total interest and dividend income:         |       | 542                                                      |       | 401 |   | 182 |   |
| Non-interest income:                        |       |                                                     |       |   |   |   |   |
| Realized gain (loss) on investments         |       | 49                                                       |       | 51 |   | (57 | ) |
| Other income                                |       | 2                                                        |       | 48 |   | — |   |
| Total non-interest income (loss)            |       | 51                                                       |       | 99 |   | (57 | ) |
| Total income                                |       | 593                                                      |       | 500 |   | 125 |   |
| Expense:                                    |       |                                                     |       |   |   |   |   |
| Professional fees                           |       | 14                                                       |       | 281 |   | 452 |   |
| Stationery and printing                     |       | —                                                   |       | 27 |   | 28 |   |
| Consulting services                         |       | —                                                   |       | 38 |   | 744 |   |
| Interest expense on subordinated debentures |       | 2,434                                                    |       | 1,109 |   | — |   |
| Investor relations                          |       | 14                                                       |       | 70 |   | 134 |   |
| Other expense                               |       | 600                                                      |       | 425 |   | 208 |   |
| Total expense                               |       | 3,062                                                    |       | 1,950 |   | 1,566 |   |
| Loss before taxes                           |       | (2,469                                                   | )          | (1,450 | ) | (1,441 | ) |
| Income tax benefit                          |       | (129                                                     | )          | — |   | (491 | ) |
| Loss before equity in income of subsidiary  |       | (2,340                                                   | )          | (1,450 | ) | (950 | ) |
| Equity in income of subsidiary              |       | 9,607                                                    |       | 8,117 |   | 7,676 |   |
| Net income                                  |       | $                                                        | 7,267      |   | $ | 6,667 |   | $ | 6,726 |   |

 

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* *

*Condensed Statements of Cash Flows*

 
| ** **                                                                              | ** ** | **For the year ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007  (As restated)**                             | ** ** | **2006  (As restated)** | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(Dollars in thousands)**                     | ** ** |
| Cash flow from operating activities:                                                    |       |                                                     |       |   |   |   |   |
| Net income:                                                                             |       | $                                                        | 7,267      |   | $ | 6,667 |   | $ | 6,726 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                     |       |   |   |   |   |
| Equity in undistributed income of  subsidiary                                           |       | (9,607                                                   | )          | (8,117 | ) | (7,676 | ) |
| Realized (gain) loss on investments                                                     |       | (49                                                      | )          | (51 | ) | 57 |   |
| Increase in other assets                                                                |       | (2,872                                                   | )     | (2,644 | ) | (1,353 | ) |
| Purchase of trading account securities                                                  |       | (274                                                     | )          | (849 | ) | (53 | ) |
| Net tax payments received from subsidiary                                               |       | 8,438                                                    |       | — |   | — |   |
| Increase (decrease) in other liabilities                                                |       | 4,108                                                    |       | (191 | ) | (60 | ) |
| Net cash provided by (used in) operating  activities                                    |       | 7,011                                                    |       | (5,185 | ) | (2,359 | ) |
| Cash flows from investing activities:                                                   |       |                                                     |       |   |   |   |   |
| Purchase of securities available for sale                                               |       | —                                                   |       | (10,054 | ) | (5,036 | ) |
| Proceeds from sales and calls of securities  available for sale                         |       | 10,054                                                   |       | 4,476 |   | — |   |
| Net (funding) repayment of notes receivable                                             |       | (1,284                                                   | )     | 1,367 |   | 13,655 |   |
| Net cash used for acquisition                                                           |       | —                                                   |       | (35,032 | ) | — |   |
| Net cash provided by (used in) investing  activities                                    |       | 8,770                                                    |       | (39,243 | ) | 8,619 |   |
| Cash flows from financing activities:                                                   |       |                                                     |       |   |   |   |   |
| Capital contribution to subsidiaries                                                    |       | —                                                   |       | (15,000 | ) | — |   |
| Dividends received from subsidiary                                                      |       | —                                                   |       | 43,806 |   | — |   |
| Proceeds from stock issuance                                                            |       | 1,392                                                    |       | 1,275 |   | 285 |   |
| Proceeds from issuance of subordinated  debentures                                      |       | —                                                   |       | 25,000 |   | — |   |
| Repayment of trust preferred securities                                                 |       | (10,454                                                  | )          | — |   | — |   |
| Treasury stock purchases                                                                |       | (3,242                                                   | )          | (179 | ) | (2,595 | ) |
| Dividends paid                                                                          |       | (6,920                                                   | )          | (6,718 | ) | (4,196 | ) |
| Net cash (used in) provided by financing  activities                                    |       | (19,224                                                  | )          | 48,184 |   | (6,506 | ) |
| Net (decrease) increase in cash and cash  equivalents                                   |       | (3,443                                                   | )          | 3,756 |   | (246 | ) |
| Cash and cash equivalents at beginning of  period                                       |       | 3,883                                                    |       | 127 |   | 373 |   |
| Cash and cash equivalents at end of period                                              |       | $                                                        | 440        |   | $ | 3,883 |   | $ | 127 |   |

 

**24.       RelatedParty Transactions**

 

The Bankroutinely enters into transactions with its directors and officers. Suchtransactions are made in the ordinary course of business on substantially thesame terms and conditions, including interest rates and collateral, as thoseprevailing at the same time for comparable transactions with other customers,and do not, in the opinion of management, involve more than the normal creditrisk or present other unfavorable features. The aggregate amount of loans tosuch related parties was $137 thousand and $283 thousand at June 30, 2007and 2006, respectively, and all such loans were performing in accordance withtheir terms at such dates.

 

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**25.        Dividend Policy**

 

The Company’sability to pay dividends is dependent, in part, upon its ability to obtaindividends from the Bank. The future dividend policy of the Company is subjectto the discretion of the Board of Directors and will depend upon a number offactors, including future earnings, financial conditions, cash needs, andgeneral business conditions. Holders of common stock will be entitled toreceive dividends as and when declared by the Board of Directors of the Companyout of funds legally available for that purpose. Such payment, however, will besubject to the regulatory restrictions set forth by the OTS. In addition, OTSregulations provides that, as a general rule, a financial institution may notmake a capital distribution if it would be undercapitalized after making thecapital distribution. During fiscal 2007, the Company paid cash dividends of$6.9 million, or $0.46 per share.

 

**26.****                               SubsequentEvent – Goodwill Impairment**

 

The Company follows the provisions of SFAS No. 142,“Goodwill and Other Intangibles,” and performs an annual impairment test ofgoodwill. However, when circumstances indicate that an event has occurredduring an interim period, the Company will perform an impairment test at thattime. The Company has determined that such an event occurred during the quarterended December 31, 2007.

 

During this period, conditions in the housing marketcontinued to deteriorate resulting in a tightening of available credit in themarketplace. Additionally, several companies that specialized in sub-primelending declared bankruptcy. These market conditions and related concernssurrounding credit caused valuations for thrifts and other financialinstitutions to decrease significantly during this quarter. The market price ofour stock declined from $12.11 on October 1, 2007 to $8.27 at December 31,2007. Additionally, during this period, the Company was delinquent in thefiling of its Form 10-Q for the quarter ended September 30, 2007 andreceived notice from NASDAQ of a potential de-listing of the stock on theNASDAQ Global Select Stock Market.

 

As a result of the above conditions, the Company is inthe process of completing an interim impairment test of Goodwill. The reviewencompasses a two-step process. The first step requires the Company to identifythe reporting units and compare the fair value of each reporting unit, which wecompute using earnings multiple approach and various transaction marketapproaches.  The Company has tworeporting units: a.) Banking operations and b.) Willow Investment Services,which includes BeneServ Corporate Benefit Services and Carnegie WealthManagement, and therefore valuations were done for each unit.  The Company’s completion of Step 1 indicatedthat impairment may exist in the Banking unit and therefore the Company is inthe process of completing the second step. In the second step, the implied fairvalue of Goodwill is calculated as the excess of the fair value of thereporting unit over the fair values assigned to its’ assets andliabilities.Preliminary indications are that the Company will record animpairment charge related its’ Banking unit for the quarter ended December 31,2007 in the range of $25.0 million to $40.0 million.

 

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**Item9A.     Controls and Procedures**

 

**9Aa. Disclosure Controls and Procedures**

 

Disclosurecontrols and procedures (as defined in Rules 13a – 15(e) or 15d-15(e) underthe Exchange Act) are designed to ensure that information required to bedisclosed in our reports filed under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms. This information is accumulated and communicated to management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosures. Ourmanagement, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered under this report. Based on the evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were noteffective as of June 30, 2007 because of the material weaknesses discussedbelow.

 

**9Ab. Internal Control over FinancialReporting (as restated)**

 

**MANAGEMENT REPORT ON EFFECTIVENESSOF INTERNAL CONTROL OVER FINANCIAL REPORTING (as restated)**

 

Management ofthe Company and the Bank is responsible for establishing and maintainingadequate internal control over financial reporting as such term is defined inthe Exchange Act. Under the supervision and with the participation ofmanagement, including our Chief Executive Officer and Chief Financial Officer,we conducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO Framework).

 

In connection with the completion of our testingof the internal controls and a review of our financial statements for the yearended June 30, 2007 under the COSO Framework, in our Form 10-K filedfor the year ended June 30, 2007, management identified materialweaknesses in our internal control over financial reporting as described below:

 

·                inadequate review and analysis offinancial statement account reconciliations related to the support for themanual posting of accounting entries and the clearing of reconciling items in atimely manner; and

 

·                improper application of accountingresources to effectively evaluate the financial reporting impact of significantmatters including, but not limited to, interest rate swap transactions.

 

Inconnection with the restatement of the Company’s consolidated financialstatements described in Note 2 to the consolidated financial statements,management has determined that an additional material weakness existed as of June 30,2007 and should be disclosed. Accordingly, management has included the following additional materialweakness:

 

·                  policies and procedures to ensurejournal entries are accompanied by sufficient supporting documentation and areadequately reviewed and approved for validity, completeness and accuracy priorto being recorded were not operating as designed.

 

As a result,certain controls and reconciliations associated with financial statementaccount balances were not performed on a timely basis, journal entries wererecorded without sufficient supporting documentation, and review and approvalprocedures relative to the material weaknesses described above were notoperating effectively.  This resulted inerrors that were material to interest income, interest expense, non-interestincome, non-interest expense, additional paid-in capital and retained earnings,including the related income tax expense effect, in each of the annual andquarterly financial statements for fiscal years 2007 and 2006, which have beenrestated and corrected prior to issuance of the financial statements includedherein.

 

Based on ourevaluation under the COSO Framework, management concluded that our internalcontrol over financial reporting was not effective as of June 30, 2007.

 

Ourindependent auditor, KPMG LLP, the independent registered public accountingfirm that audited the financial statements included in this report on Form 10-K,has issued a report on of the Company’s internal control over financialreporting. Their report appears in Item 8.

 

**9Ac.Changes in Internal Control Over Financial Reporting**

 

No change in our internal control over financial reporting (as definedin Rules 13a-15(f) under the Exchange Act) occurred during the lastfiscal quarter in the fiscal year ended June 30, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**9Ad.Remediation of Material Weaknesses in Process**

 

In response to the material weaknesses noted above, the Company hascommenced the following corrective actions to remediate the material weaknesseson an ongoing basis:

 

·                        The Company has conducted athorough assessment of the design of the reconciliation process as it relatesto the posting of manual journal entries. The Company has revised itsreconciliation process to require that all significant manual journal entries containthe appropriate detailed support, and the processing of such entries beapproved by the Chief Accounting Officer, Corporate Controller and/or the ChiefFinancial Officer. The approval of certain reconciliations in which the errorsoccurred will require the review and approval of the Chief Accounting Officer,Corporate Controller and/or Chief Financial Officer. Additionally, allreconciling items are required to be cleared within a 90-day period.  TheCompany believes that, once fully implemented and tested, these procedures aswell as certain other process enhancements will ensure accurate and timelycompletion of general ledger reconciliations with a level of precision todetect errors that, in the future, would be material to the Company’s financialstatements if not so detected.

 

·                        Management has developedprocedures that we believe, once fully implemented and tested, will ensure thatsignificant accounting transactions are sufficiently researched and documentedand appropriately recorded.

 

·                        The Company has hired a newCorporate Controller as well as additional qualified personnel within theaccounting and finance departments.   Wewill continue to review our staffing needs in the finance and accounting areato ensure adequate resources.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this amended report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
| ** **             | **WILLOW FINANCIAL BANCORP, INC.** |
|------------------------|-----------------------------------------|
| ** **             | ** **                              |
| Date: May 2, 2008 | By:                                     | /s/ DONNA M. COUGHEY |
|                   |                                    | Donna M. Coughey |
|                   |                                    | *President and Chief Executive Officer* |
|                   |                                    |   |
| Date: May 2, 2008 | By:                                     | /s/ JOSEPH T. CROWLEY |
|                   |                                    | Joseph T. Crowley |
|                   |                                    | *Chief Financial Officer* |
|                        |                                         |  |  |

 

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