**UNITED STATESSECURITIES AND**EXCHANGE COMMISSION

**Washington, D.C. 20549**

**FORM 10-K/A**

**(Amendment No. 1)**

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO 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** |
|-------|------------|---------------------------------------------------------------------------------------------------------------|

 

**For the 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**

**WILLOW FINANCIAL BANCORP, INC.**

(ExactName of Registrant as Specified in its Charter)

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

 

**170SOUTH WARNER ROAD**

**WAYNE,PENNSYLVANIA 19087**

(Addressof Principal Executive Offices)

Registrant’stelephone number: (including area code) **(610) 995-1700**

Securitiesregistered pursuant to Section 12(b) of the 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** |
|                                              |                                                |  |

 

Securitiesregistered pursuant to Section 12(g) of the Act: **NONE**

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. YES o NO x

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.YES o NO x

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES x NO o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o  Accelerated Filer x  Non-Accelerated Filer o

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). YES o NO x

The aggregate market value ofthe voting stock held by non-affiliates of the Registrant based on the closingprice of $14.92 on December 31, 2006, the last business day of theRegistrant’s second quarter was $185,242,587 (16,640,575 shares outstandingless 4,224,852 shares held by affiliates at $14.92 per share). Althoughdirectors and executive officers of the Registrant and certain employee benefitplans were assumed to be “affiliates” of the Registrant for purposes of thecalculation, the classification is not to be interpreted as an admission ofsuch status.

As of the close of businesson September 24, 2007 there were 15,543,943 shares of the Registrant’sCommon Stock outstanding.

**DOCUMENTSINCORPORATED BY REFERENCE**

1.                                       Portions of the Definitive Proxy Statement forthe 2007 Annual Meeting of Stockholders are incorporated by reference inPart III.

 

----

**EXPLANATORY NOTE**

This Amendment to ourAnnual Report on Form 10-K amends our Annual Report on Form 10-K for the fiscalyear ended June 30, 2007, originally filed with the Securities and ExchangeCommission on October 1, 2007 (the “Original Filing”).  We are filing this Amendment to correctcertain information disclosed in Part II Item 7A, “Quantitative and QualitativeDisclosures about Market Risk” and Item 8, “Financial Statements andSupplementary Data,” and to include Item 9, “Changes in and Disagreements withAccountants and Financial Disclosure” (which had been inadvertently omitted inthe Original Filing) on pages 62, 69, 91 and 103 of the Original Filing. Exceptas described in this Explanatory Note, no other changes have been made to theOriginal Filing, and this Amendment does not amend or update any otherinformation set forth in the Original Filing.

2

----

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

***Asset/Liability Management and Interest Rate Risk***

The market value of assets and liabilities, as well asfuture earnings, can be affected by interest rate risk. Market values ofcertain financial assets have an inverse relationship to rates, i.e., wheninterest rates rise, the market value of many of the Company’s assets declineand when rates fall, the market value of many of the Company’s assets rise. Theprimary assets of the Company are loans to borrowers who often have the abilityto prepay their loan. Therefore, in a falling rate environment, the increase inthe market value of the Company’s assets is limited by this option for theborrower to prepay the loan.

The ability to maximize net interest income is largelydependent upon the achievement of a positive interest spread that can bemaintained during fluctuations in prevailing interest rates. Interest ratesensitivity gap (“gap”) is a measure of the difference between interest-earningassets and interest-bearing liabilities that either mature or re-pricewithin a specified time period. A gap is considered positive when the amount ofinterest-earning assets exceeds the amount of interest-bearingliabilities, and is considered negative when interest-bearing liabilitiesexceed interest-earning assets. Generally, during a period of risinginterest rates, a negative gap would adversely affect net interest income,while a positive gap would result in an increase in net interest income. Duringa period of falling interest rates, a negative gap would generally result in anincrease in net interest income, and a positive gap would result in a decreasein net interest income. This is usually the case; however, interest rates ondiffering financial instruments will not always change at the same time or tothe same extent.

The following gaptable 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  months**         | ** ** | **3 to 12  months** | ** ** | **1 to 3  years** | ** ** | **3 to 5  years** | ** ** | **over 5  years** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Securities and  interest-bearing deposits                                                                                     |       | $                                    | 83,282     |                          | $          | 58,249                      |       | $                           | 58,980     |                   | $          | 15,899    |       | $ | 93,622 |   | $ | 310,032 |   |
| Loans receivable                                                                                                              |       | 244,873                              |       | 159,469                       |       | 315,875                     |       | 94,500                      |       | 232,877                |       | 1,047,594 |       |
| Total interest-earning  assets                                                                                                |       | 328,155                              |       | 217,718                       |       | 374,855                     |       | 110,399                     |       | 326,499                |       | 1,357,626 |       |
| Certificates of deposit                                                                                                       |       | 93,765                               |       | 179,794                       |       | 53,144                      |       | 3,242                       |       | 4,727                  |       | 334,672   |       |
| Other interest-bearing  deposits                                                                                              |       | 202,224                              |       | 115,770                       |       | 202,456                     |       | 5,784                       |       | 80,989                 |       | 607,223   |       |
| Borrowings                                                                                                                    |       | 102,923                              |       | 30,114                        |       | 64,229                      |       | 10,799                      |       | 27,523                 |       | 235,588   |       |
| Total interest-bearing  liabilities                                                                                           |       | 398,912                              |       | 325,678                       |       | 319,829                     |       | 19,825                      |       | 113,239                |       | 1,177,483 |       |
| Excess (deficiency) of  interest-earning assets over interest-bearing liabilities                                        |       | $                                    | (70,757    | )                             | $          | (107,960                    | )          | $                           | 55,026     |                   | $          | 90,574    |       | $ | 213,260 |   | $ | 180,143 |   |
| Cumulative excess  (deficiency) of interest-earning assets over interest-bearing liabilities                             |       | $                                    | (70,757    | )                             | $          | (178,717                    | )          | $                           | (123,691   | )                      | $          | (33,117   | )          | $ | 180,143 |   | $ | 360,286 |   |
| Cumulative excess  (deficiency) of interest-earning assets to Interest-bearing liabilities  as a Percent of total assets |       | (4.6                                 | )%         | (11.5                         | )%         | (8.0                        | )%         | (2.1                        | )%         | 11.6                   | %          | 23.3      | %          |
| Ratio of interest-earning  assets to interest-bearing liabilities                                                             |       | 82.3                                 | %          | 66.9                          | %          | 117.2                       | %          | 556.9                       | %          | 288.3                  | %          | 115.3     | %          |
| Cumulative ratio of interest-Earning assets to assets  to Interest-bearing liabilities                                   |       | 82.3                                 | %          | 75.3                          | %          | 88.2                        | %          | 96.9                        | %          | 122.7                  | %          |      |       |

 

At June 30, 2007, the ratio of the cumulativeinterest-earning assets maturing or re-pricing in one-year or less tointerest-bearing liabilities maturing or re-pricing in one-year or lesswas 75.3%, which results in a cumulative one-year gap to total assets ratio ofnegative 11.5%, indicating that the Bank’s net interest income could declinedepending upon the degree to which interest rates change and the change in the 

3

----

relationship betweeninterest rates used to re-price assets and interest rates used in there-pricing of liabilities.

The Company has adopted asset/liability managementpolicies designed to quantify the interest rate risk caused by mismatches inthe maturities and re-pricing of our interest-earning assets and interest-bearingliabilities. These interest rate risk and asset/liability management actionsare taken under the guidance of the Finance Committee. The Finance Committee’spurpose is to communicate, coordinate and control asset/liability managementconsistent with our business plan and Board approved policies. The objective ofthe Finance Committee is to manage asset and funding sources to produce resultsthat are consistent with liquidity, capital adequacy, growth, risk andprofitability goals. The Finance Committee meets at least quarterly andmonitors the volume and mix of assets and funding sources taking into accountthe relative costs and spreads, the interest rate sensitivity gap and liquidityneeds. The Finance Committee also reviews economic conditions and interest rateprojections, current and projected liquidity needs and capital positions,anticipated changes in the mix of assets and liabilities, and interest rateexposure limits versus current projections pursuant to gap analysis andinterest income simulations. At each meeting, the Finance Committee recommendschanges in strategy as appropriate. Interest rate risk issues are alsodiscussed by the Board of Directors on a regular basis. Management meetsperiodically to monitor progress in achieving asset/liability targets approvedby the Board, particularly the type and rate on asset generation and sources offunding.

In order to manage the Company’s assets andliabilities and improve our interest rate risk position, emphasis has beenplaced on the origination of assets with shorter maturities or adjustable ratessuch as commercial and multi-family real estate loans, constructionloans, home equity loans and to a lesser extent commercial business loans. Atthe same time, other actions include attempts to increase our core deposits andthe use of FHLB advances as additional sources of funds. Additionally, longerterm fixed rate single-family residential mortgage loans are originatedand held for sale.

The Finance Committee regularly reviews interest raterisk by, among other things, examining the impact of alternative interest rateenvironments on net interest income and net portfolio value (“NPV”), and thechange in NPV. NPV is the difference between the market value of assets and themarket value of liabilities and off-balance sheet items under various interestrate scenarios. Sensitivity is the difference (measured in basis points)between the NPV to assets ratio at market rate and the NPV to assets ratiodetermined under each rate scenario. The Finance Committee monitors both theNPV and sensitivity according to guidelines established by the OTS in ThriftBulletin 13A “Management of Interest Rate Risk, Investment Securities andDerivative Activities,” and board approved limitations.

Presented below, as of June 30, 2007 and 2006, isan analysis of the interest rate risk position as measured by NPV andsensitivity based upon various rate scenarios. These values were obtained froman internal model produced by the Bank as required by OTS regulation as totalassets now exceed $1.0 billion. Due to the level of interest rates, no valuesare calculated for hypothetical rate scenarios of down 300 basis points at June 30,2007. It only provides an estimate of economic value at a point in time and theeconomic value of the same portfolio under the above referenced interest ratescenarios.

4

----

**Estimated changein NPV and SensitivityAt 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    | ) | (33.8 | )% | 7.46 | % |
| up 200 basis points                    |       | (35,035                           | )          | (22.1 | ) | 8.65 |   |
| up 100 basis points                    |       | (16,798                           | )          | (10.6 | ) | 10.32 |   |
| no change—base case               |       | —                            |       | — |   | 10.78 |   |
| down 100 basis points                  |       | 13,757                            |       | 8.7 |   | 11.55 |   |
| down 200 basis  points                 |       | 21,829                            |       | 13.8 |   | 11.97 |   |
|                                        |            |                                   |            |  |  |  |  |  |

 

**Estimated changein NPV and SensitivityAt 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    | ) | (27.5 | )% | 9.76 | % |
| up 200 basis points                    |       | (33,116                           | )          | (16.2 | ) | 11.12 |   |
| up 100 basis points                    |       | (14,395                           | )          | (7.1 | ) | 12.16 |   |
| no change—base case               |       | —                            |       | — |   | 12.91 |   |
| down 100 basis points                  |       | 8,812                             |       | 4.3 |   | 13.34 |   |
| down 200 basis points                  |       | 1,726                             |       | 0.8 |   | 12.89 |   |
| down 300 basis  points                 |       | (15,299                           | )          | (7.5 | ) | 11.87 |   |
|                                        |            |                                   |            |  |  |  |  |  |

 

The Bank’s sensitivity remained relatively stable forfiscal 2007 as compared to fiscal 2006 due primarily to interest sensitiveassets acquired in the Merger, which was partially offset, by the intangibleassets recorded with the acquisition.

NPV is more sensitive and may be more negativelyimpacted by rising interest rates than by declining rates. This occursprimarily because as rates rise, the market value of long-term fixed rateassets, like fixed rate mortgage loans, declines due to both the rate increaseand slowing prepayments. When rates decline, these assets do not experiencesimilar appreciation in value. This is due to the decrease in the duration ofthe asset resulting from the increase in prepayments.

***Recent Accounting Pronouncements***

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

In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”). This Statement permits entities to choose to measuremany financial instruments and certain other items at fair value. SFAS 159provides entities with the opportunity to reduce volatility in reportedearnings caused by measuring related assets and liabilities differently. SFAS 159is effective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. Early adoption is permitted as of the beginningof a fiscal year that begins on or before November 15, 2007, provided theentity also elects to apply the provisions of FASB Statement No. 157, “FairValue 

5

----

Measurements.” TheCompany is currently assessing the implications of this Statement on itsfinancial statements.

*FASB Statement No,157, Fair Value Measurements*

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework formeasuring fair value in accordance with U.S. generally accepted accountingprinciples, and enhances disclosures about fair value measurements. SFAS 157applies when other accounting pronouncements require fair value measurements;it does not require new fair value measurements. SFAS 157 is effective forfinancial statements issued for fiscal years beginning after November 15,2007, and for interim periods within those years. The Company is currentlyassessing the implications of this Statement on its financial statements.

*Staff Accounting Bulletin No. 108, Consideringthe Effects of Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements*

In September 2006, the Securities and ExchangeCommission (“SEC”) published Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). SAB 108 expresses the SEC staff’sviews regarding the process of quantifying financial statement misstatements. TheSEC staff suggests that registrants electing not to restate prior periodsshould reflect the effects of applying the guidance in this interpretation inthe annual financial statements covering the first fiscal year ending after November 15,2006. This interpretation did not have a material impact on the Company’sconsolidated financial statements.

*FASBInterpretation 48, Accounting for Uncertainty in Income Tax Positions*

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Tax Positions.” Thisinterpretation clarifies the application of FASB Statement No. 109 byestablishing a threshold condition that a tax position must meet for any partof the benefit of that position to be recognized in the financial statements. Inaddition to recognition, the interpretation provides guidance on themeasurement, derecognition, classification, and disclosure of tax positions andis effective for fiscal years beginning after December 15, 2006. TheCompany has evaluated this interpretation and determined that it will have nomaterial impact on results of its future operations and financial condition.

*FASB Statement No,155, Accounting for Certain Hybrid Financial Instruments*

In February 2006, the FASB issued SFAS No. 155,*Accounting for Certain Hybrid Financial Instruments*.Under this new statement, an entity may re-measure at fair value a hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation from the host, if the holder irrevocably elects to accountfor the whole instrument on a fair value basis. Subsequent changes in the fairvalue of the instrument would be recognized in earnings. This statement iseffective for all financial instruments that the Company acquires or issuesafter July 1, 2007. The adoption of this statement will not have amaterial impact on the Company’s financial position or results of operations.

*EITF 06-4, Accounting for Deferred Compensationand Postretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements*

In June 2006, the Emerging Issues Task Forcereached a consensus that, for endorsement split-dollar life insurancearrangements, an employer should recognize the liability for future benefitsbased on the substantive agreement with the employee, since the postretirementbenefit obligation is not effectively settled. An entity is permitted to applythe consensus by retrospective application to all prior periods in accordancewith FASB Statement No. 154, including its required disclosures. Theconsensus is effective for 

6

----

fiscal years beginningafter December 15, 2007, with early adoption permitted as of the beginningof an entity’s fiscal year. The Bank has recorded a liability of $246 thousandwithin other liabilities on its consolidated statements of financial conditionto account for the settlement of the future benefit obligation.

**Selected QuarterlyFinancial Data**

The followingtable presents selected quarterly operating data for the fiscal years endedJune 30, 2007 and 2006. The earnings per share amounts for periods priorto March 31, 2007 have been adjusted to give retroactive effect to the 5%stock dividend. In addition, as a result of the matters discussed inItem 9A. “Controls and Procedures” in this Form 10-K, the amountsreported for each quarter in the fiscal year ended June 30, 2007 have beenrevised from previously reported amounts.
|                                     | ** ** | **For the quarter ended**                                        | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **06/30/07**                                                                    | ** ** | **03/31/07** | ** ** | **12/31/06** | ** ** | **09/30/06** | ** ** |
| ** **                          | ** ** | ** **                                                                      | ** ** | **(As  restated)** | ** ** | **(As  restated)** | ** ** | **(As  restated)** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest  income              |       | $                                                                               | 21,712     |   | $ | 21,247 |   | $ | 21,424 |   | $ | 21,890 |   |
| Total interest  expense             |       | 10,679                                                                          |       | 10,390 |   | 10,441 |   | 9,758 |   |
| Net interest  income                |       | 11,033                                                                          |       | 10,857 |   | 10,983 |   | 12,132 |   |
| Provision  (recovery) for loan loss |       | 753                                                                             |       | — |   | — |   | (100 | ) |
| Total non-interest  income          |       | 3,506                                                                           |       | 2,928 |   | 3,338 |   | 2,726 |   |
| Total non-interest  expense         |       | 12,291                                                                          |       | 11,251 |   | 10,847 |   | 10,670 |   |
| Income tax  expense                 |       | 178                                                                             |       | 812 |   | 1,039 |   | 1,367 |   |
| Net income                          |       | 1,317                                                                           |       | 1,722 |   | 2,435 |   | 2,921 |   |
| Earnings per  share                 |       |                                                                            |       |   |   |   |   |   |   |
| Basic                               |       | $                                                                               | 0.09       |   | $ | 0.12 |   | $ | 0.16 |   | $ | 0.19 |   |
| Diluted                             |       | $                                                                               | 0.09       |   | $ | 0.11 |   | $ | 0.16 |   | $ | 0.19 |   |

 
|                             | ** ** | **For the quarter ended**                                        | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **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     |       | 9,326                                                                           |       | 8,586 |   | 7,971 |   | 6,355 |   |
| Net interest  income        |       | 13,235                                                                          |       | 13,206 |   | 13,634 |   | 9,217 |   |
| Provision for  loan loss    |       | 2,485                                                                           |       | — |   | 207 |   | 513 |   |
| Total non-interest  income  |       | 2,880                                                                           |       | 2,078 |   | 2,326 |   | 363 |   |
| Total non-interest  expense |       | 10,290                                                                          |       | 9,503 |   | 9,767 |   | 7,842 |   |
| Income tax  expense         |       | 991                                                                             |       | 1,857 |   | 2,109 |   | 299 |   |
| Net income                  |       | 2,349                                                                           |       | 3,924 |   | 3,877 |   | 926 |   |
| Earnings per  share         |       |                                                                            |       |   |   |   |   |   |   |
| Basic                       |       | $                                                                               | 0.16       |   | $ | 0.25 |   | $ | 0.26 |   | $ | 0.08 |   |
| Diluted                     |       | $                                                                               | 0.15       |   | $ | 0.25 |   | $ | 0.26 |   | $ | 0.08 |   |

 

7

----

The results forthe first through third quarters of the current fiscal year as reported on theCompany’s Form 10-Q have been adjusted by the following amounts:
|                                | ** ** | **For the quarter ended**                                        | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **03/31/07**                                                                    | ** ** | **12/31/06** | ** ** | **09/30/06** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest  income(a)      |       | $                                                                               | (87.0      | ) | $ | (115.0 | ) | $ | (21.0 | ) |
| Total interest  expense(a)     |       | 386.0                                                                           |       | 347.0 |   | 70.0 |   |
| Net interest  income           |       | (473.0                                                                          | )          | (462.0 | ) | (91.0 | ) |
| Provision for  loan losses     |       | —                                                                          |       | — |   | — |   |
| Total  non-interest income(b)  |       | 131.0                                                                           |       | 18.0 |   | 154.0 |   |
| Total  non-interest expense(c) |       | 143.0                                                                           |       | (286.0 | ) | 355.0 |   |
| Income tax  expense(d)         |       | (169.0                                                                          | )          | (54.0 | ) | (99.0 | ) |
| Net income                     |       | (316.0                                                                          | )          | (104.0 | ) | (193.0 | ) |
| Earnings per  share:           |       |                                                                            |       |   |   |   |   |
| Basic                          |       | $                                                                               | (0.01      | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| Diluted                        |       | $                                                                               | (0.02      | ) | $ | (0.01 | ) | $ | (0.01 | ) |

 

----

(a)             Adjustmentsrelate to items identified in various reconciliations for which reconcilingitems were not investigated in a timely manner.

(b)            Adjustmentsrelate primarily to the change in the fair market value of various interestrate swaps as well as proceeds received from a previously impaired bond.

(c)             Adjustmentsrelate primarily to stale-dated items identified in reconciliations as well as theaccrual for paid time off.

(d)            Adjustmentsrelate to the tax effect of the above noted items at a marginal tax rate of34%.

A balance sheet reclassification of $9.9 millionwas recorded from retained earnings to additional paid-in capital to properly reflectthe stock dividend issued on February 23, 2007, revising the previouslyreported amounts.

8

----

**Item 8.**                          FinancialStatements and Supplementary Data

**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and StockholdersWillow Financial Bancorp, Inc.:

We have audited the accompanying consolidatedstatements of financial condition of Willow Financial Bancorp, Inc. andsubsidiary (the Company) as of June 30, 2007 and 2006, and the relatedconsolidated statements of income, changes in stockholders’ equity andcomprehensive income, and cash flows for each of the years in the three-yearperiod ended June 30, 2007. These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company as of June 30, 2007 and 2006, and the results oftheir operations and their cash flows for each of the years in the three-yearperiod ended June 30, 2007, in conformity with U.S. generally acceptedaccounting principles.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the Company’s internal control over financialreporting as of June 30, 2007, based on criteria established in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated September 28, 2007 expressed an adverseopinion on the effectiveness of the Company’s internal control over financialreporting.
| /s/  KPMG LLP              |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |   |
| September 28, 2007    |   |

 

9

----

**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and StockholdersWillow Financial Bancorp, Inc.:

We have audited Willow Financial Bancorp, Inc. andsubsidiary’s (the Company) internal control over financial reporting as of June30, 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*. Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, and testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk. Our audit alsoincluded performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

A material weakness is a deficiency, or a combinationof deficiencies, in internal control over financial reporting, such that thereis a reasonable possibility that a material misstatement of the company’sannual or interim financial statements will not be prevented or detected on atimely basis. The following material weaknesses have been identified andincluded in management’s assessment: (1) inadequate review and analysis offinancial statement account reconciliations primarily related to the supportfor the manual posting of certain accounting entries and the clearing ofreconciling items in a timely manner and (2) improper application of accountingresources to effectively evaluate the financial reporting impact of significantmatters including, but not limited to, interest rate swap transactions. We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated statements of financialcondition as of June 30, 2007 and 2006 and the related consolidated statementsof income, stockholders’ equity and comprehensive income, and cash flows foreach of the years in the three-year period ended June 30, 2007 of the Company.These material weaknesses were considered in determining the nature, timing,and extent of audit tests applied in our audit of the June 30, 2007 

10

----

consolidated financial statements, and this reportdoes not affect our report dated September 28, 2007, which expressed anunqualified opinion on those consolidated financial statements.

In our opinion,because of the effect of the aforementioned material weaknesses on theachievement of the objectives of the control criteria, the Company has notmaintained effective internal control over financial reporting as of June 30,2007, based on criteria established in *InternalControl—Integrated Framework* issued by COSO.
| /s/  KPMG LLP              |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |   |
| September 28, 2007    |   |

 

11

----

**WillowFinancial Bancorp, Inc.Consolidated Statements of Financial Condition**
| ** **                                                                                                                              | ** ** | **At  June 30, 2007**                                          | ** ** | **At  June 30, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                              | ** ** | **(Dollars in thousands,   except share data)** | ** ** |
| Assets:                                                                                                                                 |       |                                                                     |       |                            |       |
| Cash and cash  equivalents:                                                                                                             |       |                                                                     |       |                            |       |
| Cash on hand and  non-interest-earning deposits                                                                                         |       | $                                                                        | 26,253     |                            | $          | 32,930 |   |
| Interest-bearing  deposits                                                                                                              |       | 32,475                                                                   |       | 4,289                           |       |
| Total cash and cash  equivalents                                                                                                        |       | 58,728                                                                   |       | 37,219                          |       |
| 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)                                                          |       | 1,036,098                                                                |       | 1,063,882                       |       |
| Loans held for sale                                                                                                                     |       | 8,075                                                                    |       | 2,635                           |       |
| Accrued interest  receivable                                                                                                            |       | 6,738                                                                    |       | 6,647                           |       |
| Property and equipment,  net                                                                                                            |       | 11,307                                                                   |       | 10,064                          |       |
| Bank owned life  insurance                                                                                                              |       | 11,930                                                                   |       | 11,483                          |       |
| Real estate owned                                                                                                                       |       | —                                                                   |       | 51                              |       |
| Other intangible  assets, net                                                                                                           |       | 14,432                                                                   |       | 12,975                          |       |
| Goodwill                                                                                                                                |       | 95,100                                                                   |       | 94,072                          |       |
| Other assets                                                                                                                            |       | 18,664                                                                   |       | 17,788                          |       |
| Total assets                                                                                                                            |       | $                                                                        | 1,550,344  |                            | $          | 1,577,060 |   |
| Liabilities and  Stockholders’ Equity:                                                                                             |       |                                                                     |       |                            |       |
| Interest-bearing  deposits                                                                                                              |       | $                                                                        | 941,895    |                            | $          | 855,526 |   |
| Non-interest-bearing  deposits                                                                                                          |       | 151,160                                                                  |       | 162,864                         |       |
| Securities sold under  agreements to repurchase                                                                                         |       | 20,000                                                                   |       | 20,000                          |       |
| Federal Home Loan Bank  advances                                                                                                        |       | 190,063                                                                  |       | 282,717                         |       |
| Advance payments from  borrowers for taxes                                                                                              |       | 4,254                                                                    |       | 4,776                           |       |
| Trust preferred  securities                                                                                                             |       | 25,525                                                                   |       | 36,149                          |       |
| Accrued interest  payable                                                                                                               |       | 2,223                                                                    |       | 2,205                           |       |
| Other liabilities                                                                                                                       |       | 9,889                                                                    |       | 9,425                           |       |
| Total liabilities                                                                                                                       |       | 1,345,009                                                                |       | 1,373,662                       |       |
| 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                                                                                                             |       | 191,223                                                                  |       | 178,886                         |       |
| Retained  earnings—substantially restricted                                                                                        |       | 51,932                                                                   |       | 60,404                          |       |
| Accumulated other  comprehensive loss                                                                                                   |       | (3,180                                                                   | )          | (3,317                          | )          |
| Obligation of deferred  compensation plan                                                                                               |       | 1,277                                                                    |       | 1,258                           |       |
| Treasury stock at cost,  1,991,427 and 1,823,123 shares at June 30, 2007 and 2006,  respectively                              |       | (31,493                                                                  | )          | (28,251                         | )          |
| Unallocated common  stock held by:                                                                                                      |       |                                                                     |       |                            |       |
| Employee Stock  Ownership Plan (ESOP)                                                                                                   |       | (2,733                                                                   | )          | (3,287                          | )          |
| Recognition and  Retention Plan Trust (RRP)                                                                                             |       | (1,866                                                                   | )          | (2,461                          | )          |
| Total stockholders’  equity                                                                                                        |       | 205,335                                                                  |       | 203,398                         |       |
| Total liabilities and stockholders’ equity                                                                                         |       | $                                                                        | 1,550,344  |                            | $          | 1,577,060 |   |

 

See accompanying Notes to Consolidated FinancialStatements

12

----

**WillowFinancial Bancorp, Inc.Consolidated Statements of Income**
| ** **                                           | ** ** | **For the year ended June 30,**                        | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest and  dividend income:                       |       |                                                                            |       |   |   |   |   |
| Loans                                                |       | $                                                                               | 69,538     |   | $ | 65,472 |   | $ | 34,536 |   |
| Investment securities and interest-bearing deposits  |       | 16,735                                                                          |       | 16,058 |   | 15,143 |   |
| Total interest  income                               |       | 86,273                                                                          |       | 81,530 |   | 49,679 |   |
| Interest  expense:                                   |       |                                                                            |       |   |   |   |   |
| Deposits                                             |       | 28,698                                                                          |       | 18,476 |   | 9,931 |   |
| Securities sold under agreements to repurchase       |       | 1,135                                                                           |       | 228 |   | — |   |
| Borrowings                                           |       | 11,435                                                                          |       | 13,534 |   | 8,818 |   |
| Total interest  expense                              |       | 41,268                                                                          |       | 32,238 |   | 18,749 |   |
| Net interest  income                                 |       | 45,005                                                                          |       | 49,292 |   | 30,930 |   |
| Provision for  loan losses                           |       | 653                                                                             |       | 3,205 |   | 1,232 |   |
| Net interest  income after provision for loan losses |       | 44,352                                                                          |       | 46,087 |   | 29,698 |   |
| Non-interest  income:                                |       |                                                                            |       |   |   |   |   |
| Investment services income, net                      |       | 3,321                                                                           |       | 2,634 |   | — |   |
| Income from insurance operations                     |       | 637                                                                             |       | — |   | — |   |
| Service charges and fees                             |       | 5,438                                                                           |       | 5,000 |   | 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                                          |       | 303                                                                             |       | 17 |   | — |   |
| Gain on termination of interest rate corridor        |       | 804                                                                             |       | — |   | — |   |
| Other income                                         |       | 1,151                                                                           |       | 558 |   | 389 |   |
| Total non-interest  income                           |       | 12,498                                                                          |       | 7,647 |   | 3,477 |   |
| Non-interest  expense:                               |       |                                                                            |       |   |   |   |   |
| Salaries and employee benefits                       |       | 24,265                                                                          |       | 20,106 |   | 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                    |       | 2,043                                                                           |       | 1,928 |   | 57 |   |
| Professional fees                                    |       | 2,444                                                                           |       | 2,303 |   | 1,441 |   |
| Other expense                                        |       | 4,583                                                                           |       | 4,206 |   | 4,168 |   |
| Total non-interest  expense                          |       | 45,059                                                                          |       | 37,402 |   | 23,397 |   |
| Income before  income taxes                          |       | 11,791                                                                          |       | 16,332 |   | 9,778 |   |
| Income tax  expense                                  |       | 3,396                                                                           |       | 5,256 |   | 3,052 |   |
| Net Income                                           |       | $                                                                               | 8,395      |   | $ | 11,076 |   | $ | 6,726 |   |
| Earnings per  share:                                 |       |                                                                            |       |   |   |   |   |
| Basic                                                |       | $                                                                               | 0.55       |   | $ | 0.79 |   | $ | 0.70 |   |
| Diluted                                              |       | $                                                                               | 0.54       |   | $ | 0.77 |   | $ | 0.67 |   |

 

See accompanying Notes to Consolidated FinancialStatements

13

----

**WillowFinancial 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                 |       | $                                                         | 53,516     |                                                 | $          | (2,463              | )          | $                                                       | 525        |      | $          | (24,926 | ) | $ | (7,905 | ) | $ | 103,776 |   |
| 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                 |       | $                                                         | 56,046     |                                                 | $          | (1,353              | )          | $                                                       | 1,076      |      | $          | (28,072 | ) | $ | (6,855 | ) | $ | 107,043 |   |
| Net income                                                |       | —                                                                          |       | —                                |       | 11,076                 |       | —                                                    |       | —                                               |       | —              |       | —                                                  |       | 11,076    |       |
| Other  comprehensive income                               |       | —                                                                          |       | —                                |       | —                 |       | (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                            |       | $                                                                               | 166        |                                  | $          | 178,886                |       | $                                                         | 60,404     |                                                 | $          | (3,317              | )          | $                                                       | 1,258      |      | $          | (28,251 | ) | $ | (5,748 | ) | $ | 203,398 |   |
| Net income                                                |       | —                                                                          |       | —                                |       | 8,395                  |       | —                                                    |       | —                                               |       | —              |       | —                                                  |       | 8,395     |       |
| 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       |       |
| 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                            |       | $                                                                               | 175        |                                  | $          | 191,223                |       | $                                                         | 51,932     |                                                 | $          | (3,180              | )          | $                                                       | 1,277      |      | $          | (31,493 | ) | $ | (4,599 | ) | $ | 205,335 |   |

 

14

----

**WillowFinancial Bancorp, Inc.Consolidated Statements of Changes in Stockholders’ Equity and ComprehensiveIncome (Continued)**

 
| ** **                                                                                             | ** ** | **For the year ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net unrealized  gains (losses) on securities available for sale arising during the period,  net of tax |       | $                                                        | 1,051      |   | $ | (3,424 | ) | $ | 1,061 |   |
| Reclassification  adjustments for (gains) losses included in net income, net of tax               |       | (148                                                     | )          | 630 |   | 49 |   |
| Gain on  termination of interest rate corridor                                                         |       | (523                                                     | )          | — |   | — |   |
| Net unrealized  (loss) gain on cash flow hedge                                                         |       | (243                                                     | )          | 830 |   | — |   |
| Other  comprehensive income (loss)                                                                     |       | 137                                                      |       | (1,964 | ) | 1,110 |   |
| Net income                                                                                             |       | 8,395                                                    |       | 11,076 |   | 6,726 |   |
| Comprehensive income                                                                                   |       | $                                                        | 8,532      |   | $ | 9,112 |   | $ | 7,836 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

15

----

**WillowFinancial Bancorp, Inc.Consolidated Statements of Cash Flows**
| ** **                                                                              | ** ** | **For the year ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(Dollars in thousands)**                     | ** ** |
| Net cash flows  from operating activities:                                              |       |                                                     |       |   |   |   |   |
| Net income                                                                              |       | $                                                        | 8,395      |   | $ | 11,076 |   | $ | 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                                                       |       | 2,043                                                    |       | 1,928 |   | 57 |   |
| Provision for loan losses                                                               |       | 653                                                      |       | 3,205 |   | 1,232 |   |
| Gain on sale of loans available for sale                                                |       | (616                                                     | )          | (370 | ) | (597 | ) |
| (Gain) loss on sale of securities available for sale  and trading                       |       | (228                                                     | )          | 936 |   | (73 | ) |
| Gain on sale of interest rate corridor                                                  |       | (804                                                     | )          | — |   | — |   |
| Gain on sale of real estate                                                             |       | (303                                                     | )          | — |   | — |   |
| Increase in loans held for sale                                                         |       | (57,313                                                  | )          | (76,020 | ) | (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                                                     | )          | (198 | ) | — |   |
| Amortization of deferred loan fees, discounts and  premiums                             |       | (1,266                                                   | )          | (1,442 | ) | (124 | ) |
| (Increase) decrease in accrued interest receivable                                      |       | (91                                                      | )          | 335 |   | (529 | ) |
| (Increase) decrease in value of bank owned life  insurance                              |       | (447                                                     | )          | 6,036 |   | — |   |
| (Increase) decrease in other assets                                                     |       | (2,434                                                   | )          | 3,225 |   | (1,129 | ) |
| Increase (decrease) in other liabilities                                                |       | 479                                                      |       | (8,455 | ) | 3,536 |   |
| Stock based compensation                                                                |       | 1,931                                                    |       | 1,963 |   | 1,625 |   |
| Increase (decrease) in accrued interest payable                                         |       | 18                                                       |       | (351 | ) | 78 |   |
| Net cash  provided by operating activities                                              |       | 4,749                                                    |       | 25,143 |   | 12,237 |   |
| Cash flows from  investing activities:                                                  |       |                                                     |       |   |   |   |   |
| Capital expenditures                                                                    |       | (5,080                                                   | )          | (3,287 | ) | (631 | ) |
| Proceeds from sale of office buildings                                                  |       | 1,649                                                    |       | 11,139 |   | — |   |
| Net decrease (increase) in loans                                                        |       | 26,118                                                   |       | (25,825 | ) | (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                                                   | )          | (35,032 | ) | — |   |
| Net cash  provided by (used in) investing activities                                    |       | 53,524                                                   |       | 75,191 |   | (54,798 | ) |
| Cash flows from  financing activities:                                                  |       |                                                     |       |   |   |   |   |
| Net increase (decrease) in deposits                                                     |       | 74,932                                                   |       | (55,519 | ) | (437 | ) |
| Increase in securities sold under agreements to  repurchase                             |       | —                                                   |       | 26,636 |   | — |   |
| Proceeds from FHLB advances                                                             |       | 107,400                                                  |       | 215,700 |   | 109,500 |   |
| Repayment of FHLB advances                                                              |       | (200,054                                                 | )          | (291,724 | ) | (78,268 | ) |
| (Decrease) increase in advance payments from  borrowers for taxes and insurance         |       | (522                                                     | )          | 1,428 |   | (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                                                      |       | 198 |   | — |   |
| Common stock repurchased as treasury stock                                              |       | (3,242                                                   | )          | — |   | (3,146 | ) |
| Net cash (used  in) provided by financing activities                                    |       | (36,763                                                  | )          | (83,724 | ) | 23,725 |   |
| Net increase  (decrease) in cash and cash equivalents                                   |       | 21,510                                                   |       | 16,610 |   | (18,836 | ) |
| Cash and cash  equivalents:                                                             |       |                                                     |       |   |   |   |   |
| Beginning of  year                                                                      |       | 37,219                                                   |       | 20,609 |   | 39,445 |   |
| End of year                                                                             |       | $                                                        | 58,729     |   | $ | 37,219 |   | $ | 20,609 |   |
| Supplemental  disclosures of cash and cash flow information                             |       |                                                     |       |   |   |   |   |
| Interest paid                                                                           |       | $                                                        | 41,126     |   | $ | 32,589 |   | $ | 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                                                    |       | (3,424 | ) | 1,061 |   |
| Net unrealized  (loss) gain on cash flow hedge, net of tax                              |       | (766                                                     | )          | 505 |   | — |   |
| Loans transferred to  other real estate owned                                           |       | —                                                   |       | — |   | 532 |   |

 

See accompanying Notes to Consolidated FinancialStatements

16

----

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

Effective at 11:59 p.m., September 21, 2006,Willow Grove Bancorp, Inc. and Willow Grove Bank changed their names toWillow Financial Bancorp, Inc. and Willow Financial Bank, respectively. Ascontained  herein, references to theCompany include both Willow Financial Bancorp, Inc. and Willow GroveBancorp, Inc. and references to the Bank include both Willow FinancialBank and Willow Grove Bank. Coincident with the name change, the Company’strading symbol on the NASDAQ Select Global Market was changed from “WGBC” to “WFBC.”

Willow Financial Bancorp, Inc. (the “Company”),is a Pennsylvania corporation and parent holding company for Willow FinancialBank (the “Bank”). The Bank, which was originally organized in 1909, is afederally chartered savings bank and wholly owned subsidiary of the Company.The Bank’s business consists primarily of making commercial business andconsumer loans as well as real estate loans, both commercial and residential,funded primarily by retail and business deposits along with borrowings.

After the close of business on August 31, 2005,the Company completed its acquisition of Chester Valley Bancorp Inc. (“ChesterValley”), a registered bank holding company headquartered in Downingtown,Pennsylvania, with over $654 million in assets. Chester Valley had twowholly owned subsidiaries, First Financial Bank, a Pennsylvania charteredcommercial bank (“Chester Valley”)with 13 full-service banking offices, and Willow Investment Services (“WIS”),formerly Philadelphia Corporation for Investment Services, a registeredinvestment advisor and broker dealer (“PCIS”). Pursuant to the Agreement andPlan of Merger, dated as of January 20, 2005 (the “Merger Agreement”),Chester Valley was merged with and into the Company, with the Company as thesurviving corporation (the “Merger”), and ChesterValley was merged with and into Willow Financial Bank with WillowFinancial Bank as the surviving bank (the “Bank Merger”). WIS became a whollyowned subsidiary of the Company. As a result of the Merger, each outstandingshare of Chester Valley common stock, par value $1.00 per share (the “ChesterValley Common Stock”), was converted into the right to receive, at the electionof the shareholder, either $27.90 in cash or 1.4823 shares of the Companycommon stock, par value $0.01 per share (the “Company Common Stock”), subjectto the allocation and pro ration provisions set forth in the Merger Agreement.The acquisition resulted in the Company’s issuance of an aggregate of 4,977,256shares of Company Common Stock and $51.0 million in cash. The total mergerconsideration paid for the Chester Valley Common Stock was $145.3 million. Thisincluded capitalized acquisition costs and the value of Chester Valley vestedstock options converted to options of the Company at the average stock price ofthe Company on the four days surrounding the announcement of the acquisition.The Company used general corporate funds to pay the aggregate cashconsideration of approximately $51.0 million for the shares of ChesterValley Common Stock acquired in the Merger for cash, as well as the approximate$3.2 million in acquisition costs.

The Merger has been accounted for using the purchasemethod of accounting, which requires that our financial statements includeactivity of Chester Valley only subsequent to the acquisition date ofAugust 31, 2005. Accordingly, our consolidated financial statements andthe information herein include the combined results of the former ChesterValley and its former subsidiaries, ChesterValley and WIS, since September 1, 2005.

Effective February 28, 2006, the Bank completedthe sale of all outstanding shares of capital stock of PCIS to Uvest BD-A, Inc.,a North Carolina Corporation and registered broker-dealer (“Uvest”) forconsideration of $100 but providing that such shares may be repurchased for$100 at any time after the closing date of the stock sale. Concurrently withthe execution of the sale of PCIS, the parties entered into a relatedSub-Clearing and Brokerage Services Agreement, which provides that an affiliateof Uvest will provide securities clearing and certain supervisory andcompliance services for PCIS, and a Financial Services Agreement between PCISand the Bank which provides that the Bank will be entitled to 90% of therevenue generated by the securities brokerage activities conducted at the PCISoffice and will bear substantially all operational and overhead expenses. Uponconsummation of the sale of PCIS stock to 

17

----

Uvest, PCIS is no longera subsidiary of the Company. However, under the provisions of FinancialAccounting Standards Board Interpretation No. 46R, “Consolidation ofVariable Interest Entities”, the results of PCIS, which now conducts businessas Willow Investment Services (“WIS”) continue to be consolidated in theCompany’s financial statements. The affiliation agreement with Uvest has theprimary effect of relieving PCIS of direct responsibility for securitiesclearing and certain back-office and oversight obligations.

On March 30, 2007, the Company completed itsacquisition of BeneServ, Inc. (“BeneServ”) for a purchase price of  up to $5.5 million. 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, Delaware, and Philadelphia counties, Pennsylvania,thereby providing a number of cross selling opportunities for both companies.The Company has recorded goodwill and other intangibles of $4.5 million on thestatement of financial condition at June 30, 2007 as a result of thisacquisition based on the preliminary purchase price allocation.

References to Company include its consolidatedentities, Willow Financial Bank, the Bank’s subsidiaries, and its businesssegment, WIS, unless the context of the reference indicates otherwise.

The accompanying consolidated financial statementsinclude the accounts of the Company and its wholly owned subsidiary, WillowFinancial Bank. The accounts of the Bank include its wholly owned subsidiaries,Willow Grove Investment Corporation, Willow Grove Insurance Agency, LLC,BeneServ, D&S Service Corporation, and First Financial Investments. Allmaterial intercompany balances and transactions have been eliminated inconsolidation. The Company follows accounting and reporting practices which arein accordance with U.S. generally accepted accounting principles.

Certain amounts in prior years are reclassified forcomparability to the current year’s presentation. Such reclassifications, whenapplicable, have no effect on net income. The Company reclassifiedcollateralized customer deposit balances at June 30, 2006 from securitiessold under agreements to repurchase to interest-bearing deposits on theconsolidated statements of financial condition.

**2.**                 Risks and Uncertainties

In the normal course of its business, the Companyencounters two significant types of risk: economic and regulatory. There arethree main components of economic risk: interest rate risk, credit risk andmarket risk. The Company is subject to interest rate risk to the degree thatits interest-bearing liabilities mature or re-price at different speeds,or on a different basis, from its interest-earning assets. The Company’sprimary credit risk is the risk of default on the Company’s loan portfolio thatresults from the borrower’s inability to make contractually required payments.The Company’s lending activities are concentrated in Pennsylvania. The largestconcentration of the Company’s loan portfolio is located in southeasternPennsylvania. 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. Market risk reflectschanges in the value of collateral underlying loans, the valuation of realestate held by the Company, the valuation of loans held for sale, securitiesavailable for sale and mortgage servicing assets. The Company is subject tocertain Federal banking laws and regulations as further described herein and innote 18. Compliance with regulations causes the Company to incursignificant costs. In addition, the possibility of future changes to suchregulations presents the risk that future additional costs will be incurredthat may impact the Company.

**3.**                 Acquisition of Chester Valley Bancorp

The above noted Chester Valley acquisition cost wasapproximately $145.3 million, comprised of $88.5 million related to4,977,256 shares of common stock issued by the Company, $54.2 million in 

18

----

cash, consisting of$51.0 million paid to shareholders of Chester Valley and $3.2 million incapitalized acquisition costs along with $2.6 million related to the conversionof former stock options of Chester Valley to options of the Company. As aresult of the Merger, the Company recorded an approximate $108.1 millionintangible asset, including a $14.9 million core deposit intangible asset withthe remainder recorded as goodwill. The Company’s statement of operations forthe twelve months ended June 30, 2006 includes the results of operationsof the 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 following table summarizes the purchase accountingadjustments resulting from the Merger:

**Chester ValleyAcquisition Summary** (Dollars in Thousands)
| Total acquisition price                                      |   | $      | 145,314 |   |
|--------------------------------------------------------------|--------|--------|---------|--------|
| Tangible book  value of Chester Valley                       |   | 47,530 |    |
| Adjustments to  record assets and liabilities at fair value: |   |   |    |
| Loan discount                                                |   | (1,181 | )       |
| FHLB advance discount                                        |   | (44    | )       |
| Certificate of deposit premium                               |   | (1,036 | )       |
| Trust preferred premium                                      |   | (277   | )       |
| Other liabilities                                            |   | (7,125 | )       |
| Market value adjustment on premises and equipment            |   | (661   | )       |
| Core deposit intangible                                      |   | 14,883 |    |
| Resulting goodwill                                           |   | 93,225 |    |

 

The following table summarizes the pro forma operatingresults of Willow Financial Bancorp, Inc. had the acquisition of ChesterValley 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)**
| Total interest income      |   | $      | 87,506 |   |
|----------------------------|--------|--------|--------|--------|
| Total interest  expense    |   | 34,423 |   |
| Provision for  loan losses |   | 3,649  |   |
| Other income               |   | 8,149  |   |
| Other expense              |   | 46,971 |   |
| Income before  tax         |   | 10,612 |   |
| Income tax                 |   | 3,246  |   |
| Net income                 |   | 7,366  |   |
| Non-recurring  items(a)    |   | 8,426  |   |
| Adjusted net  income(b)    |   | $      | 15,792 |   |
| Earnings per  Share:       |   |   |   |
| Basic                      |   | $      | 0.56   |   |
| Diluted                    |   | $      | 0.54   |   |

 

----

(a)          Reflects losses onsecurities sales ($1.8 million), professional fees ($1.8 million) and stockoption compensation payments to holders of certain Chester Valley options ($4.8million).

(b)         Adjusted for non-recurring items at aneffective tax rate of 35%.

19

----

The Company does not believe the pro-forma operatingresults for the year ended June 30, 2005 would provide meaningfulinformation to the reader of the financial statements as the change in interestrates occurring during the fiscal year ended June 30, 2006 resulted insignificant changes in the purchase accounting adjustments resulting from theMerger. Additionally, the Merger was effective on the close of business on August 31,2005 and was therefore close to the beginning of the fiscal year ending on June 30, 2006.

The Company has deemed the acquisition of BeneServ, Inc.to be immaterial to the consolidated financial statements.

**4.**                 Summary of Significant AccountingPolicies

***Use of Estimates***

In preparing the consolidated financial statements,the Company is required to make estimates and assumptions that affect thereported amounts of assets and liabilities as of the date of the statement offinancial condition and revenue and expense for the period. Actual resultscould differ significantly from those estimates. Material estimates that areparticularly susceptible to significant change in the near-term include thedetermination of the allowance for loan losses and income taxes. Managementbelieves that the allowance for loan losses and the balances in income taxaccounts are adequate. Various regulatory agencies, as an integral part oftheir examination process, periodically review the Bank’s allowance for loanlosses and valuations of real estate owned. Such agencies may require the Bankto recognize additions to the allowance or adjustments to the valuations basedon their judgments about information available to them at the time of theirexamination.

***Cash and Cash Equivalents***

For purposes of the consolidated statements of cashflows, cash and cash equivalents include cash and interest-bearingdeposits with original maturities of three months or less.

***Loans Held for Sale***

Mortgage loans originated and intended for sale in thesecondary market are carried at the lower of cost or market calculated on anaggregate basis, with any unrealized losses reflected in the consolidatedstatements of income. Loans transferred from loans held for sale to loansreceivable are transferred at the lower of cost or market value at the date oftransfer. Gains are recognized upon delivery to the purchaser of said loans.

***Investment Securities***

The Company divides its securities portfolio intothree segments: (a) held to maturity, (b) available for sale and (c) trading.Securities in the held to maturity category are carried at cost, adjusted foramortization of premiums and accretion of discounts, using the level yieldmethod, based on the Company’s intent and ability to hold the securities untilmaturity. Marketable securities included in the available for sale category arecarried at fair value, with unrealized gains or losses that are temporary innature, net of taxes, reflected as an adjustment to equity. Trading securitiesconsist of mutual funds related to the Company’s deferred compensation plan forcertain executive level employees. Changes in the fair value of tradingsecurities are recorded through earnings. There is a corresponding liability inother liabilities 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 loss invalue is other than temporary. The term “other than temporary” is not intendedto indicate that the decline is permanent, but indicates that

20

----

the prospects for anear-term recovery of value is not necessarily favorable, or that there is alack of evidence to support realizable value equal to or greater than carryingvalue of the investment. Once a decline in fair value is determined to be otherthan temporary, the fair value of the security is reduced and reflected in theconsolidated statements of income.

The fair value of marketable securities is determinedfrom publicly quoted market prices. Securities available for sale that are notreadily marketable, which include Federal Home Loan Bank of Pittsburgh stock,are carried at cost, which approximates liquidation value. Premiums anddiscounts on securities are amortized/accreted using the level yield method.Trading account securities are carried at fair value, with unrealized gains andlosses reflected in the consolidated statements of income.

At the time of purchase, the Company makes adetermination of whether or not it will hold the securities to maturity, basedupon an evaluation of the probability of future events. Those securities thatthe Company believes may not be held to maturity, due to interest rate risk,liquidity needs, or other asset/liability decisions, are classified asavailable for sale. If securities are sold, a gain or loss is determined by thespecific identification method and is reflected in the operating results in theperiod the sale occurs.

***Allowance for Loan Losses***

The allowance for loan losses is maintained at a levelthat management believes is adequate to cover known and inherent losses in theloan portfolio that are both probable and reasonable to estimate at eachreporting date. Management establishes the loan loss allowance in accordancewith guidance provided by the Securities and Exchange Commission’s StaffAccounting Bulletin 102 (SAB 102). The determination of the adequacy of theallowance is based upon an evaluation of the portfolio, loss experience,current economic conditions, volume, growth, composition of the portfolio, andother relevant factors. The Company uses historical loss factors for each loantype and, for loans that we consider higher risk for all but single-familymortgage loans and guaranteed consumer loans, qualitative factors are alsoconsidered. This component establishes a range for factors such as, but notlimited to, delinquency trends, asset classification trends and currenteconomic conditions. Management then assesses these conditions and establishes,to the best of its ability, the allowance for loan losses from within the rangecalculated, based upon the facts known at that time. The methodology does notimply that any portion of the allowance for loan loss is restricted, but theallowance for loan loss applies to the entire loan portfolio.

***Loans***

Loans are recorded at cost, net of unearned discounts,deferred fees, and allowances. Discounts or premiums on purchased loans areamortized using the level yield method over the remaining contractual life ofeach loan, adjusted for actual prepayments. Loan origination fees and certaindirect origination costs are deferred and amortized over the contractual lifeof the related loans using the level yield method.

Interest receivable on loans is accrued to income asearned. Non-accrual loans are loans on which the accrual of interest has ceasedbecause the collection of principal or interest payments is determined to bedoubtful by management. It is the policy of the Company to discontinue theaccrual of interest and reverse any accrued interest when principal or interestpayments are delinquent more than 90 days (unless the loan principal andinterest are determined by management to be fully secured and in the process ofcollection), or earlier if the financial condition of the borrower raisessignificant concern with regard to the ability of the borrower to service thedebt in accordance with the terms of the loan. Interest income on such loans isnot accrued until the financial condition and payment record of the borrowerdemonstrates the ability to service the debt. Subsequent cash receipts areapplied either to the outstanding principal or recorded as interest income,depending on management’s assessment of ultimate collectibility of principaland interest.

Loans are considered past due after one payment hasbeen missed. Loans are charged off when they reach “loss” status in accordancewith the Bank’s asset classification policy. There are three classifications

21

----

for problem assets: “substandard,”“doubtful,” and “loss.” Substandard assets have one or more defined weaknessesand are characterized by the distinct possibility that the Bank will sustainsome loss if the deficiencies are not corrected. Doubtful assets haveweaknesses of substandard assets with the additional characteristic that theweaknesses make collection or liquidation in full on the basis of currentexisting facts, conditions and values, questionable, and there is a highprobability of loss. An asset classified as loss is considered uncollectibleand of such little value that continuance as an asset of the institution is notwarranted.

***Property and Equipment***

Property and equipment are stated at cost, lessaccumulated depreciation and amortization. The Company computes depreciationand amortization using the straight-line method over the estimated useful livesof the assets, which range from three to 40 years. Significant renovationsand additions are capitalized. Leasehold improvements are depreciated over theshorter of the useful lives of the assets or the related lease term. Whenassets are retired or otherwise disposed of, the cost and related accumulateddepreciation are removed from the accounts and any resulting gain or loss isreflected in income for the period. The cost of maintenance and repairs ischarged to expense as incurred.

***Goodwill and Other Intangibles***

Goodwill represents the excess cost over fair value ofassets acquired over liabilities as a result of the Merger and earlier branchacquisitions. Included in other intangibles are core deposit intangibles, ameasure of the value of checking and savings deposits acquired in the Mergeraccounted for under the purchase method. The core deposit intangible is beingamortized to expense over a fourteen-year life using a method that approximatesa level yield method. A customer intangible recorded as a result of theacquisition of BeneServ is being amortized to expense over a ten-year lifeusing a straight line basis. The Company follows the provisions of SFAS No. 142,“Goodwill and Other Intangible Assets,” and performs impairment tests of theintangible assets at least annually and impairment losses are recognized if thecarrying value of the intangible exceeds its fair value. The Company has notrecorded any impairment losses as a result of this analysis in 2007, 2006 or2005.

***Income Taxes***

Deferred tax assets and liabilities are recognized forfuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. The effecton deferred tax assets and liabilities of a change in tax rates is recognizedin income in the period that includes the enactment date.

***Earnings Per Share***

Earnings per share (“EPS”) consists of two separatecomponents, basic EPS and diluted EPS. Basic EPS is computed by dividing netincome by the weighted average number of common shares outstanding for eachperiod presented, see Note 6. Diluted EPS is calculated by dividing netincome by the weighted average number of common shares outstanding plusdilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stockoptions granted through the Company’s stock option plans and unvested commonstock awards.

22

----

***Stock Based Compensation***

On July 1, 2005, the Company adopted Statementsof Financial Accounting Standards (SFAS) No. 123R, “Share-basedPayment.” This Statement establishes the standards for accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for equity instruments of the enterprise or liabilitiesthat are based on the fair value of the enterprise’s equity instruments or thatmay be settled by the issuance of such equity instruments. SFAS No. 123Rrequires an entity to recognize the grant-date fair-value of stock options andother equity-based compensation issued to employees in the statement ofoperations. The revised Statement generally requires that an entity account forthose transactions using the fair-value based method and eliminates an entity’sability to account for share-based compensation transactions using theintrinsic value method of accounting provided in Accounting Principles Board(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” whichwas permitted under Statement No. 123, as originally issued. Prior to July 1,2005, the Company did not recognize employee equity-based compensation costs innet income. The adoption of SFAS No. 123R had the following impact onreported amounts compared with amounts that would have been reported using theintrinsic value method under 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 and Financial Liabilities*

In February 2007, the Financial AccountingStandards Board (“FASB”) issued 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 an entity’sfirst fiscal year that begins after November 15, 2007. Early adoption ispermitted as of the beginning of a fiscal year that begins on or before November 15,2007, provided the entity also elects to apply the provisions of FASB StatementNo. 157, “Fair Value Measurements.” The Company 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

23

----

implicationsof this Statement 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 ExchangeCommission (“SEC”) published Staff Accounting Bulletin No. 108, “Consideringthe Effects of Prior Year Misstatements When Quantifying Misstatements inCurrent Year Financial Statements” (“SAB 108”). SAB 108 expresses the SEC staff’sviews regarding the process of quantifying financial statement misstatements. TheSEC staff suggests that registrants electing not to restate prior periodsshould reflect the effects of applying the guidance in this interpretation inthe annual financial statements covering the first fiscal year ending after November 15,2006. This interpretation did not have a material impact on the Company’sconsolidated financial statements.

*FASB Interpretation 48,Accounting for Uncertainty in Income Tax Positions*

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Tax Positions.” Thisinterpretation clarifies the application of FASB Statement No. 109 byestablishing a threshold condition that a tax position must meet for any partof the benefit of that position to be recognized in the financial statements. Inaddition to recognition, the interpretation provides guidance on themeasurement, derecognition, classification, and disclosure of tax positions andis effective for fiscal years beginning after December 15, 2006. TheCompany has evaluated this interpretation and noted that it will have nomaterial impact on results of its future operations and financial condition.

*FASB Statement No, 155,Accounting for Certain Hybrid Financial Instruments*

In February 2006, the FASB issued SFASNo. 155, *Accounting for Certain Hybrid FinancialInstruments*. Under this new statement, an entity may re-measure atfair value a hybrid financial instrument that contains an embedded derivativethat otherwise would require bifurcation from the host, if the holderirrevocably elects to account for the whole instrument on a fair value basis.Subsequent changes in the fair value of the instrument would be recognized inearnings. This statement is effective for all financial instruments that theCompany acquires or issues after July 1, 2007. The adoption of thisstatement will not have a material impact on the Company’s financial positionor results of operations.

*EITF06-4, Accounting for Deferred Compensation and Postretirement BenefitAspects of Endorsement Split-Dollar Life Insurance Arrangements*

In June 2006, the Emerging Issues Task Forcereached a consensus that, for endorsement split-dollar life insurancearrangements, an employer should recognize the liability for future benefitsbased on the substantive agreement with the employee, since the postretirementbenefit obligation is not effectively settled. An entity is permitted to applythe consensus by retrospective application to all prior periods in accordancewith FASB Statement No. 154, including its required disclosures. Theconsensus is effective for fiscal years beginning after December 15, 2007,with early adoption permitted as of the beginning of an entity’s fiscal year.The Bank has recorded a liability of $246 thousand within other liabilities onthe consolidated statements of financial condition to account for the settlementof the future benefit obligation.

24

----

**5.**                 Stock Compensation Plans

The stockholders of the Company approved a stockoption plan in fiscal 2000 (the “1999 Plan”) for officers, directors andcertain employees of the Company and its subsidiaries. Pursuant to the terms ofthe 1999 Plan, the number of common shares reserved for issuance was a total of536,509, of which 53,544 options were unawarded at June 30, 2007. Includedin this amount are 9,405 shares forfeited during the year ended June 30,2007. Additionally, the stockholders of the Company approved a stock optionplan in fiscal 2003 (the “2002 Plan”) for officers, directors and certainemployees of the Company and its subsidiaries. Pursuant to the terms of the2002 Plan, the number of common shares reserved for issuance was 673,483 ofwhich 187,985 were available for future grants at June 30, 2007. Includedin this amount are 64,268 shares forfeited during the year ended June 30,2007. Generally, options were granted with an exercise price equal to fairmarket value at the date of grant and expire in 10 years from the date ofgrant. Generally, stock options granted vest over a five-year period commencingon the first anniversary of the date of grant. In addition, as part of theMerger, options previously granted under plans of Chester Valley were convertedinto options to acquire 383,945 shares of Company common stock. Unrecognizedcompensation cost on unvested option awards and weighted average period to berecognized are $292 thousand and 3.3 years, respectively at June 30, 2007.Compensation expense related to option awards was $208 thousand, $306 thousand,and $350 thousand for the years ended June 30, 2007, 2006 and 2005,respectively.

The following table provides information about optionsoutstanding for the year ended June 30, 2007:
|                                           | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **WeightedAverage**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 Company expects approximately 7,500 of unvestedoptions to be forfeited.

Proceeds, related tax benefits realized from optionsexercised and intrinsic value of options 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 following table provides information about optionsoutstanding and exercisable options at June 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                      |       |

 

25

----

The weighted average remaining contractual life foroptions outstanding and weighted average exercise price per share forexercisable options at June 30, 2007 were as follows:
| ** **               | ** ** | **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 Company granted 70,025, 22,096 and zero stockoptions during the years ended June 30, 2007, 2006 and 2005, respectively.The weighted average grant date fair value of options granted was $2.61 and$2.89 for the years ended June 30, 2007 and 2006, respectively. The fair valuefor stock options granted during the year ended June 30, 2007 wasdetermined at the date of grant using a Black-Scholes options-pricing model.The fair value of option awards under the Option Plans is estimated on the dateof grant using the Black-Scholes valuation methodology, which is dependent uponcertain assumptions, as summarized 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 expected average risk-free rate is based on theU.S. Treasury yield curve on the day of grant. The expected average liferepresents the weighted average period of time that options granted areexpected to be outstanding giving consideration to vesting schedules andhistorical option exercise experience. Expected volatility is based onhistorical volatilities of the Company’s common stock. The expected dividendyield is based on historical information.

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

**RRP**

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

26

----

Coincident with theapproval of the 2005 RRP, the Company terminated its Directors Retirement Planand the Directors Incentive Compensation Plan, at which time the directorsbecame fully vested in their accrued benefit under the Directors RetirementPlan. As of June 30, 2007, 175,511 shares were granted under the 2005 RRP;however, 12,167 shares were forfeited.

Compensation expense related to the RRP shares was$833 thousand, $701 thousand and $597 thousand for the years endedJune 30, 2007, 2006 and 2005, respectively. Unrecognized compensation coston unvested RRP shares and weighted average period to be recognized are $1.8million and 2.0 years, respectively.

Activity in issued but unvested RRP shares under thethree 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 aggregate intrinsic value of unvested RRP awardsunder the three plans at June 30, 2007 was $2,164,760.

**6.**                 Earnings Per Share

For the years ended June 30, 2007, 2006 and 2005earnings per share, basic and diluted, were $0.55 and $0.54, $0.79 and $0.77,and $0.70 and $0.67, respectively.

The following is a reconciliation of the numeratorsand denominators of the basic and diluted earnings per share calculations.
| ** **                                                                    | ** ** | **Year Ended June 30,**                                 | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | **Basic**                                                              | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands, except share data)** | ** ** |
| Net income                                                                    |       | $                                                                      | 8,395      |   | $ | 8,395 |   | $ | 11,076 |   | $ | 11,076 |   | $ | 6,726 |   | $ | 6,726 |   |
| Dividends on  unvested stock awards                                           |       | (56                                                                    | )          | (56 | ) | (76 | ) | (76 | ) | (99 | ) | (99 | ) |
| Income available  to common stock holders                                     |       | $                                                                      | 8,339      |   | $ | 8,339 |   | $ | 11,000 |   | $ | 11,000 |   | $ | 6,627 |   | $ | 6,627 |   |
| Weighted average  shares outstanding                                          |       | 15,117,871                                                             |       | 15,117,871 |   | 13,921,456 |   | 13,921,456 |   | 9,409,145 |   | 9,409,145 |   |
| Effect of  dilutive securities                                                |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Common stock  equivalents                                                     |       | —                                                                 |       | 226,283 |   | — |   | 338,155 |   | — |   | 304,147 |   |
| Unvested stock  awards                                                        |       | —                                                                 |       | 6,705 |   | — |   | 18,014 |   | — |   | 144,752 |   |
| Adjusted  weighted average shares used in earnings per share calculation |       | 15,117,871                                                             |       | 15,350,859 |   | 13,921,456 |   | 14,277,625 |   | 9,409,145 |   | 9,858,044 |   |
| Earnings per share                                                            |       | $                                                                      | 0.55       |   | $ | 0.54 |   | $ | 0.79 |   | $ | 0.77 |   | $ | 0.70 |   | $ | 0.67 |   |

 

27

----

**7.**                 Investment Securities

HTM and AFS investment securities at June 30, 2007and 2006 consisted of the following:
| ** **                      | ** ** | **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 |   |

 

28

----

Proceeds from the sales of securities available forsale 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 $279thousand, $533 thousand, and $415 thousand were realized in fiscal2007, 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 fiscal2005 resulting from other than temporary declines in values of certain equitysecurities.

As a result of the Company’s de-leveraging strategyimplemented as a result of the Merger, $34.9 million in held-to-maturity (HTM)securities were liquidated. This was performed in accordance with theprovisions of SFAS No. 115, which allows for a sale of HTM securitiescoincident with a merger to allow the Company to maintain its interest ratesensitivity immediately prior to the merger. The Company realized a net gain ofapproximately $181 thousand on the sale of the securities in fiscal year 2006.This gain is reflected in loss (gain) on sale of securities available for saleand trading on the consolidated statements of cash flow.

At June 30, 2007, securities with a totalcarrying value of $23.7 million are held as collateral for the Company’sreverse repurchase arrangements. Accrued interest receivable on securitiesamounted to $1.5 million at June 30, 2007 and 2006.

The amortized cost and estimated fair value ofinvestment securities held to maturity, investment securities and available forsale at June 30, 2007, by contractual 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         |       | 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 Company must maintain ownership of specifiedamounts of stock as a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”).The Company’s ownership of FHLB stock was $11.4 million and $16.9 millionas of June 30, 2007 and 2006, respectively.

For mortgage-backed securities, expectedmaturities will differ from contractual maturities because borrowers may havethe right to prepay the obligation. Of the Company’s $34.2 million of U.S.Government and Government agency securities at June 30, 2007, none arecallable within one year.

As described in note 12, certain investmentsecurities available for sale are maintained to collateralize advances from theFHLB.

Provided below is a summary of investment securitiesclassified as held to maturity and available-for-sale which were in anunrealized loss position at June 30, 2007 and 2006. Approximately $3.4million, or 66.0%, of the unrealized loss at June 30, 2007 was comprisedof securities in a continuous loss position for twelve months or more, whichconsisted of equity securities as compared to $255 thousand, or 4.1%, atJune 30, 2006. A significant portion of these equity securities representsmutual fund investments backed primarily by investments in adjustable-ratemortgage-backed securities. The Company does not intend to dispose ofthese securities and does not believe that they are permanently impaired.Further, the Company

29

----

believes thedeterioration in value is attributable to changes in market conditions as theloss relates to certain mutual fund investments and not the credit quality ofthe issuer.
|                                  | ** ** | **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 | ) |

 

30

----

Management does notbelieve any individual unrealized loss as of June 30, 2007 represents another-than-temporary impairment. The temporary impairment is directly relatedto changes in market interest rates and/or rating downgrades. In general, asinterest rates rise, the fair value of fixed-rate securities will decrease and,as interest rates fall, the fair value of fixed-rate securities will increase.The severity 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. In evaluating the securitiesportfolio for impairment, the Company has considered analyst reports and sectorcredit ratings. None of the bonds in the Company’s securities portfolio arebelow investment grade. Additionally, the Company has the ability and intent tohold these securities until such time as the value recovers or the securitiesmature.

**8.**                 Loans

Loans receivable as of June 30,2007 and 2006 consisted of the following:
|                                                | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage loans:                                |       |                                 |       |                        |       |
| Single-family                                  |       | $                                    | 273,247    |                        | $          | 298,509 |   |
| Multi-family & commercial real estate |       | 316,681                              |       | 326,268                     |       |
| Construction                                   |       | 93,180                               |       | 112,774                     |       |
| Home equity                                    |       | 272,295                              |       | 259,119                     |       |
| Total mortgage loans                           |       | 955,403                              |       | 996,670                     |       |
| Consumer loans                                 |       | 3,917                                |       | 4,304                       |       |
| Commercial  business loans                     |       | 88,274                               |       | 80,815                      |       |
| Total loans  receivable                        |       | 1,047,594                            |       | 1,081,789                   |       |
| Allowance for  loan losses                     |       | (12,210                              | )          | (16,737                     | )          |
| Deferred loan  costs (fees), net               |       | 714                                  |       | (1,170                      | )          |
| Loans receivable, net                          |       | $                                    | 1,036,098  |                        | $          | 1,063,882 |   |

 

Included in loansreceivable are loans on non-accrual status in the amounts of $3.9 million,$15.5 million and $666 thousand at June 30, 2007, 2006 and 2005,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 recorded investmentof $1.4 million, $12.8 million, and $121 thousand, respectively. Averageimpaired loans were $7.0 million, $5.0 million and $414 thousand forthe years ended June 30, 2007, 2006 and 2005, respectively. Cash of $116thousand, $281 thousand and $77 thousand was collected on theseimpaired loans during the years ended June 30, 2007, 2006 and 2005,respectively. Interest income of $0, $196 thousand, and $0 was recognized onsuch 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.

31

----

The following is a summary of the activity in theallowance for loan losses for the years ended June 30, 2007, 2006 and2005:
|                                   | ** ** | **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                                                      |       | 3,205 |   | 1,232 |   |
| Less charge-offs for:             |       |                                                     |       |   |   |   |   |
| Mortgage loans                    |       | (76                                                      | )          | (24 | ) | (7 | ) |
| Consumer loans                    |       | (277                                                     | )          | (62 | ) | (22 | ) |
| Commercial real estate loans      |       | (1,848                                                   | )          | — |   | — |   |
| Commercial business loans         |       | (3,185                                                   | )          | (47 | ) | (316 | ) |
| Total Charge-offs                 |       | (5,386                                                   | )          | (133 | ) | (345 | ) |
| Plus: Recoveries                  |       | 206                                                      |       | 615 |   | 6 |   |
| Allowance acquired in the Merger  |       | —                                                   |       | 6,937 |   | — |   |
| Balance, end of the  period       |       | $                                                        | 12,210     |   | $ | 16,737 |   | $ | 6,113 |   |

 

**9.**                 Goodwill and Other Intangible Assets

The Company recordedgoodwill of $1.0 million during 2007 relating to the acquisition of BeneServand $93.2 million in 2006 that resulted from the Merger. The remaininggoodwill balance, which approximates $848 thousand at June 30, 2007, relatesto a branch acquisition in 1994. The net other intangible balance of $14.4million at June 30, 2007 primarily resulted from the Merger as well as thecustomer intangible from the acquisition of BeneServ. The amortization expense of the other intangible assets for the fiscalyear ended June 30, 2007 was $2.0 million.

The estimated aggregateamortization expense related to other intangibles for each of the fivesucceeding 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      |   |

 

**10.**          Property and Equipment

Property and equipment bymajor 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                                               |       | 6,649 |   |
| Total                              |       |                                 |       | 18,784                                               |       | 13,488 |   |
| Accumulated  depreciation          |       |                                 |       | (7,477                                               | )          | (3,424 | ) |
| Property and equipment,  net       |       |                                 |       | $                                                    | 11,307     |   | $ | 10,064 |   |

 

32

----

Depreciation expense forthe years ended June 30, 2007, 2006 and 2005 amounted to $2.6 million,$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 oodwill while thebalance of such premium of $528 thousand is deferred and amortized as areduction of rent expense over the term of the leases.

**11.**          Deposits

Deposit balances by typeconsisted of the following at June 30, 2007, and 2006:
|                                                       | ** ** | **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 |   | 33.2 |   |
| 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                   |       | 116,171                              |       | 10.6                        |       | 114,329 |   | 11.2 |   |
| Non-interest-bearing  checking accounts               |       | 151,160                              |       | 13.8                        |       | 162,864 |   | 16.0 |   |
| Total                                                 |       | $                                    | 1,093,055  |                        | 100.0      | % | $ | 1,018,390 |   | 100.0 | % |

 

While certificates ofdeposit are frequently renewed at maturity rather than paid out, a summary ofcertificates of deposit by contractual maturity and rate at June 30, 2007is 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, 2007certificates 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    |   |

 

33

----

Interest expense ondeposits for the years ended June 30, 2007, 2006 and 2005 consisted of thefollowing:
|                          | ** ** | **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 |   |

 

**12.**          Federal Home Loan Bank Advances

Under terms of itscollateral agreement with the FHLB, the Company maintains otherwiseunencumbered qualifying assets (principally qualifying 1-4 familyresidential mortgage loans and U.S. government agency, and mortgage-backedsecurities) in the amount of at least as much as its advances from the FHLB.The Company’s FHLB stock is also pledged to secure these advances.

At June 30, 2007,the Company’s FHLB advances have contractual maturities as follows:
|                    | ** ** | **Amount  outstanding**              | ** ** | **Weighted  average rate** | ** ** |
|--------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **(dollars in thousands)** | ** ** |
| Due by:            |       |                                 |       |                            |       |
| June 30, 2008 |       | $                                    | 14,636     |                            | 3.5        | % |
| June 30, 2009 |       | 27,459                               |       | 3.9                             |       |
| June 30, 2010 |       | 9,032                                |       | 4.9                             |       |
| June 30, 2011 |       | 23,242                               |       | 5.3                             |       |
| June 30, 2012 |       | 29,675                               |       | 4.4                             |       |
| Thereafter         |       | 86,019                               |       | 4.0                             |       |
| Total              |       | $                                    | 190,063    |                            | 4.2        | % |

 

At June 30, 2007,$152.5 million of the above advances were callable at the direction of theFHLB within certain parameters, of which $107.5 million could be calledwithin one year. Included in the $152.5 million are $47.5 million in advanceswhich could only be called if an index reaches a certain strike rate. At June 30,2007, these advances were between approximately 2.13 % and 4.25% from thestrike rate.

**13.**          Trust Preferred Securities and OtherBorrowings

Effective with theacquisition 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 to WillowGrove Statutory Trust I, a Connecticut Statutory Trust, in which the Companyowns all of the common equity. The Trust then issued $25.0 million of TrustPreferred Securities, which pay interest quarterly at three-month Libor plus1.31% to investors, which are secured by the Junior Subordinated 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.

34

----

The Bank utilizes outsideborrowings to supplement its funding needs. At June 30, 2007, the Bank had$20.0 million outstanding in repurchase agreements with a weighted averageinterest rate of 4.50%. The underlying securities collateralizing theserepurchase agreements had a market value of $23.7 million at June 30,2007.

**14.**          Income Taxes

Income tax expense forthe years ended June 30, 2007, 2006 and 2005 consisted of the following:
|                                        | ** ** | ** ** | ** ** | **Current**                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------------------------|------------|--------------|------------|-----------|------------|
| ** **                             | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** |
| For  the year ended June 30, 2007 |       | Federal    |       | $                                    | 1,453      |         | $          | 1,926     |       | $ | 3,379 |   |
|                                   |       | State      |       | 17                                   |       | —       |       | 17        |       |
|                                   |       | Total      |       | $                                    | 1,470      |         | $          | 1,926     |       | $ | 3,396 |   |
| For  the year ended June 30, 2006 |       | Federal    |       | $                                    | 2,646      |         | $          | 2,586     |       | $ | 5,232 |   |
|                                   |       | State      |       | 24                                   |       | —       |       | 24        |       |
|                                   |       | Total      |       | $                                    | 2,670      |         | $          | 2,586     |       | $ | 5,256 |   |
| For  the year ended June 30, 2005 |       | Federal    |       | $                                    | 3,050      |         | $          | 2         |       | $ | 3,052 |   |
|                                   |       | State      |       | —                               |       | —       |       | —    |       |
|                                   |       | Total      |       | $                                    | 3,050      |         | $          | 2         |       | $ | 3,052 |   |

 

The expense (benefit) forincome taxes differed from that computed at the statutory federal corporaterate 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                     |       | $                                                        | 4,009      |   | 34.0 | % | $ | 5,716 |   | 35.0 | % | $ | 3,324 |   | 34.0 | % |
| State tax, net  of federal tax benefit |       | 11                                                       |       | 0.1 |   | 15 |   | 0.1 |   | — |   | — |   |
| Low income  housing credits            |       | (162                                                     | )          | (1.4 | ) | (154 | ) | (0.9 | ) | (29 | ) | (0.3 | ) |
| Tax-exempt  interest                   |       | (601                                                     | )          | (5.1 | ) | (269 | ) | (1.6 | ) | (280 | ) | (2.9 | ) |
| Meals and  entertainment               |       | 11                                                       |       | 0.1 |   | 6 |   | 0.0 |   | 6 |   | 0.1 |   |
| BOLI                                   |       | (152                                                     | )          | (1.3 | ) | (130 | ) | (0.8 | ) | (65 | ) | (0.7 | ) |
| Dividends on  ESOP shares              |       | (93                                                      | )          | (0.8 | ) | (106 | ) | (0.7 | ) | (108 | ) | (1.1 | ) |
| ESOP  compensation expense             |       | 138                                                      |       | 1.2 |   | 174 |   | 1.1 |   | 196 |   | 2.0 |   |
| Stock based  compensation              |       | 16                                                       |       | 0.1 |   | 107 |   | 0.7 |   | — |   | — |   |
| Change in  statutory federal tax rate  |       | 73                                                       |       | 0.6 |   | (93 | ) | (0.6 | ) | — |   | — |   |
| Other                                  |       | 146                                                      |       | 1.3 |   | (10 | ) | (0.1 | ) | 8 |   | 0.1 |   |
| Income tax expense                     |       | $                                                        | 3,396      |   | 28.8 | % | $ | 5,256 |   | 32.2 | % | $ | 3,052 |   | 31.2 | % |

 

35

----

Significant deferred taxassets and liabilities included in other assets and liabilities of the Companyas 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                          |       | —                               |       | 299 |   |
| Investment in  joint venture                      |       | 236                                  |       | 188 |   |
| Net operating  loss carryover                     |       | —                               |       | 196 |   |
| Low income  housing credit carryover              |       | 397                                  |       | — |   |
| AMT credit  carryover                             |       | 182                                  |       | — |   |
| Other, net                                        |       | 223                                  |       | 206 |   |
| Gross deferred  tax assets                        |       | 9,581                                |       | 12,364 |   |
| 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                            |       | $                                    | 6,088      |   | $ | 8,268 |   |

 

The realizability ofdeferred tax assets is dependent upon a variety of factors, including thegeneration of future taxable income, the existence of taxes paid andrecoverable, 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 $397 thousand in low income housing tax credit carry-forwards.These carry-forwards expire in June 2017.

The Small Business JobProtection Act of 1996 (the “1996 Act”) eliminated the use of the reservemethod of accounting for bad debt reserves by savings institutions, effectivefor taxable years beginning after 1995. Prior to the 1996 Act, bad debtreserves created prior to January 1, 1988 were subject to recapture intotaxable income if the Bank failed to meet certain thrift asset and definitionaltests. New federal legislation eliminated these thrift related recapture rules.However, under current law, pre-1988 reserves remain subject to recaptureshould the Bank make certain non-dividend distributions or ceases to maintain abank 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 taxdeductions for which no federal income tax provisions have been made.

36

----

**15.**          Benefit Plans

*401(k) Plan*

The Bank’s benefit planscover all eligible employees and permits them to make certain contributions totheir 401(k) accounts in the plan on a pretax basis. EffectiveJanuary 1, 2006, employees are permitted to contribute up to 25% of theirsalary to this plan. The Company matches every dollar contributed up to 4% ofsalary, plus 50% of the amount of an employees’ salary reductions in excess of4% of salary, but not in excess of 6% of salary. The expense related to the401(k) portion of this plan was $628 thousand, $255 thousand, and $70thousand for the years ended June 30, 2007, 2006 and 2005, respectively.

*Employee Stock OwnershipPlan*

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 RetirementPlans*

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 $779 thousand and $634 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.

37

----

**16.**          Commitments and Contingencies

At June 30, 2007 and2006, 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 is a party tofinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers. These financialinstruments include commitments to extend credit and standby letters of credit.Those instruments involve, to varying degrees, elements of credit risk inexcess of the amount recognized in the balance sheet. The Company’s exposure tocredit loss in the event of non-performance by the other party to the financialinstrument for commitments to extend credit and standby letters of credit isrepresented by the contractual notional amount of those instruments. TheCompany uses the same credit policies in making commitments and conditionalobligations as it does for on-balance-sheet instruments (see Note 4above). At June 30, 2007 and June 30, 2006, respectively, the Companywas committed to the funding of first mortgage loans of $15.3 million and$9.9 million, respectively, construction loans of $48.7 million and$61.6 million, respectively, commercial real estate loans of $1.8 million and$5.7 million, respectively, lines of credit of $164.8 million and$146.0 million, respectively, and standby letters of credit of $16.8million and $9.0 million, respectively.

**Guarantees**

In the normal course ofbusiness, the Company sells loans in the secondary market. As is customary insuch sales, the Company provides indemnification to the buyer under certaincircumstances. This indemnification may include the obligation to repurchaseloans by the Company, under certain circumstances. In most cases repurchases andlosses are rare, and no provision is made for losses at the time of sale. Whenrepurchases and losses are probable and reasonably estimable, a provision ismade in the financial statements for such estimated losses.

On May 12, 2003, theCompany entered into a sales and servicing master agreement with the FederalHome Loan Bank of Pittsburgh (“FHLB”). The agreement allows the Company to sellloans 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 Company offersresidential and construction real estate loans as well as commercial andconsumer loans. The Company’s lending activities are concentrated inPennsylvania. The largest concentration of the Company’s loan portfolio islocated in eastern Pennsylvania. The ability of the Company’s borrowers torepay amounts owed is dependent on several factors, including the economicconditions in the borrower’s geographic region and the borrower’s financialcondition.

38

----

**Legal Proceedings**

As previously describedin the company’s prospectus/joint proxy statement dated April 27, 2005 andincluded in its registration statement on Form S-4 (fileNo. 333-123622) filed in connection with the Merger, FFB previouslyreceived a subpoena from the Regional Municipal Securities Counsel in thePhiladelphia Office of the Securities and Exchange Commission (the “SEC”). Thesubpoena arose out of a non-public SEC investigation titled “HummelstownGeneral Authority,” which Authority issued non-rated revenue bonds now indefault, underwritten by the firm of a former director of Chester Valley andFFB. The SEC subpoena requested the production of certain documents concerningFFB’s involvement with non-rated municipal securities, including those issuedto finance the Whitetail Golf Course by the Dauphin County General Authorityand the Hummelstown General Authority, through the former director’s firm, andrelated matters. FFB previously produced documents to the SEC and certainofficers of FFB provided testimony to the SEC in response to the SEC’svoluntary request for assistance in this matter. On August 3, 2006, theSEC filed a complaint in federal court against the former director, his wife,and the former director’s firm. The Bank is not named as a defendant in thecomplaint filed by the SEC.

FFB is a party to threecivil actions relating to some of the revenue bonds which are the subject ofthe SEC investigation described above. On August 30, 2005, a writ ofsummons was filed by the Boyertown Area School District (“Boyertown”) in theCourt of Common Pleas, Montgomery County, Pennsylvania commencing a civilaction 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). OnSeptember 19, 2005, Red Lion Area School District (“Red Lion”) fileda complaint in the Court of Common Pleas, York County, Pennsylvania,against*inter alia*, FFB.*Red Lion Area School District v. Bradbury et. al.*,No. 2005-SU­1656­Y01; No. 2005­SU­2544­Y01. This case has beentransferred to the Court of Common Pleas of Montgomery County, Pennsylvania,and an amended complaint was filed on October 18, 2006. The amended complaintasserts the following claims against FFB: Declaratory Judgment (Count 15),Breach of Trust Indenture (Count 16), Civil Conspiracy (Count 17), CivilConspiracy—Alternative Legal Basis (Count 18), Breach of Common Law Duties asTrustee (Count 19), Tortious Action in Concert/Aiding and Abetting Fraud (Count20), Breach of Trust Indenture (Count 21), Breach of Fiduciary Duties(Count 22), Vicarious Liability and Respondeat Superior (Count 23), UnjustEnrichment (Count 24), and Unjust Enrichment (Count 25). On March 16,2006, Perkiomen Valley School District (“Perkiomen”) filed a complaint in theCourt of Common Pleas, Montgomery County, 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 tovigorously defend itself in the suits.

On June 16, 2007,Cincinnati Insurance Company (“Cincinnati”) commenced a declaratory judgmentaction in federal court against the Bank, Red Lion, Boyertown, and Perkiomenseeking a declaration that Cinncinnati is not obligated to provide insurancecoverage to the Bank in connection with the SEC subpoena and the litigationbrought by Red Lion, Boyertown, and Perkiomen:*Cincinnati Insurance Company v. First Financial Bank et al*., 07-02389(E.D. Pa.). The Bank’s answer was provided on September 20, 2007.

In the normal course ofbusiness, the Company is involved in various legal proceedings. Management ofthe Company, based on discussions with legal counsel, believes that suchproceedings will not have a

39

----

material adverse effecton the financial condition or operations of the Company. There can be noassurance that any of the outstanding legal proceedings to which the Company isa party will not be decided adversely to the Company’s interests and have amaterial adverse effect on the financial condition and operations of theCompany.

**Other Commitments**

In connection with theoperation of 29 of its banking offices and an operations center, the Companyleases certain office space. The leases are classified as operating leases,with rent expense of $2.9 million, $2.0 million, and $837 thousand for theyears ended June 30, 2007, 2006 and 2005, respectively. Minimum paymentsover 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     |   |

 

**17.**          Accounting for Derivative Instruments andHedging

The Company may from timeto time utilize derivative instruments such as interest rate swaps, interestrate collars, interest rate floors, interest rate swaptions or combinationsthereof to assist in its asset/liability management. In accordance with SFASNo. 133, “Accounting for Derivative Instruments,” the Company documentsits hedge relationships, including identification of the hedging instrumentsand the hedged items, as well as its risk management objectives and strategiesfor undertaking the hedge. The Company also assesses, both at inception and atleast quarterly thereafter, whether the derivative instruments that are used inhedging transactions are highly effective in offsetting the changes in eitherthe fair value or cash flows of the hedged item. For fair value hedges, boththe effective 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 the Merger,the Company assumed the responsibility for a $20 million notional interest rateswap whereby the Company paid a variable rate and received a fixed rate. Theinterest rate swap had been used to hedge certain Federal Home Loan Bankborrowings of the former Chester Valley. On the date of the Merger, theinterest 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

40

----

quarter endedDecember 31, 2005, the derivative instrument ceased to be a highlyeffective hedge; therefore, the Company discontinued hedge accounting resultingin a pre-tax charge of $47 thousand. The interest rate swap was unwound inFebruary 2006 without resulting in any additional impact to the statementof operations. The basis adjustment that was previously recorded on the hedgedborrowing that is recorded in the statement of financial condition is amortizedas an increase in interest expense over the remaining life of the borrowingusing the interest method.

Additionally, inAugust 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 toOctober 23, 2006, the Interest Rate Corridor reduced the negative impacton earnings of the borrowings in a rising interest rate environment. The fairmarket value of the Interest Rate Corridor had two components: the intrinsicvalue and the time value of the option. The Interest Rate Corridor wasmarked-to-market quarterly, with changes in the intrinsic value of the InterestRate 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 $804thousand in the statement of operations upon repayment of the $30 million FHLBadvance.

At June 30, 2007, theCompany had five interest rate swap arrangements used to hedge specific loansoriginated by the Bank for which the transactions were economically beneficialto the Bank in passing along the interest rate risk to the borrower. The swapseffectively convert the rates from a floating rate based on LIBOR to a fixedrate throughout the life of the underlying loans. At June 30, 2007, the totaloutstanding notional amount on these swaps was $9.3 million. The weightedaverage floating and fixed rates on these transactions were 4.6% and 5.3%,respectively at June 30, 2007. The Company lacked sufficient documentation forthese transactions to receive hedge accounting treatment. As such, the Bank hasrecorded a net receivable of $196 thousand in other assets on the statements offinancial condition at June 30, 2007. The change in the fair value of theinterest rate swaps is included as a component of other income on theconsolidated statements of income.

**18.**          Regulatory Matters

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies. Failure to meet minimum capital requirements can initiate certainmandatory, and possibly additional discretionary actions by regulators that ifundertaken, could have a direct material effect on the Company’s financialstatements. Under capital adequacy guidelines and the regulatory framework forprompt corrective action, the Bank must meet specific capital guidelines thatinvolve quantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under accounting practices. The Bank’scapital amounts and classifications are also subject to qualitative judgmentsby the regulators about components, risk weightings, and other factors.

41

----

At June 30,2007, the Bank had regulatory capital, which was well in excess of regulatorylimits set by the Office of Thrift Supervision. The current requirements andthe Bank’s actual capital levels are detailed below:
|                                | ** ** | **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)           |       | $                                    | 122,710    |                                                       | 8.5        | %                                                                                                             | $          | 21,734 |   | 1.5 | % | $ | 28,979 |   | 2.0 | % |
| Core capital                   |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| (to adjusted tangible  assets) |       | 122,710                              |       | 8.5                                                        | %          | 57,958                                                                                                        |       | 4.0 | % | 72,447 |   | 5.0 | % |
| Tier I capital                 |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| (to risk-weighted assets)      |       | 122,710                              |       | 12.7                                                       | %          | N/A                                                                                                           |       | N/A |   | 57,769 |   | 6.0 | % |
| Risk-based capital             |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| (to risk-weighted assets)      |       | 134,284                              |       | 14.0                                                       | %          | 77,025                                                                                                        |       | 8.0 | % | 96,282 |   | 10.0 | % |
| *As of  June 30, 2006*    | * *   |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| Tangible capital               |       | * *                             | * *   | * *                                                   | * *   | * *                                                                                                      | * *   | * * | * * | * * | * * | * * | * * |
| (to tangible assets)           |       | $                                    | 114,061    |                                                       | 7.8        | %                                                                                                             | $          | 22,028 |   | 1.5 | % | $ | 29,370 |   | 2.0 | % |
| Core capital                   |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| (to adjusted tangible assets)  |       | 114,061                              |       | 7.8                                                        | %          | 58,711                                                                                                        |       | 4.0 | % | 73,426 |   | 5.0 | % |
| Tier I capital                 |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| (to risk-weighted assets)      |       | 114,061                              |       | 11.9                                                       | %          | N/A                                                                                                           |       | N/A |   | 57,165 |   | 6.0 | % |
| Risk-based  capital            |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| (to  risk-weighted assets)     |       | 125,569                              |       | 13.2                                                       | %          | 76,220                                                                                                        |       | 8.0 | % | 95,274 |   | 10.0 | % |

 

In its letter approving the merger of Willow FinancialBank and First Financial Bank, the Office of Thrift Supervision (“OTS”), as oneof the conditions for approval, indicated that, for the periods ending December 31,2005, 2006, and 2007, Willow Financial Bank must have tier one core capitalratios at least equal to 6.50%, 6.75%, and 7.25%, respectively, and totalrisk-based capital equal to 11.97%, 12.02% and 12.40%, respectively. WillowFinancial Bank must also submit to the Office of Thrift Supervision, quarterlystatus reports detailing its compliance with the conditions on regulatorycapital outlined in its approval letter. The Office of Thrift Supervision’sconditions for approval of the Bank Merger also indicated that, for the periodsending December 31, 2005, 2006, and 2007, Willow Financial Bancorp musthave consolidated tangible capital ratios at least equal to 5.14%, 5.59% and6.12%, respectively. The Bank and the Company currently exceed all of theserequirements.

**19.**          Fair Value of FinancialInstruments

The Company’s methods for determining the fair valueof its financial instruments as well as significant assumptions and limitationsare set forth below.

**Limitations**

Estimates of fair value are made at a specific pointin time, based upon, where available, relevant market prices and informationabout the financial instrument. Such estimates do not include any premium ordiscount that could result from offering for sale at one time the Company’sentire holdings of a particular financial instrument. For a substantial portionof the Company’s financial instruments, no quoted market price exists.Therefore, estimates of fair value are necessarily based on a number of 

42

----

significant assumptions(many of which involve events outside the control of management). Suchassumptions include assessments of current economic condition, perceived risksassociated with these financial instruments and their counterparties, futureexpected loss experience, and other factors. Given the uncertaintiessurrounding these assumptions, the reported fair values represent estimatesonly and, therefore, cannot be compared to the historical accounting model. Useof different assumptions or methodologies is likely to result in significantlydifferent fair value estimates.

The estimated fair values presented neither includenor give effect to the values associated with the Company’s banking or otherbusinesses, existing customer relationships, branch banking network, property,equipment, goodwill, or certain tax implications related to the realization ofunrealized gains or losses. The fair value of non-interest-bearing demanddeposits, savings and NOW accounts, and money market deposit accounts is equalto the carrying amount because these deposits have no stated maturity. Thisapproach to estimating fair value excludes the significant benefit that resultsfrom the low-cost funding provided by such deposit liabilities, as compared toalternative sources of funding. As a consequence, this presentation may distortthe actual fair value of a banking organization that is a going concern.

The following methods and assumptions were used toestimate the fair value of each major classification of financial instrumentsat June 30, 2007 and 2006:

***Cash and CashEquivalents, Accrued Interest Receivable, Deposits with No Stated Maturities,Accrued Interest Payable, and Certificates of Deposit***

These financial instruments have carrying values thatapproximate fair value.

***Securities Available for Sale, Trading and Held toMaturity***

Current quoted market prices were used to determinefair value.

***Loans***

Fair values were estimated for portfolios of loanswith similar financial characteristics. Loans were segregated by type and eachloan category was further segmented by fixed and adjustable-rate interestterms. The estimated fair value of the segregated portfolios was calculated bydiscounting cash flows based on estimated maturity and prepayment speeds usingestimated market discounted rates that reflected credit and interest riskinherent in the loans. The estimate of the maturities and prepayment speeds wasbased on the Company’s historical experience. Cash flows were discounted usingmarket rates adjusted for portfolio differences.

***Loans Available for Sale***

The fair value of mortgage loans originated andintended for sale in the secondary market is based on contractual cash flowsusing current market rates, calculated on an aggregate basis.

***FHLB Advances***

Fair value was estimated using discounted cash flowanalysis based on the Company’s current incremental borrowing rate for similartypes of borrowing arrangements.

***Trust Preferred Securities***

Fair value was determined using discounted cash flowanalysis based on changes in the market rates since date of issuance.

43

----

***Commitments to Extend Credit***

The majority of the Company’s commitments to extendcredit carry current interest rates if converted to loans. Because commitmentsto extend credit are generally not assignable by the borrower, they only havevalue to the Company and the borrower. The estimated fair value approximatesthe recorded deferred fee amounts.

The carryingamounts and estimated fair values of the Company’s financial instruments,including off-balance sheet financial instruments, at June 30, 2007 and2006, are as follows:
|                                    | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **Carrying  Amount**                 | ** ** | **Fair  Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                            |       |                                 |       |                        |       |   |   |   |   |
| Cash and cash equivalents          |       | $                                    | 58,728     |                        | $          | 58,728 |   | $ | 37,219 |   | $ | 37,219 |   |
| 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                         |       | 1,036,098                            |       | 1,020,289                   |       | 1,063,882 |   | 1,056,425 |   |
| Accrued interest receivable        |       | 6,738                                |       | 6,738                       |       | 6,647 |   | 6,647 |   |
| Liabilities:                       |       |                                 |       |                        |       |   |   |   |   |
| Deposits with no stated maturities |       | 758,383                              |       | 758,383                     |       | 683,611 |   | 683,611 |   |
| Certificates of deposit            |       | 334,672                              |       | 315,561                     |       | 301,627 |   | 301,627 |   |
| FHLB Advances                      |       | 190,063                              |       | 183,429                     |       | 282,717 |   | 275,970 |   |
| Trust preferred securities         |       | 25,525                               |       | 24,537                      |       | 36,149 |   | 36,149 |   |
| Accrued interest  payable          |       | 2,223                                |       | 2,223                       |       | 2,205 |   | 2,205 |   |
|                                    |            |                                      |            |                             |            |  |  |  |  |  |  |  |  |

 
|                                           | ** ** | **Contract  Amount** | ** ** | **Fair  Value** | ** ** | **Contract  Amount** | ** ** | **Fair  Value** | ** ** |
|-------------------------------------------|------------|----------------------|------------|-----------------|------------|----------------------|------------|-----------------|------------|
| Off balance  sheet financial instruments: |       |                 |       |            |       |                 |       |            |       |
| Commitments to  extend credit             |       | $                    | 38,259     |            | $          | —               |       | $               | 14,747     |   | $ | — |   |
| Standby letters of  credit                |       | $                    | 16,772     |            | $          | —               |       | $               | 9,012      |   | $ | — |   |

 

**20.**          Comprehensive Income(Loss)

The tax effectsallocated to each component of other comprehensive income (loss) are asfollows:
|                                                                    | ** ** | **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 |   |

 

44

----

 
|                                                                     | ** ** | **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                         |       | $                                                | (5,298     | ) | $ | 1,874 |   | $ | (3,424 | ) |
| Reclassification adjustment for losses included in  net income |       | 970                                              |       | (340 | ) | 630 |   |
| Net unrealized gain on cash flow hedge                              |       | 777                                              |       | (272 | ) | 505 |   |
| Total other  comprehensive loss                                     |       | $                                                | (3,551     | ) | $ | 1,262 |   | $ | (2,289 | ) |

 
|                                                               | ** ** | **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 |   |

 

**21.**          Segment Information

Under the definition of SFAS No. 131, “DisclosuresAbout Segments of an Enterprise and Related Information,”  the Company has twooperating segments at June 30, 2007 and 2006; Willow Financial Bank andWIS. The Willow Financial Bank segment primarily provides loan and depositservices to commercial and retail customers through its network of29 branch locations. The WIS segment, which was acquired on August 31,2005 in connection with the Merger, operates a full service investment advisoryand securities brokerage firm.

Segmentinformation for the twelve months ended June 30, 2007 and 2006 is asfollows:
|                       | ** ** | **Year ended June 30,** | ** ** |
|-----------------------|------------|----------------------------------------|------------|
| ** **            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| ** **            | ** ** | **Bank**                               | ** ** | **WIS** | ** ** | **Total** | ** ** | **Bank** | ** ** | **WIS** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **(Dollars in thousands)**   | ** ** |
| Interest income       |       | $                                      | 86,273     |   | $ | — |   | $ | 86,273 |   | $ | 81,530 |   | $ | — |   | $ | 81,530 |   |
| Interest expense      |       | 41,268                                 |       | — |   | 41,268 |   | 32,238 |   | — |   | 32,238 |   |
| Net interest  income  |       | 45,005                                 |       | — |   | 45,005 |   | 49,291 |   | 1 |   | 49,292 |   |
| Non-interest  income  |       | 10,189                                 |       | 2,309 |   | 12,498 |   | 5,558 |   | 2,089 |   | 7,647 |   |
| Depreciation  expense |       | 2,598                                  |       | — |   | 2,598 |   | 1,837 |   | — |   | 1,837 |   |
| Income tax  expense   |       | 3,262                                  |       | 134 |   | 3,396 |   | 5,256 |   | 124 |   | 5,256 |   |
| Total net income      |       | 8,116                                  |       | 279 |   | 8,395 |   | 10,722 |   | 230 |   | 11,076 |   |
| Total assets          |       | 1,550,141                              |       | 203 |   | 1,550,344 |   | 1,576,246 |   | 814 |   | 1,577,060 |   |
|                       |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

45

----

**22.**          Parent Company FinancialInformation (Willow Financial Bancorp, Inc.)

*CondensedStatements of Financial Condition*
|                                                                        | ** ** | **At  June 30, 2007**      | ** ** | **At  June 30, 2006** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                                                                |       |                                 |       |                            |       |
| Cash on deposit with subsidiaries                                      |       | $                                    | 1,108      |                            | $          | 5,214 |   |
| Note receivable from subsidiary                                        |       | 4,770                                |       | 5,182                           |       |
| Investment in subsidiaries                                             |       | 218,648                              |       | 206,076                         |       |
| 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                                                           |       | 3,540                                |       | 4,974                           |       |
| Total assets                                                           |       | $                                    | 236,595    |                            | $          | 239,755 |   |
| Liabilities and  stockholders’ equity:                            |       |                                 |       |                            |       |
| Subordinated debentures                                                |       | $                                    | 25,744     |                            | $          | 36,198 |   |
| Other liabilities                                                      |       | 5,516                                |       | 159                             |       |
| Total  liabilities                                                     |       | 31,260                               |       | 36,357                          |       |
| Total  stockholders’ equity                                       |       | 205,335                              |       | 203,398                         |       |
| Total liabilities and  stockholders’ equity                       |       | $                                    | 236,595    |                            | $          | 239,755 |   |

 

*CondensedStatements of Income*
|                                             | ** ** | **For the year ended June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **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                  |       | 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                               |       | 350                                                      |       | 269 |   | 208 |   |
| Total expense                               |       | 2,812                                                    |       | 1,794 |   | 1,566 |   |
| Loss before  taxes                          |       | (2,219                                                   | )          | (1,294 | ) | (1,441 | ) |
| Income tax  benefit                         |       | (129                                                     | )          | — |   | (491 | ) |
| Loss before  equity in income of subsidiary |       | (2,090                                                   | )          | (1,294 | ) | (950 | ) |
| Equity in income  of subsidiary             |       | 10,485                                                   |       | 12,370 |   | 7,676 |   |
| Net income                                  |       | $                                                        | 8,395      |   | $ | 11,076 |   | $ | 6,726 |   |

 

46

----

*CondensedStatements of Cash Flows*
| ** **                                                                              | ** ** | **For the year ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(Dollars in thousands)**                     | ** ** |
| Cash flow from  operating activities:                                                   |       |                                                     |       |   |   |   |   |
| Net income:                                                                             |       | $                                                        | 8,395      |   | $ | 11,076 |   | $ | 6,726 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                     |       |   |   |   |   |
| Equity in undistributed income of subsidiary                                            |       | (10,485                                                  | )          | (12,370 | ) | (7,676 | ) |
| Realized (gain) loss on investments                                                     |       | (49                                                      | )          | (51 | ) | 57 |   |
| Decrease (increase) in other assets                                                     |       | 1,051                                                    |       | 208 |   | (1,353 | ) |
| Purchase of trading account securities                                                  |       | (274                                                     | )          | (574 | ) | (53 | ) |
| Increase (decrease) in other liabilities                                                |       | 5,357                                                    |       | (191 | ) | (60 | ) |
| Net cash from  (used in) operating activities                                           |       | 3,995                                                    |       | (1,902 | ) | (2,359 | ) |
| Cash flows from  investing activities:                                                  |       |                                                     |       |   |   |   |   |
| Purchase of securities available for sale                                               |       | —                                                   |       | (10,007 | ) | (5,036 | ) |
| Proceeds from sales and calls of securities  available for sale                         |       | 10,257                                                   |       | 4,737 |   | — |   |
| Net repayment of notes receivable                                                       |       | 412                                                      |       | 383 |   | 13,655 |   |
| Net cash used for acquisition                                                           |       | —                                                   |       | (35,032 | ) | — |   |
| Net cash  provided by (used in) investing activities                                    |       | 10,669                                                   |       | (39,919 | ) | 8,619 |   |
| Cash flows from  financing activities:                                                  |       |                                                     |       |   |   |   |   |
| Capital contribution to subsidiaries                                                    |       | —                                                   |       | (15,000 | ) | — |   |
| Dividends received from subsidiary                                                      |       | —                                                   |       | 42,030 |   | — |   |
| Proceeds from stock issuance                                                            |       | 1,392                                                    |       | 1,275 |   | 285 |   |
| Proceeds from issuance of subordinated debentures                                       |       | —                                                   |       | 25,000 |   | — |   |
| Repayment of trust preferred securities                                                 |       | (10,000                                                  | )          | — |   | — |   |
| Treasury stock purchases                                                                |       | (3,242                                                   | )          | (179 | ) | (2,595 | ) |
| Dividends paid                                                                          |       | (6,920                                                   | )          | (6,218 | ) | (4,196 | ) |
| Net cash (used  in) provided by financing activities                                    |       | (18,770                                                  | )          | 46,908 |   | (6,506 | ) |
| Net (decrease)  increase in cash and cash equivalents                                   |       | (4,106                                                   | )          | 5,087 |   | (246 | ) |
| Cash and cash  equivalents at beginning of period                                       |       | 5,214                                                    |       | 127 |   | 373 |   |
| Cash and cash  equivalents at end of period                                             |       | $                                                        | 1,108      |   | $ | 5,214 |   | $ | 127 |   |

 

**23.**          Related PartyTransactions

The Bank routinely enters into transactions with itsdirectors and officers. Such transactions are made in the ordinary course ofbusiness on substantially the same terms and conditions, including interestrates and collateral, as those prevailing at the same time for comparabletransactions with other customers, and do not, in the opinion of management,involve more than the normal credit risk or present other unfavorable features.The aggregate amount of loans to such related parties was $137 thousand and$283 thousand at June 30, 2007 and 2006, respectively, and all such loanswere performing in accordance with their terms at such dates.

47

----

**24.**          Dividend Policy

The Company’s ability to pay dividends is dependent,in part, upon its ability to obtain dividends from the Bank. The futuredividend policy of the Company is subject to the discretion of the Board ofDirectors and will depend upon a number of factors, including future earnings,financial conditions, cash needs, and general business conditions. Holders ofcommon stock will be entitled to receive dividends as and when declared by theBoard of Directors of the Company out of funds legally available for thatpurpose. Such payment, however, will be subject to the regulatory restrictionsset forth by the OTS. In addition, OTS regulations provides that, as a generalrule, a financial institution may not make a capital distribution if it wouldbe undercapitalized after making the capital distribution. During fiscal 2007, the Company paid cashdividends of $6.9 million, or $0.46 per share.

**25.**          Quarterly Financial Data
|                                     | ** ** | **For the quarter ended**                                        | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **06/30/07**                                                                    | ** ** | **03/31/07** | ** ** | **12/31/06** | ** ** | **09/30/06** | ** ** |
| ** **                          | ** ** | ** **                                                                      | ** ** | **(As  restated)** | ** ** | **(As  restated)** | ** ** | **(As  restated)** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest  income              |       | $                                                                               | 21,712     |   | $ | 21,247 |   | $ | 21,424 |   | $ | 21,890 |   |
| Total interest  expense             |       | 10,679                                                                          |       | 10,390 |   | 10,441 |   | 9,758 |   |
| Net interest  income                |       | 11,033                                                                          |       | 10,857 |   | 10,983 |   | 12,132 |   |
| Provision  (recovery) for loan loss |       | 753                                                                             |       | — |   | — |   | (100 | ) |
| Total non-interest  income          |       | 3,506                                                                           |       | 2,928 |   | 3,338 |   | 2,726 |   |
| Total non-interest  expense         |       | 12,291                                                                          |       | 11,251 |   | 10,847 |   | 10,670 |   |
| Income tax  expense                 |       | 178                                                                             |       | 812 |   | 1,039 |   | 1,367 |   |
| Net income                          |       | 1,317                                                                           |       | 1,722 |   | 2,435 |   | 2,921 |   |
| Earnings per  share                 |       |                                                                            |       |   |   |   |   |   |   |
| Basic                               |       | $                                                                               | 0.09       |   | $ | 0.12 |   | $ | 0.16 |   | $ | 0.19 |   |
| Diluted                             |       | $                                                                               | 0.09       |   | $ | 0.11 |   | $ | 0.16 |   | $ | 0.19 |   |

 
|                             | ** ** | **For the quarter ended**                                        | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **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     |       | 9,326                                                                           |       | 8,586 |   | 7,971 |   | 6,355 |   |
| Net interest  income        |       | 13,235                                                                          |       | 13,206 |   | 13,634 |   | 9,217 |   |
| Provision for  loan loss    |       | 2,485                                                                           |       | — |   | 207 |   | 513 |   |
| Total non-interest  income  |       | 2,880                                                                           |       | 2,078 |   | 2,326 |   | 363 |   |
| Total non-interest  expense |       | 10,290                                                                          |       | 9,503 |   | 9,767 |   | 7,842 |   |
| Income tax  expense         |       | 991                                                                             |       | 1,857 |   | 2,109 |   | 299 |   |
| Net income                  |       | 2,349                                                                           |       | 3,924 |   | 3,877 |   | 926 |   |
| Earnings per  share         |       |                                                                            |       |   |   |   |   |   |   |
| Basic                       |       | $                                                                               | 0.16       |   | $ | 0.25 |   | $ | 0.26 |   | $ | 0.08 |   |
| Diluted                     |       | $                                                                               | 0.15       |   | $ | 0.25 |   | $ | 0.26 |   | $ | 0.08 |   |

 

48

----

The results forthe first through third quarters of the current fiscal year as reported on theCompany’s Form 10-Q have been adjusted by the following amounts:
|                                | ** ** | **For the quarter ended**                                        | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **03/31/07**                                                                    | ** ** | **12/31/06** | ** ** | **09/30/06** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest  income(a)      |       | $                                                                               | (87.0      | ) | $ | (115.0 | ) | $ | (21.0 | ) |
| Total interest  expense(a)     |       | 386.0                                                                           |       | 347.0 |   | 70.0 |   |
| Net interest  income           |       | (473.0                                                                          | )          | (462.0 | ) | (91.0 | ) |
| Provision for  loan losses     |       | —                                                                          |       | — |   | — |   |
| Total  non-interest income(b)  |       | 131.0                                                                           |       | 18.0 |   | 154.0 |   |
| Total  non-interest expense(c) |       | 143.0                                                                           |       | (286.0 | ) | 355.0 |   |
| Income tax  expense(d)         |       | (169.0                                                                          | )          | (54.0 | ) | (99.0 | ) |
| Net income                     |       | (316.0                                                                          | )          | (104.0 | ) | (193.0 | ) |
| Earnings per  share:           |       |                                                                            |       |   |   |   |   |
| Basic                          |       | $                                                                               | (0.01      | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| Diluted                        |       | $                                                                               | (0.02      | ) | $ | (0.01 | ) | $ | (0.01 | ) |

 

----

(a)             Adjustmentsrelate to items identified in various reconciliations for which reconcilingitems were not investigated in a timely manner.

(b)            Adjustmentsrelate primarily to the change in the fair market value of various interestrate swaps as well as proceeds received from a previously impaired bond.

(c)             Adjustmentsrelate primarily to stale-dated items identified in reconciliations as well as theaccrual for paid time off.

(d)            Adjustmentsrelate to the tax effect of the above noted items at a marginal tax rate of34%.

A balance sheet reclassification of $9.9 millionwas recorded from retained earnings to additional paid-in capital to properlyreflect the stock dividend issued on February 23, 2007, revising thepreviously reported amounts.

**Item 9.    Changesin and Disagreements with Accountants and Financial Disclosure.**

None

49

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this amended report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                         | ** ** | **WILLOW  FINANCIAL BANCORP, INC.** |
|-------------------------|------------|------------------------------------------|
| Date: October 16,  2007 |       | By:                                      | /s/ DONNA M.  COUGHEY |
|                    |       |                                     | Donna M. Coughey |
|                    |       |                                     | *President and Chief Executive  Officer* |
|                    |       |                                     |   |
| Date: October 16, 2007  |       | By:                                      | /s/ JOSEPH T.  CROWLEY |
|                    |       |                                     | Joseph T. Crowley |
|                    |       |                                     | *Chief Financial Officer* |

 

50

----