**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**FORANNUAL AND TRANSITION REPORTSPURSUANT TO SECTIONS 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

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

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

**-or-**

**o**                                  Transition report pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934.

 

**Forthe transition periodfrom                       to                       **

**CommissionFile Number: 0-49706**

**WILLOW FINANCIALBANCORP, INC.**

(Exact Name of Registrantas Specified in its Charter)

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

 

**170 SOUTH WARNER ROADWAYNE, PENNSYLVANIA 19087**

(Address of PrincipalExecutive Offices)

Registrant’s telephonenumber: (including area code) **(610) 995-1700**

Securities registeredpursuant to Section 12(b) of the Act:

**Common Stock (par value$0.01 per share)**

(Title of Class)

Securities registeredpursuant to Section 12(g) of the Act: **NONE**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. YES o NO x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. YES o NO x

Indicate by check markwhether the Registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor 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 tothis Form 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-2of the Exchange Act). YES o NO x

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

As of the close of businesson September 24, 2007 there were 17,487,770 shares of the Registrant’sCommon Stock outstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

1.                  Portions of the Definitive Proxy Statementfor the 2007 Annual Meeting of Stockholders are incorporated by reference in Part III.

 

----

**Willow Financial Bancorp, Inc.FORM 10-KFor the Fiscal Year Ended June 30, 2007INDEX**
| PART I   |   |                                                                                                              |   |   |   |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Item 1.       |   | Business                                                                                                          |   | 3      |   |
| Item 1A.      |   | Risk Factors                                                                                                      |   | 34     |   |
| Item 1B.      |   | Unresolved Staff Comments                                                                                         |   | 38     |   |
| Item 2.       |   | Properties                                                                                                        |   | 39     |   |
| Item 3.       |   | Legal Proceedings                                                                                                 |   | 40     |   |
| Item 4.       |   | Submission of Matters to a Vote of Security Holders                                                               |   | 41     |   |
| PART II  |   |                                                                                                              |   |   |   |
| Item 5.       |   | Market for Registrant’s Common Stock, Related  Stockholder Matters and Issuer Purchases of Equity Securities |   | 42     |   |
| Item 6.       |   | Selected Financial Data                                                                                           |   | 43     |   |
| Item 7.       |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                       |   | 45     |   |
| Item 7A.      |   | Quantitative and Qualitative Disclosures about  Market Risk                                                       |   | 57     |   |
| Item 8.       |   | Financial Statements and Supplementary Data                                                                       |   | 63     |   |
| Item 9A.      |   | Controls and Procedures                                                                                           |   | 103    |   |
| Item 9B.      |   | Other Information                                                                                                 |   | 105    |   |
| PART III |   |                                                                                                              |   |   |   |
| Item 10.      |   | Directors, Executive Officers, and Corporate  Governance of the Registrant                                        |   | 105    |   |
| Item 11.      |   | Executive Compensation                                                                                            |   | 105    |   |
| Item 12.      |   | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                   |   | 105    |   |
| Item 13.      |   | Certain Relationships and Related Transactions, and  Director Independence                                        |   | 106    |   |
| Item 14.      |   | Principal Accounting Fees and Services                                                                            |   | 106    |   |
| PART IV  |   |                                                                                                              |   |   |   |
| Item 15.      |   | Exhibits and Financial Statement Schedules                                                                        |   | 107    |   |
|          |   | Signatures                                                                                                        |   | 111    |   |
|               |        |                                                                                                                   |        |        |        |  |

 

ii

----

**Forward LookingStatements**

*This Annual Report on Form 10-K containscertain forward-looking statements (as defined in the Securities ExchangeAct of 1934 and the regulations hereunder). Forward-looking statementsare not historical facts but instead represent only the beliefs, expectationsor opinions of Willow Financial Bancorp, Inc. and its management regardingfuture events, many of which, by their nature, are inherently uncertain.Forward-looking statements may be identified by the use of such words as:“believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”, or words ofsimilar meaning, or future or conditional terms such as “will”, “would”, “should”,“could”, “may”, “likely”, “probably”, or “possibly.” Forward-lookingstatements include, but are not limited to, financial projections and estimatesand their underlying assumptions; statements regarding plans, objectives andexpectations with respect to future operations, products and services; andstatements regarding future performance. Such statements are subject to certainrisks, uncertainties and assumption, many of which are difficult to predict andgenerally are beyond the control of Willow Financial Bancorp and itsmanagement, that could cause actual results to differ materially from those expressedin, or implied or projected by, forward-looking statements. The followingfactors, among others, could cause actual results to differ materially from theanticipated results or other expectations expressed in the forward-lookingstatements: (1) economic and competitive conditions which could affect thevolume of loan originations, deposit flows and real estate values; (2) thelevels of non-interest income and expense and the amount of loan losses; (3) competitivepressure among depository institutions increasing significantly; (4) changesin the interest rate environment causing reduced interest margins; (5) generaleconomic conditions, either nationally or in the markets in which WillowFinancial Bancorp is or will be doing business, being less favorable thanexpected;(6) political and social unrest, including acts of war orterrorism; or (7) legislation or changes in regulatory requirementsadversely affecting the business in which Willow Financial Bancorp will beengaged. Willow Financial Bancorp undertakes no obligation to update theseforward-looking statements to reflect events or circumstances that occurafter the date on which such statements were made.*

**PART I**

**Item 1.**                        Business

**General.****  **Effective on September 21, 2006, Willow GroveBancorp, Inc. and Willow Grove Bank changed their names to WillowFinancial Bancorp, Inc. and Willow Financial Bank, respectively. Ascontained herein, references to the Company include both Willow Financial Bancorp, Inc.and Willow Grove Bancorp, Inc. and references to the Bank include bothWillow Financial Bank and Willow Grove Bank. Coincident with the name change,the Company’s trading symbol on the NASDAQ Global Select Market was changedfrom “WGBC” to “WFBC”.

Willow Financial Bancorp, Inc. (the “Company”),is a Pennsylvania corporation and parent holding company for Willow FinancialBank (the “Bank”). The Company operates out of its Corporate Headquarters andoperations center currently located in Wayne, Pennsylvania. The Bank, which wasoriginally organized in 1909, is a Federally chartered savings bank and whollyowned subsidiary of the Company. The Bank’s business consists primarily ofmaking commercial business and consumer loans as well as real estate loans,both commercial and residential, funded primarily by retail and businessdeposits along with borrowings obtained from the Federal Home Loan Bank (“FHLB”)of Pittsburgh, or borrowings obtained from third parties through repurchaseagreements. The Bank operates a branch banking network consisting of 29full-service offices which are located in neighboring Chester County,Montgomery County and Bucks County, Pennsylvania, as well as Philadelphia.

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 $636 million in assets. Chester Valley had twowholly owned subsidiaries, First Financial Bank, a Pennsylvania charteredcommercial bank (“FFB”) with 13 full-service banking offices, and PhiladelphiaCorporation for Investment Services, a registered investment advisor and 

3

----

broker dealer (“PCIS”).Pursuant to the Agreement and Plan of Merger, dated as of January 20, 2005(the “Merger Agreement”), Chester Valley was merged with and into the Company,with the Company as the surviving corporation (the “Merger”), and FFB wasmerged with and into the Bank with Willow Financial Bank as the surviving bank(the “Bank Merger”). PCIS, doing business as Willow Investment Services (“WIS”)since March 2007, now operates as a business segment of the Company. As aresult of the Merger, each outstanding share of Chester Valley common stock,par value $1.00 per share (the “Chester Valley Common Stock”), was convertedinto the right to receive, at the election of the shareholder, either $27.90 incash or 1.4823 shares of Company common stock, par value $0.01 per share (the “CompanyCommon Stock”), subject to the allocation and pro ration provisions set forthin the Merger Agreement. The acquisition resulted in the Company’s issuance ofan aggregate of 4,977,256 shares of Company Common Stock and$51.0 million in cash, resulting in a total merger consideration paid forChester Valley Common Stock of $145.3 million. This included capitalizedacquisition costs and the value of Chester Valley vested stock options whichwere converted to options of the Company. The Company used general corporatefunds to pay the aggregate cash consideration of approximately$51.0 million for the shares of Chester Valley Common Stock acquired inthe Merger for cash, as well as the approximate $3.2 million in acquisitioncosts.

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 of August 31,2005. Accordingly, our consolidated financial statements and the informationherein include the combined results of Chester Valley and its formersubsidiaries, FFB and PCIS, since September 1, 2005.

The Company believes the Merger enhanced its franchisevalue through the addition of 13 branch locations in the growing and affluentcounty of Chester County, Pennsylvania. Additionally, the Company’s existingcustomers have benefited from additional products offered by Chester Valley,which were not being offered previously by the Company.

Effective February 28, 2006, the Companycompleted the sale of all outstanding shares of capital stock of WIS, formerlyPCIS, to Uvest BD-A, Inc., a North Carolina Corporation and registeredbroker-dealer (“Uvest”) for consideration of $100 but providing that suchshares may be repurchased for $100 at any time after the closing date of thestock sale. Concurrently with the execution of the sale of WIS, the Bank andUvest entered into a related Sub-Clearing and Brokerage Services Agreement,which provides that an affiliate of Uvest provides securities clearing andcertain supervisory and compliance services for WIS, and a Financial ServicesAgreement between WIS and the Bank which provides that the Bank will beentitled to 90% of the revenue generated by the securities brokerage andinvestment advisory activities conducted at WIS and will bear substantially alloperational and overhead expenses. Upon consummation of the sale of WIS stockto Uvest, WIS is no longer a subsidiary of the Company. However, under theprovisions of Financial Accounting Standards Board Interpretation No. 46R,“*Consolidation of Variable Interest Entities*”,the results of WIS continue to be consolidated in the Company’s financialstatements. The affiliation agreement with Uvest has the primary effect ofrelieving WIS of direct responsibility for securities clearing and certainback-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 in cash. The purchase price includes a payment of $4.2 million atclosing plus an additional amount up to $1.3 million in payments through thethree-year anniversary date of the acquisition, subject to the achievement ofcertain performance thresholds. BeneServ is an insurance agency serving thecorporate employee benefit market segment. BeneServ and the Company share atarget market in small businesses located in Chester, Montgomery, Bucks, andPhiladelphia counties, Pennsylvania, thereby providing a number of crossselling opportunities for both companies. As of June 30, 2007, based onthe preliminary purchase price allocation, the Company recorded goodwill andother intangibles of $4.5 million on the statement of financial condition as aresult of this acquisition.

4

----

References to Company include its consolidatedentities, Willow Financial Bank, the Bank’s subsidiaries, and WIS, which is aseparate business segment, unless the context of the reference indicatesotherwise.

In recent years, the Company’s business plan hasfocused on the following primary goals—changing operations to a full-servicecommunity bank and continued steady growth while maintaining a high level ofasset quality. Until the acquisition of Chester Valley, the growth wasaccomplished through internal means. To the extent that additional acquisitionopportunities present themselves and are deemed prudent by the Company’s Boardof Directors and management, additional acquisitions of financial institutionswill be considered to further enhance shareholder value. The Company also willconsider adding additional de novo Bank branch offices to enhance its presencein its existing geographic network.

The Bank’s customer deposits are insured to themaximum extent provided by law, by the Federal Deposit Insurance Corporation (“FDIC”)through the Deposit Insurance Fund (“DIF”). The Bank is subject to examinationand comprehensive regulation by the Office of Thrift Supervision (“OTS”) and isalso regulated by the FDIC. The Bank is also subject to reserve requirementsestablished by the Board of Governors of the Federal Reserve System (the “FederalReserve Board” or “FRB”), and is a member of the FHLB of Pittsburgh, one of theregional banks comprising the Federal Home Loan Bank System.

The Company’s executiveoffices are located at 170 South Warner Road, Wayne, Pennsylvania, and itstelephone number is (610) 995-1700.

**AvailableInformation**

The Company files annual,quarterly and special reports, proxy statements and other information with theSecurities and Exchange Commission (“SEC”). Our SEC filings are available tothe public at the SEC’s web site at http: //www.sec.gov. Members of the publicmay also read and copy any document we file at the SEC’s Public Reference Room at100 F Street, N.E., Washington, D.C. 20549. You can request copies of thesedocuments by writing to the SEC and paying a fee for the copying cost. Pleasecall the SEC at 1-800-SEC-0330 for more information about theoperation of the public reference room. In addition, our stock is listed fortrading on the Nasdaq Global Select Market and trades under the symbol “WFBC”.You may find additional information regarding Willow Financial Bancorp, Inc.at *www.nasdaq.com*. In addition tothe foregoing, we maintain a web site at *www.wfbonline.com*.We make available on our Internet web site copies of Willow Financial Bancorp’sAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and any amendments to such documents assoon as reasonably practicable after the Company files such material with, orfurnish such documents to, the SEC.

**Market Area andCompetition**

The Bank’s primary market area includes Bucks,Montgomery, Chester and Philadelphia Counties in Pennsylvania. To a lesserextent, the Bank provides services to areas of Delaware, Berks and LancasterCounties, Pennsylvania as well as central and southern New Jersey and the stateof Delaware.

The Bank’s directcompetition for attracting deposits and originating loans has historically comefrom savings associations, other savings banks, commercial banks and creditunions. The Bank faces additional competition for deposits from short-termmoney market funds and other corporate and government securities funds, mutualfunds, and other non-financial institutions such as securities brokerage firmsand insurance companies. The Bank competes for loans and deposits throughcompetitive interest rates, maturities and fees as well as providing qualityservice to its customers.

5

----

**Employees**

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

**LendingActivities**

**LoanPortfolio Composition.****  **Thefollowing table sets forth the composition of the loan portfolio as of thedates indicated. This data does not include single family loans classified asheld for sale which amounted to $8.1 million, $2.6 million, $1.8 million,$1.1 million, and $5.3 million at June 30, 2007, 2006, 2005,2004, and 2003, respectively.

| ** **       | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** | **June 30, 2003** | ** ** |
|------------------|------------|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **       | ** ** | ** **                           | ** ** | **Percent of**         | ** ** | ** **                  | ** ** | **Percent of**         | ** ** | ** **                  | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **       | ** ** | **Amount**                           | ** ** | **Total**                   | ** ** | **Amount**                  | ** ** | **total**                   | ** ** | **Amount**                  | ** ** | **total** | ** ** | **Amount** | ** ** | **total** | ** ** | **Amount** | ** ** | **total** | ** ** |
| ** **       | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage  loans: |       |                                 |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                  |            |                                      |            |                             |            |                             |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

| Single-family                            |   | $         | 273,247 |   |   | 26.08  | %      |      | $         | 298,509 |   |   | 27.59  | %       |   | $       | 202,942 |   |   | 34.34   | %      |   | $       | 181,049 |   |    | 34.15  | %      |   | $       | 131,821 |   |   | 31.40  | %      |   |
|------------------------------------------|--------|-----------|---------|--------|--------|--------|--------|-----------|-----------|---------|--------|--------|--------|---------|--------|---------|---------|--------|--------|---------|--------|--------|---------|---------|--------|---------|--------|--------|--------|---------|---------|--------|--------|--------|--------|--------|
| Commercial real estate  and multi-family |   | 316,681   |    |   | 30.23  |   |   | 326,268   |      |    | 30.16  |   |   | 174,920 |   |    | 29.60   |   |   | 180,881 |   |   | 34.12   |    |   | 155,892 |   |   | 37.14  |    |    |
| Construction                             |   | 93,180    |    |   | 8.89   |   |   | 112,774   |      |    | 10.42  |   |   | 86,658  |   |    | 14.66   |   |   | 57,014  |   |   | 10.75   |    |   | 36,191  |   |   | 8.62   |    |    |
| Home equity                              |   | 272,295   |    |   | 26.00  |   |   | 259,119   |      |    | 23.96  |   |   | 100,805 |   |    | 17.06   |   |   | 91,848  |   |   | 17.32   |    |   | 72,990  |   |   | 17.39  |    |    |
| Total mortgage loans                     |   | 955,403   |    |   | 91.20  |   |   | 996,670   |      |    | 92.13  |   |   | 565,325 |   |    | 95.66   |   |   | 510,792 |   |   | 96.34   |    |   | 396,894 |   |   | 94.55  |    |    |
| Consumer loans                           |   | 3,917     |    |   | 0.37   |   |   | 4,304     |      |    | 0.40   |   |   | 2,106   |   |    | 0.36    |   |   | 1,678   |   |   | 0.32    |    |   | 2,324   |   |   | 0.55   |    |    |
| Commercial business  loans               |   | 88,274    |    |   | 8.43   |   |   | 80,815    |      |    | 7.47   |   |   | 23,492  |   |    | 3.98    |   |   | 17,686  |   |   | 3.34    |    |   | 20,549  |   |   | 4.90   |    |    |
| Total loans receivable                   |   | 1,047,594 |    |   | 100.00 | %      |   | 1,081,789 |      |    | 100.00 | %      |   | 590,923 |   |    | 100.00  | %      |   | 530,156 |   |   | 100.00  | %       |   | 419,767 |   |   | 100.00 | %       |    |
| Allowance for loan  losses               |   | (12,210   | )       |   |   |   |   | (16,737   | )         |    |   |   |   | (6,113  | )      |    |    |   |   | (5,220  | )      |   |    |    |   | (5,312  | )      |   |   |    |    |
| Deferred loan  cost(fees)                |   | 714       |    |   |   |   |   | (1,170    | )         |    |   |   |   | (623    | )      |    |    |   |   | (747    | )      |   |    |    |   | (656    | )      |   |   |    |    |
| Loans  receivable, net                   |   | 1,036,098 |    |   |   |   |   | $         | 1,063,882 |    |   |   |   |    | $      | 584,187 |    |   |   |    |   | $      | 524,189 |    |   |    |   |   | $      | 413,799 |    |   |   |   |   |

 

**ContractualPrincipal Repayments and Interest Rates.****  **The following table sets forth scheduledcontractual amortization of the loan portfolio at June 30, 2007. Demandloans, loans having no schedule of repayments and no stated maturity andoverdraft loans are reported as due in one year or less.

| ** **                                    | ** ** | **At June 30, 2007, the amount due within** | ** ** | ** **                                            | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                    | ** ** | **1 year or  less**                                                  | ** ** | **more than  1 year to  3 years** | ** ** | **more than  3 years to  5 years** | ** ** | **more than  5 years to  10 years** | ** ** | **more than  10 years to  20 years** | ** ** | **more than  20 years** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)**                                           | ** ** |
| Mortgage  loans:                              |       |                                                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family  and home equity                |       | $                                                                              | 1,142      |                                                  |       | $ | 11,239 |   |   |   | $ | 20,820 |   |   | $ | 73,926 |   | $ | 234,193 |   | $ | 204,222 |   | $ | 545,542 |   |
| Commercial real estate  and multi-family |       | 5,069                                                                          |       |                                                  | 33,675     |   |   |   | 27,125 |   |   | 174,312 |   | 72,238 |   | 4,262 |   | 316,681 |   |
| Construction                                  |       | 51,535                                                                         |       |                                                  | 32,025     |   |   |   | 9,620 |   |   | — |   | — |   | — |   | 93,180 |   |
| Total  mortgage loans                         |       | 57,746                                                                         |       |                                                  | 76,939     |   |   |   | 57,565 |   |   | 248,238 |   | 306,431 |   | 208,484 |   | 955,403 |   |
| Consumer                                      |       | 96                                                                             |       |                                                  | 1,138      |   |   |   | 884 |   |   | 1,435 |   | 154 |   | 210 |   | 3,917 |   |
| Commercial  business                          |       | 14,556                                                                         |       |                                                  | 18,729     |   |   |   | 12,750 |   |   | 24,323 |   | 2,886 |   | 15,030 |   | 88,274 |   |
| Total                                         |       | $                                                                              | 72,398     |                                                  |       | $ | 96,806 |   |   |   | $ | 71,199 |   |   | $ | 273,996 |   | $ | 309,471 |   | $ | 223,724 |   | $ | 1,047,594 |   |

 

Of the $975.2 million ofloan principal repayments due after June 30, 2008, $451.2 million havefixed rates of interest and $524.0 million have adjustable rates of interest.

**LendingActivity and Products.****  **The Bank’s lending activities are subject tounderwriting standards and origination procedures, which have been approved byits Board of Directors.

**Single-FamilyResidential First Mortgage Loans.****  **We process, underwrite and originatesingle-family residential mortgage loans on both a retail and wholesalebasis. We have developed an 

6

----

extensive network ofactive residential mortgage brokers and mortgage bankers to support ourwholesale production system. These correspondents identify, process and closeloans on our behalf based upon rates and terms that we provide to them on aregular basis which correlate to our assessment of our demand for various typesof loans. The correspondents forward completed loan applications that areunderwritten and approved by Bank personnel in accordance with standardspreviously approved by the Board of Directors. Depending upon the variousprograms we have with the correspondents, loans will be classified as eitherpurchased, where the correspondent provides the funds for the loan closing oras originated, where the Bank provides the funds for the closing of the loan.In either scenario, the loan could be held in portfolio or sold (on either aservicing released or retained basis) in the secondary market. Retailresidential lending activities are supplemented by loan originations throughthe Bank’s internal loan officers, whereby loan applications are obtainedthrough our branch network and referrals from local builders, real estatebrokers and financial consultants. In order to facilitate sale in the secondarymarket, single-family residential mortgage loans generally areunderwritten in accordance with Federal Home Loan Mortgage Corporation (“FHLMC”)and Federal National Mortgage Association (“FNMA”) guidelines. The Bank alsooriginates loans that do not conform to the underwriting standards of FHLMC andFNMA that are held in the portfolio. In general, these loans do not conform totheir underwriting standards due to the size of the loan. Upon completion ofthe Merger with Chester Valley, the Company’s strategy has changed in that loanportfolio growth is concentrated in commercial business, construction,commercial real estate and multi-family and consumer lending products. Toa lesser extent, the Company originates single-family residential loansfor its portfolio, primarily with adjustable interest rates. The Company doesnot originate sub-prime mortgage loans.

The Bank generally requires a current appraisalprepared by an independent appraiser or an acceptable alternative propertyvaluation on all new single-family residential mortgage loans as well asprivate mortgage insurance on all first mortgage loans with a loan to value inexcess of 80%. Title insurance is required on loans secured by real estate withthe exception of certain single-family residential loans originated under$150 thousand. Hazard insurance is required on all real estate loans. Floodinsurance is also required for all loans secured by properties located in adesignated flood area.

Subsequent to the Merger, the Bank’s processing,underwriting and origination of single-family residential mortgage loanswas streamlined through the implementation of an in-house origination andprocessing staff. During the year ended June 30, 2007, the Company sold anaggregate of $51.9 million in single-family residential mortgage loans into thesecondary market. Most of the Company’s newly originated single-familyresidential mortgage loans, together with servicing rights, are now originatedfor re-sale in the secondary market.

At June 30, 2007, single-family residentialmortgage loans aggregated $273.2 million as compared to $298.5 million at June 30,2006. The $25.3 million or 8.5% decrease resulted largely from portfoliorepayments while most new loans were sold in the secondary market during theyear.

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

Home equity loans and lines of credit are secured bythe borrower’s residence, on which the Bank generally obtains a second lienposition on the underlying real estate. The Bank’s home equity programs 

7

----

provide financing inamounts up to 95% of the value of the property securing the loan, when combinedwith the first mortgage. In addition to originating home equity loans throughour branch offices, the Bank relies considerably on purchased loans from itsnetwork of correspondents.

**OtherConsumer Lending Activities.****  **The Bank offers various types of other consumer loansthrough its branch network primarily consisting of loans secured byautomobiles, to a much lesser extent deposit account loans, and unsecuredpersonal loans. The Bank facilitates the funding of student loans in conjunctionwith American Education Services (“AES/PHEAA”). At June 30, 2007,$3.9 million, or 0.4% of our total loan portfolio consisted of these typesof loans. This compares to $4.3 million of other consumer loans, or 0.4%of the total loan portfolio, at June 30, 2006.

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

Generally, the Bank provides these loans on a securedbasis and they are collateralized by accounts receivable, inventory, equipment,or other general corporate assets of the borrower. Additionally, the principalsof the borrower guarantee most commercial business loans. In general, interestrates are adjustable, indexed to a published rate of interest or fixed.

Generally, commercial business loans have higher risksassociated with them than single-family mortgage loans due to theborrowers’ business operations being more susceptible to local and nationaleconomic conditions as well as collateral being less tangible than real estate.These risks are mitigated by the Bank employing individuals experienced in thistype of lending and by generally requiring the personal guarantees of thebusiness’s principals. Additionally, in some instances, personal assets of theprincipals are obtained as additional security for these loans.

**CommercialReal Estate and Multi-Family Residential Real Estate Loans.****  **At June 30, 2007, commercialreal estate and multi-family residential loans amounted to $316.7 millionor 30.2% of the total loan portfolio. This compares to $326.3 million or30.2% at June 30, 2006. Included in commercial real estate loans are approximately$107.7 million of loans to businesses secured by real estate owned by thebusiness.

The Bank’s commercial real estate and multi-familyresidential loan portfolio consists primarily of loans secured by officebuildings, retail and industrial buildings, strip shopping centers, residentialproperties with five or more units, non-FNMA eligible single-familyresidential investment properties and other properties used for commercial andmulti-family purposes located within the Bank’s market area.

The Bank’s underwriting standards for the commercialreal estate and multi-family residential loan portfolio allows for termsup to 25 years with monthly amortization over the life of the loan andloan to value ratios of not more than 80%. Interest rates are generallyadjustable with a maximum interest rate reset period of five years. Prepaymentfees are generally charged on most commercial real estate and multi-familyloans in order to partially protect the Bank in a falling interest rateenvironment. Personal guarantees are generally required as additional securityfor this portfolio of loans.

Commercial real estate and multi-family realestate lending generally involves increased risks as compared to single-familyresidential lending including, but not limited to, larger loans to individualborrowers and loan payments that are dependent upon the successful operation ofthe project or the borrower’s business. The Bank attempts to mitigate theserisks by limiting loans to proven businesses, properties with historicaloperating performance sufficient to service the debt, utilizing conservativedebt 

8

----

coverage ratios in theunderwriting, and periodically monitoring the operation of the business orproject and the physical condition of the property. Additionally, independentappraisal reports are obtained on each loan to substantiate the property’smarket value, and are reviewed by qualified Bank personnel or, if required bythe Bank’s policies, qualified third party consultants, prior to the closing ofthe loan.

In addition to originating loans, the Bankperiodically purchases participation interests in larger balance loans,typically multi-family and commercial real estate mortgage loans andconstruction loans, from other financial institutions in our market area. We maypurchase these loans to supplement our own originations or sell participationsto manage borrower concentration risks. All purchased participations complywith the Bank’s approved underwriting standards. During fiscal 2007, theCompany purchased an aggregate of $40.5 million in participationinterests.

**Constructionand Land Acquisition Loans.****  **Construction loans for residential and commercialprojects, which generally are secured by properties in southeasternPennsylvania, southern New Jersey and northern Delaware are originated withinour market area. The Bank generally limits construction loans to builders anddevelopers with whom the Bank has an established relationship, or who areotherwise known to officers of the Bank. Additionally, the Bank may acquireparticipation interests in certain construction loans originated by other localfinancial institutions that have similar underwriting standards as the Bank.These participation loans undergo a full underwriting in accordance with theBank’s established policy. Construction loans outstanding at June 30, 2007were $93.2 million, or 8.9% of total loans, compared to$112.8 million or 10.4% of total loans at June 30, 2006. The $19.6million or 17.4% decrease is due primarily to the diminishing demand for new constructionfinancing, resulting from a slowdown in the housing market.

Construction loans generally have variable rates ofinterest, which is a strong tool in managing the interest rate risk exposure ofthe Bank. Generally, they have a maximum term to maturity of three years andloan to value ratios of 80% or less. Residential construction loans todevelopers are made on either a pre-sold or speculative (unsold) basis. Limitsare placed on the number of units that can be built on a speculative basis basedupon the reputation, prior experience and financial position of the builder,the location of the property, and prior sales in the development and thesurrounding area.

Independent appraisals are obtained for allconstruction loans and are reviewed and analyzed by qualified employees of theBank or, in some instances, qualified third party consultants. Propertyinspections are done at inception as well as prior to advancing additionalproceeds committed under the loan documents. Monthly payment of interest isrequired on all construction loans.

Construction loans can also be originated for theacquisition and development of land for sale (i.e. roads or otherimprovements). These loans generally require that the builder have a commitmentfor a construction loan for the units to be built on the site. These loans aresecured by a lien on the property and are generally limited to a loan to valueof 75% or less of the appraised value. The loans have a variable rate ofinterest and require monthly payments of interest. The principal of the loan isrepaid as units are sold and released. Generally, all of these loans are in theBank’s market area and are to developers with whom the Bank has a priorrelationship. Personal guarantees from the borrowers are generally required forthese loans.

Construction and land loans generally carry a higherdegree of risk than single-family residential lending, due to theconcentration of principal in a limited number of loans and borrowers and theeffect of economic conditions on developers, builders and projects. Additionalrisk is also associated with construction lending because of the inherentdifficulty in estimating both a property’s value at completion and theestimated cost to complete a project. The nature of these loans is such thatthey are more difficult to evaluate and monitor. In addition, speculativeconstruction loans to a builder are not pre-sold and thus pose a greaterpotential risk than construction loans to individuals on their personalresidences.

9

----

In order to mitigate some of the risks inherent toconstruction lending, inspections are done both prior to origination andthroughout construction prior to advancing funds, limiting the advancement offunds for speculative homes, limiting originations to builders who haveestablished relationships or significant experience, as well as obtainingpersonal guarantees from the principals.

Thefollowing table shows the activity in our loan portfolio during the periodsindicated:

| ** **                                      | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)**   | ** ** |
| Loans held at the  beginning of the period      |       | $                                      | 1,081,789  |   | $ | 590,923 |   | $ | 530,156 |   |
| Originated and purchased  for portfolio(1)(2):  |       |                                   |       |   |   |   |   |
| Mortgage loans:                                 |       |                                   |       |   |   |   |   |
| Single-family                                   |       | 30,049                                 |       | 142,305 |   | 52,933 |   |
| Commercial real estate and multi-family         |       | 37,039                                 |       | 20,927 |   | 39,879 |   |
| Construction                                    |       | 76,017                                 |       | 73,573 |   | 70,558 |   |
| Home equity                                     |       | 95,845                                 |       | 96,995 |   | 54,782 |   |
| Consumer loans                                  |       | 1,218                                  |       | 1,088 |   | 267 |   |
| Commercial business loans                       |       | 67,187                                 |       | 24,578 |   | 11,153 |   |
| Total  originations and purchases for portfolio |       | 307,355                                |       | 359,466 |   | 229,572 |   |
| Loans acquired  from the Merger                 |       | —                                 |       | 467,700 |   | — |   |
| Amortization and  curtailments                  |       | (336,370                               | )          | (336,782 | ) | (168,466 | ) |
| Net (charge-offs)  recoveries                   |       | (5,180                                 | )          | 482 |   | (339 | ) |
| Net (decrease)  increase in loans               |       | (34,195                                | )          | 490,866 |   | 60,767 |   |
| Total loans held at the  end of the period      |       | $                                      | 1,047,594  |   | $ | 1,081,789 |   | $ | 590,923 |   |

----

(1)          Excludes loansclassified as held for sale at the time of origination.

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

**Loans to One Borrower.****  **Under the Financial InstitutionsReform, Recovery, and Enforcement Act of 1989 (“FIRREA”) and pursuant toregulations for Federal Savings Banks, the aggregate loans that the Bank canmake to any one borrower is equal to 15% of the Bank’s unimpaired capital andsurplus. For the Bank, this amount would be approximately $20.1 million atJune 30, 2007. There are provisions that would allow us to lend anadditional 10% of unimpaired capital and surplus if the loans are secured byreadily marketable securities. At June 30, 2007, our three largest creditrelationships with an individual borrower and related entities amounted to$16.1 million, $16.0 million and $16.0 million; each of whichare in conformity with the current loans to one borrower regulations describedabove.

**Asset Quality**

**General.****  **As a part of the efforts to maintainasset quality, the Bank has developed and implemented an asset classificationsystem in conjunction with federal regulations. All of our assets are subjectto this classification system. Loans are periodically reviewed and theclassifications reviewed at least quarterly by the Loan Committee of the Boardof Directors.

When a borrower fails to make a scheduled payment, theBank attempts to cure the delinquency by making personal contact with theborrower. Initial contacts are generally made 16 days after the date thepayment is due. In most cases, delinquencies are promptly resolved. If thedelinquency continues, late charges are assessed and additional efforts aremade to collect the deficiency. The Bank generally works with borrowers toresolve such problems; however, when the account becomes 90 daysdelinquent, the Bank institutes foreclosure or other proceedings, as necessary,to minimize any potential loss.

10

----

On loans for which the Bank considers the collectionof principal or interest payments doubtful, the Bank ceases the accrual ofinterest income. On loans more than 90 days past due, as to principal andinterest payments, it is the Bank’s policy to discontinue accruing additionalinterest and reverse any interest currently accrued unless it is determinedthat the loan principal and interest are fully secured and in the process ofcollection. On occasion, a loan may be placed on non-accrual earlier if thefinancial condition of the borrower raises significant concern with regard tothe borrower’s ability to service the debt in accordance with the terms of theloan. Interest income is not accrued on these loans until the borrower’sfinancial condition and payment record demonstrate an ability to service thedebt.

Real estate that the Bank acquires as a result offoreclosure or deed-in-lieu of foreclosure is classified as real estate owneduntil sold. Real estate owned is recorded at the lower of cost or fair valueless estimated selling cost. Costs associated with acquiring and improving aforeclosed property are usually capitalized to the extent that the carryingvalue does not exceed fair value less estimated selling costs. Holding costsare charged to expense. Gains and losses on the sale of real estate owned arereflected in operations, as incurred.

**Delinquent Loans.****  **The following table sets forthinformation concerning delinquent loans at the dates indicated. The amountspresented represent the total outstanding principal balances of the relatedloans rather than the actual payment amounts that are past due.

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

 

Loans delinquent 30 to 89 days amounted to$3.9 million at June 30, 2007 compared to $9.2 million at June 30,2006. Management regularly monitors all delinquent loan activity. Managementbelieves that these loans are adequately collateralized or the allowance isadequate to cover any potential collateral shortfall.

11

----

**Non-Performing Assets.****  **The following table sets forthinformation with respect to non-performing assets the Bank has identified,including non-accrual loans and other real estate owned. Total non-performingassets amounted to $3.9 million, or 0.25% of total assets, at June 30,2007 compared to $15.8 million, or 1.00% of total assets, at June 30,2006. The $11.9 million decrease in the Company’s non-performing assetsduring fiscal 2007 was due primarily to the following factors: (1) netcharge-offs during the year of $4.8 million relating to two commercial businessloan relationships categorized as non-accrual at June 30, 2006; (2) thesale of an approximate $3.5 million commercial real estate loan which wasclassified as non-accrual at June 30, 2006; (3) the sale ofcommercial real estate which was foreclosed upon during the year and hadsecured a $2.0 million commercial real estate loan categorized as non-accrualat June 30, 2006; and (4) payments of $2.1 million during the year onloans in non-accrual status at June 30, 2006. These decreases werepartially offset by a commercial business loan relationship and a constructionloan relationship of $780 thousand and $463 thousand, respectively, which weretransferred to non-accrual status during fiscal 2007.

| ** **                                      | ** ** | **At June 30,**            | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Accruing loans 90 or  more days past due        |       |                                 |       |   |   |   |   |   |   |   |   |
| Mortgage loans                                  |       | $                                    | —     |   | $ | — |   | $ | 109 |   | $ | — |   | $ | 367 |   |
| Commercial business loans                       |       | —                               |       | — |   | — |   | — |   | 147 |   |
| Other                                           |       | —                               |       | — |   | — |   | 3 |   | — |   |
| Total accruing  loans 90 or more days  past due |       | —                               |       | — |   | 109 |   | 3 |   | 514 |   |
| Non-accrual loans                               |       |                                 |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family                                   |       | 845                                  |       | 1,059 |   | 146 |   | 568 |   | 1,064 |   |
| Construction                                    |       | 463                                  |       | — |   | — |   | — |   | — |   |
| Commercial real estate and multi-family         |       | 697                                  |       | 7,753 |   | 315 |   | 48 |   | 48 |   |
| Home equity                                     |       | 601                                  |       | 479 |   | 99 |   | 39 |   | 236 |   |
| Consumer                                        |       | 56                                   |       | 154 |   | — |   | 16 |   | 7 |   |
| Commercial business                             |       | 1,188                                |       | 6,036 |   | 106 |   | 698 |   | 360 |   |
| Total non-accrual  loans                        |       | 3,850                                |       | 15,481 |   | 666 |   | 1,369 |   | 1,715 |   |
| Performing  troubled debt restructurings        |       | 1                                    |       | 256 |   | 1,912 |   | 1,404 |   | 1,463 |   |
| Total non-performing  loans                     |       | 3,851                                |       | 15,737 |   | 2,687 |   | 2,776 |   | 3,692 |   |
| Other real estate  owned, net                   |       | —                               |       | 51 |   | 439 |   | 403 |   | 391 |   |
| Total non-performing  assets                    |       | $                                    | 3,851      |   | $ | 15,788 |   | $ | 3,126 |   | $ | 3,179 |   | $ | 4,083 |   |
| Non-performing  loans to total loans            |       | 0.37                                 | %          | 1.45 | % | 0.46 | % | 0.52 | % | 0.88 | % |
| Non-performing  assets to total assets          |       | 0.25                                 | %          | 1.00 | % | 0.33 | % | 0.34 | % | 0.48 | % |

** **

**Classifiedand Criticized Assets.****  **Federal regulations require that each insuredinstitution classify its assets on a regular basis. Furthermore, in connectionwith examinations of insured institutions, federal examiners have authority toidentify problem assets and, based upon their judgment, classify them. Thereare three classifications for problem assets: “substandard,” “doubtful,” and “loss.”Substandard assets have one or more defined weaknesses and are characterized bythe distinct possibility that the insured institution will sustain some loss ifthe deficiencies are not corrected. Doubtful assets have weaknesses ofsubstandard assets with the additional characteristic that the weaknesses makecollection or liquidation in full on the basis of current existing facts,conditions and values, questionable, and there is a high probability of loss.An asset classified as loss is considered uncollectible and of such littlevalue that continuance as an asset of the institution is not warranted. Federalregulations also require another unclassified category designated “specialmention” to be established and maintained for assets that do not 

12

----

currently expose aninsured institution to a sufficient degree of risk to warrant classification assubstandard, doubtful, or loss. At June 30, 2007, the Company had$8.2 million of assets classified as substandard, consisting of$6.2 million of commercial real estate and business loans,$1.3 million of single-family mortgage loans, and $660 thousandof consumer loans, and $1.4 million classified as doubtful, consisting ofcommercial real estate and business loans. This compares to $6.6 millionof assets classified as substandard, consisting of $5.1 million ofcommercial real estate and business loans, $974 thousand of single-familymortgage loans, $525 thousand of consumer loans, and $12.4 million classifiedas doubtful, consisting of $12.3 million of commercial real estate and businessloans and $86 thousand of single-family mortgage loans at June 30, 2006.There were no loans classified as loss at June 30, 2007 or 2006.

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

Theallowance is increased by a provision for loan losses, which is charged againstincome. As shown in the table below, at June 30, 2007, our allowance forloan losses amounted to $12.2 million or 317.1% and 1.16% of our non-performingloans and total loans receivable less deferred fees, respectively.

| ** **                                                                    | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands)**   | ** ** |
| Balance—beginning  of period                                             |       | $                                      | 16,737     |   | $ | 6,113 |   | $ | 5,220 |   | $ | 5,312 |   | $ | 4,626 |   |
| Plus: provisions  for loan losses                                             |       | 653                                    |       | 3,205 |   | 1,232 |   | 426 |   | 1,034 |   |
| Less: charge-offs  for                                                        |       |                                   |       |   |   |   |   |   |   |   |   |
| Mortgage loans                                                                |       | (76                                    | )          | (24 | ) | (7 | ) | (58 | ) | (284 | ) |
| Consumer loans                                                                |       | (277                                   | )          | (62 | ) | (22 | ) | (11 | ) | (4 | ) |
| Commercial real estate loans                                                  |       | (1,848                                 | )          | — |   | — |   | — |   | — |   |
| Commercial business loans                                                     |       | (3,185                                 | )          | (47 | ) | (316 | ) | (658 | ) | (103 | ) |
| Total charge-offs                                                             |       | (5,386                                 | )          | (133 | ) | (345 | ) | (727 | ) | (391 | ) |
| Plus: recoveries  for                                                         |       |                                   |       |   |   |   |   |   |   |   |   |
| Mortgage loans                                                                |       | 1                                      |       | 36 |   | 6 |   | 74 |   | — |   |
| Consumer loans                                                                |       | 45                                     |       | 44 |   | — |   | 1 |   | — |   |
| Commercial business loans                                                     |       | 160                                    |       | 535 |   | — |   | 134 |   | 43 |   |
| Total recoveries                                                              |       | 206                                    |       | 615 |   | 6 |   | 209 |   | 43 |   |
| Allowance acquired from the Merger                                            |       | —                                 |       | 6,937 |   | — |   | — |   | — |   |
| Balance—end of  period                                                   |       | $                                      | 12,210     |   | $ | 16,737 |   | $ | 6,113 |   | $ | 5,220 |   | $ | 5,312 |   |
| Allowance for  loan loss to total end of period non-performing loans          |       | 317.06                                 | %          | 106.35 | % | 227.50 | % | 188.04 | % | 143.88 | % |
| Charge-offs  to average loans                                                 |       | 0.51                                   | %          | 0.01 | % | 0.06 | % | 0.16 | % | 0.08 | % |
| Allowance for loan loss  to end of period total loans less deferred fees |       | 1.16                                   | %          | 1.55 | % | 1.05 | % | 1.27 | % | 1.27 | % |

 

The provision for loan losses for the year ended June 30,2007 was $653 thousand, a decrease of $2.6 million from $3.2 million in theprior year. Net charge-offs in fiscal 2007 were $5.2 million as compared to 

13

----

net recoveries of$482 thousand in fiscal year 2006. The increase is due primarily to thecharge-off of two loan relationships which were categorized as non-accrual at June 30,2006. The decrease in the provision for loan losses in fiscal 2007 compared tofiscal 2006 was due primarily to the decrease in non-performing assets. Theincrease in the provision for loan losses in fiscal 2006 compared to fiscal 2005was due primarily to a corresponding increase in non-performing loans andclassified loans. Management assesses the allowance for loan losses at leastquarterly, and makes any necessary provision for losses needed to maintain theits allowance for losses at a level deemed adequate. Management believes thatthe allowance for loan losses was adequate at June 30, 2007 to coverlosses that are both probable and reasonably estimable based upon the facts andcircumstances known to us at that date.

Effective December 21, 1993, the OTS inconjunction with the Comptroller of the Currency, the FDIC and the FederalReserve Board issued a Policy Statement regarding a financial institution’sallowance for loan and lease losses. The Policy Statement, which reflects theposition of the regulatory agencies and does not necessarily constitutegenerally accepted accounting principles, includes guidance (i) on ourresponsibilities for the assessment and establishment of an adequate allowance;and (ii) for the agencies’ examiners to use in evaluating the adequacy ofsuch allowance and the policies used to determine such allowance. The PolicyStatement also sets forth quantitative measures for the allowance with respectto assets classified substandard and doubtful and with respect to the remainingportion of the institution’s portfolio. Specifically, the Policy Statement setsforth the following quantitative measures which examiners may use to determinethe reasonableness of an allowance: (i) 30% to 50% of the portfolio thatis classified doubtful; (ii) 10% to 20% of the portfolio classifiedsubstandard; and (iii) for the portions of the portfolio that have notbeen classified (including loans designated special mention), estimated creditlosses over the upcoming twelve months based on facts and circumstancesavailable as of the evaluation date. While the Policy Statement sets forth thisquantitative measure, such guidance is not intended as a “floor” or “ceiling”.Our policy for establishing loan losses is consistent with the PolicyStatement. In July 2001, the SEC issued Staff Accounting Bulletin (“SAB”) No. 102,“Selected Loan Loss Allowance Methodology And Documentation Issues”. Theguidance in the SAB was effective immediately and focuses on the documentationthe SEC staff normally expects registrants to prepare and maintain in supportof the allowance for loan losses. Concurrent with the SEC’s issuance of SAB No. 102,the federal banking agencies, represented by the FFIEC issued an interagencypolicy statement entitled “Allowance For Loan and Lease Loss Methodologies AndDocumentation For Banks and Savings Institutions” (“FFIEC Policy Statement”).The SAB and FFIEC Policy Statement were the result of an agreement between theSEC and the federal banking agencies in March 1999 to provide guidance onallowance for loan loss methodologies and supporting documentation. Managementbelieves that the Bank’s documentation relating to the allowance for loan lossis consistent with this guidance.

Theallocation of the allowance for loan losses is shown in the table below. It isbroken down by loan type at June 30, 2007. Through such allocations, theBank does not intend to imply that actual future charge-offs will necessarilyfollow the same pattern or that any portion of the allowance is restricted.

| ** **                                   | ** ** | **June 30, 2007**          | ** ** | **June 30, 2006**                                   | ** ** | **June 30, 2005** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **Amount**                           | ** ** | **Percent of  loan type to  total loans** | ** ** | **Amount**                  | ** ** | **Percent of  loan type to  total loans** | ** ** | **Amount** | ** ** | **Percent of  loan type to  total loans** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Mortgage loans:                              |       |                                 |       |                                                          |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single-family                                |       | $                                    | 438        |                                                          |       | 26.08                       | %          |   | $ | 473 |   |   | 27.59 | % |   |   | $ | 155 |   |   |   | 34.34 | % |   |
| Commercial real estate and multi-family |       | 6,121                                |       |                                                          | 30.25      |                        |       | 7,412 |   |   | 30.16 |   |   |   | 2,280 |   |   |   | 29.60 |   |   |
| Construction                                 |       | 1,768                                |       |                                                          | 8.89       |                        |       | 1,979 |   |   | 10.42 |   |   |   | 2,169 |   |   |   | 14.66 |   |   |
| Home equity                                  |       | 1,435                                |       |                                                          | 25.99      |                        |       | 1,351 |   |   | 23.96 |   |   |   | 537 |   |   |   | 17.06 |   |   |
| Total mortgage  loans                        |       | 9,762                                |       |                                                          | 91.21      |                        |       | 11,215 |   |   | 92.13 |   |   |   | 5,141 |   |   |   | 95.66 |   |   |
| Consumer loans                               |       | 776                                  |       |                                                          | 0.37       |                        |       | 663 |   |   | 0.40 |   |   |   | 71 |   |   |   | 0.36 |   |   |
| Commercial  business loans                   |       | 1,672                                |       |                                                          | 8.42       |                        |       | 4,859 |   |   | 7.47 |   |   |   | 901 |   |   |   | 3.98 |   |   |
| Total                                        |       | $                                    | 12,210     |                                                          |       | 100.00                      | %          |   | $ | 16,737 |   |   | 100.00 | % |   |   | $ | 6,113 |   |   |   | 100.00 | % |   |

 

14

----

**SecuritiesActivities**

**General.**   TheBank’s investment policy is designed, among other things, to provide managementwith an additional tool in implementing its asset/liability strategies. Itemphasizes principal preservation, favorable returns, maintaining liquidity andflexibility, and minimizing credit risk. The policy permits investments in USgovernment and agency securities, investment grade corporate bonds andcommercial paper, municipal bonds, various types of mortgage-backedsecurities and collateralized mortgage obligations, certificates of deposit andfederal funds sold to financial institutions approved by our Board ofDirectors, and certain equity investments and mutual funds.

The Bank will from time to time use hedging programssuch as interest rate swaps, caps, collars or other activities involving theuse of off-balance sheet financial derivatives to assist in its’Asset/Liability management and the mitigation of interest rate risk. The Bankhas not purchased mortgage-backed derivative instruments that would becharacterized “high-risk” under OTS regulations at the time of purchase, norhas it purchased corporate obligations, which are not rated investment grade.

Statement of Financial Accounting Standards (“SFAS”) No. 115requires the Company to classify a security as available for sale (“AFS”),held-to-maturity (“HTM”), or trading, at the time of acquisition. Securitiesclassified as HTM must be purchased with the intent and ability to hold thatsecurity until its final maturity, and can be sold prior to maturity only undercertain rare circumstances. HTM securities are accounted for based upon thehistorical cost of the security. AFS securities can be sold at any time basedupon our needs or judgment as to market changes. AFS securities are accountedfor at fair value with unrealized gains and losses on these securities, net ofincome tax effects, reflected in the stockholders’ equity section of ourStatement of Financial Condition.

Additionally, securities are evaluated periodically todetermine whether a decline in their fair value is other than temporary.Management utilizes criteria such as the magnitude and duration of the decline,in addition to the reasons underlying the decline, to determine whether theloss in value is other than temporary. The term “other than temporary” is notintended to indicate that the decline is permanent, but indicates that theprospects for a near-term recovery of value is not necessarily favorable, orthat there is a lack of evidence to support realizable value equal to orgreater than carrying value of the investment. Once a decline in fair value isdetermined to be other than temporary, the fair value of the security isreduced through a charge to earnings in the consolidated statements of income.

Management does not believe any individual unrealizedloss on its securities as of June 30, 2007 represents another-than-temporary impairment. The temporary impairment is directly relatedto changes in market interest rates. In general, as interest rates rise, thefair value of fixed-rate securities will decrease and, as interest rates fall,the fair value of fixed-rate securities will increase. The severity of theimpairment as a percent of the total investment position is nominal and theduration of the impairment to date is short. The impairments are deemedtemporary based on the direct relationship of the decline in fair value tomovements in interest rates, as well as the relatively short duration of theinvestments and their high credit quality. Additionally, the Company has theability and intent to hold these securities until such time as the valuerecovers or the securities mature.

At June 30, 2007, investment securities amountedto $277.9 million, or 17.9% of total assets. This includes a $3.2 millionunrealized loss, net of income tax, on those investment securities classifiedas AFS. The portfolio consists of US government and agency securities, manywith callable features and agency and non-agency mortgage-backedpass-through securities, collateralized mortgage obligations, municipal bonds,equity investments primarily in mutual funds.

15

----

Thefollowing table sets forth information on the carrying value and the amortizedcost of our securities classified as held to maturity and available for sale atthe dates indicated.

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

 

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

----

(1)          Includes mutual fundswith a fair value of approximately $10.1 million at June 30, 2007.

Prior to the effective date of the Merger, the Bankundertook a strategy to de-leverage a portion of its balance sheet by, amongother things, selling certain of its AFS securities. This effort resulted inthe Company selling an aggregate of approximately $95.9 million insecurities which resulted in an aggregate net loss of approximately$912 thousand, which was recognized in fiscal 2006. Prior to the effectivedate of the Merger, both Willow Financial Bank and First Financial Bank hadtaken advantage of market conditions in selling certain securities which didnot result in an aggregate loss to either Company, or in the case of FirstFinancial Bank, would potentially reduce a negative mark to market in purchaseaccounting. The net proceeds received from this strategy were utilized to repayhigher costing FHLB borrowings.

In addition to HTM and AFS securities , at June 30,2007 and 2006 the company had $1.2 million and $902 thousand, respectively, oftrading account securities consisting of mutual funds related to the Company’sdeferred compensation plan for certain executive level employees. There is acorresponding liability in other liabilities on the consolidated statements offinancial condition at June 30, 2007 and 2006.

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

16

----

passes those paymentsthrough to the intermediary who then remits the payment to the investor. TheUS Government agencies and government sponsored enterprises, primarily theGovernment National Mortgage Association (“GNMA”), FNMA and FHLMC, guaranteethe timely payment of principal and interest on these securities. MBSs that arepooled by US Government or government sponsored enterprises are known as agencymortgage-backed securities. Other private servicers may pool mortgagesinto similar pass-through securities and are known as non-agency MBSs. Thesenon-agency MBSs do not have the guaranteed timely payment of principal andinterest that an agency MBS has, and may also include loans that may notqualify to be included in an agency MBS, for reasons such as, but not limitedto, the size of the loan. At June 30, 2007, the Company’s mortgage-backedsecurities portfolio does not include any securities backed by sub-primemortgage loans.

MBSs are issued in stated principal amounts and arebacked by mortgage loans within a specific interest rate range, but may havevarying maturity dates. The underlying pool of mortgages may be comprised ofeither fixed-rate or adjustable-rate mortgage loans. Each MBS pool will alsodiffer based upon the actual level of prepayment experienced by the underlyingmortgage loans.

At June 30, 2007, the weighted average life ofour fixed-rate and adjustable-rate mortgage-backed securities wasapproximately 3.2 years and 3.0 years, respectively, based upon management’sassumptions related to the future prepayments of the underlying mortgages.Prepayments that are greater than those projected will shorten the remainingterm of the security, while a decrease in the amount of prepayments willlengthen the amount of time until the security matures. Prepayments depend onmany factors, including the type of mortgage, the coupon rate, the remainingperiod until the loan matures or the rate is scheduled to reset, the geographicregion, and the general level of market interest rates. During periods ofrising interest rates, if the coupon rates of the underlying mortgages are lessthan prevailing market rates offered on mortgages, refinancing will decreaseand prepayments of the mortgages underlying the security will decline.Conversely, when market interest rates are falling, and the coupon rate on theunderlying mortgage exceeds the prevailing market interest rate for mortgagesoffered, refinancings tend to increase which will increase the amount ofprepayments of the underlying mortgages.

CMOs are securities that are structured from a pool ofMBSs or whole loans. The structuring results in sectors known as tranches. Eachtranche within a CMO will have different cash flow requirements and interestrates. Although still subject to prepayments, this structuring into tranchesprovides a more predictable cash flow to the bondholder.

**USGovernment and Government Agency Securities and Municipal Bonds.****  **At June 30, 2007, the carrying value of USgovernment and US government agency securities within the investment securitiesportfolio was $34.2 million, which includes approximately$1.1 million in unrealized losses, compared to $34.3 million, whichincluded approximately $1.2 million in unrealized losses, at June 30,2006. This portfolio is comprised primarily of securities issued by the FHLB.Many of these securities have call features that allow the issuer to redeemthese securities at par value prior to their stated maturity. Generally, if theprevailing market interest rate on new issue callable agency securities withsimilar maturities exceeds the coupon rate of the security with the callfeature, the call will not be exercised. Conversely, if the prevailing marketinterest rate for new issue agency callable securities with similar maturitiesis below the coupon rate of the security with the call feature, the call willbe exercised and the bond will be redeemed. When calls are exercised and bondsredeemed prior to their maturity, the Bank faces the risk of re-investing thoseproceeds into other investments with lower yields or longer terms.

Municipal bonds classified as held to maturity at June 30,2005, were sold in fiscal 2006 as part of the Company’s de-leveraging strategyreferenced above in accordance with the provisions of Financial AccountingStandards Board (“FASB”) Statement No. 115, “Accounting for CertainInvestments in Debt and Equity Securities.”

17

----

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

**Other Investments.****  **Other than MBSs, US government andgovernment agency securities and municipal bonds, the Company has investmentsin various equity securities and mutual funds. At June 30, 2007,$1.1 million was invested in equity securities and $10.1 million wasinvested in mutual funds. The equity securities include stock of severalpublicly traded companies, primarily local financial institutions. The mutualfund investment of $10.1 million is backed primarily by investments inadjustable-rate mortgage-backed securities and other investmentsauthorized by our investment policy.

**Sources of Funds**

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

**Deposits.****  **As shown in the table below, theBank’s core deposit accounts at June 30, 2007 (which the Bank consider tobe all deposits other than certificate accounts) represent 69.4% of totaldeposits as compared to 70.4% at June 30, 2006.

| ** **                                          | ** ** | **At June 30,**            | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                          | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                          | ** ** | **Amount**                           | ** ** | **Percent of  total** | ** ** | **Amount** | ** ** | **Percent of  total** | ** ** |
| ** **                                          | ** ** | **(Dollars in thousands)** | ** ** |
| Savings accounts  (passbooks, statements and clubs) |       | $                                    | 87,565     |   |   | 8.0 | % |   | $ | 101,119 |   |   | 9.9 | % |   |
| Money market  accounts                              |       | 403,487                              |       |   | 36.9 | % |   | 338,451 |   |   | 33.2 | % |   |
| Certificates of  deposit                            |       | 334,672                              |       |   | 30.7 | % |   | 301,627 |   |   | 29.7 | % |   |
| Checking accounts:                                  |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing                                    |       | 116,171                              |       |   | 10.6 | % |   | 114,329 |   |   | 11.2 | % |   |
| Non-interest-bearing                                |       | 151,160                              |       |   | 13.8 | % |   | 162,864 |   |   | 16.0 | % |   |
| Total                                               |       | $                                    | 1,093,055  |   |   | 100.0 | % |   | $ | 1,018,390 |   |   | 100.0 | % |   |

 

18

----

Duringthe year ended June 30, 2007, total deposits increased by $74.7 million,or 7.3% compared to the year ended June 30, 2006. The increase occurredprimarily from an increase in money market demand deposit accounts as theCompany has been successful in migrating money market balances from customersof its business segment, WIS, as well as an increase in certificates of depositresulting from customer preference for higher rate deposit accounts. Coredeposits, as previously defined, increased by $41.6 million.

| ** **                           | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(Dollars in thousands)**   | ** ** |
| Beginning balance                    |       | $                                      | 1,018,390  |   | $ | 602,678 |   | $ | 603,115 |   |
| Net increase  (decrease) in deposits |       | 47,945                                 |       | (34,442 | ) | (9,569 | ) |
| Deposits assumed  in acquisition     |       | —                                 |       | 437,065 |   | — |   |
| Interest credited                    |       | 26,720                                 |       | 13,089 |   | 9,132 |   |
| Ending balance                       |       | $                                      | 1,093,055  |   | $ | 1,018,390 |   | $ | 602,678 |   |

 

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

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

 

Shownbelow are the amount and remaining term to maturity for certificates of depositas of June 30, 2007.

| ** **               | ** ** | **Amounts maturing in** | ** ** |
|--------------------------|------------|-----------------------------------|------------|
| ** **               | ** ** | **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** | ** ** |
| **Interest rates:** | ** ** | ** **                        | ** ** | **(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 |   |   |
|                          |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

----

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

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

 

**Borrowings.****  **The Bank utilizes borrowings tosupplement its funding needs and in the past, under certain instances, asrevenue enhancement programs to take advantage of arbitrage opportunities wheninvestment returns exceeded the cost of borrowings. At June 30, 2007, theCompany had $235.7 million in outstanding borrowings, which were comprisedof $190.1 million of FHLB borrowings, $25.5 million of trust preferredsecurities, and $20.0 million of repurchase agreements. The investment in FHLBstock, as well as a portion of our residential mortgage loan portfolio andinvestment securities portfolio, secure advances from the FHLB. The FHLB ofPittsburgh provides an array of borrowing programs which include: fixed orvariable rate programs; various fixed terms ranging from overnight to20 years; and other programs that have callable or putable featuresattached to them. The Bank intends to continue to utilize borrowings in thefuture as an alternative source of funds. The repurchase agreements are securedby various securities within the Company’s investment securities portfolio.During the current fiscal year, approximately $103.2 million of theseborrowings were paid down with proceeds from repayments within the investmentand loan portfolios as well as the funds generated from the growth in theCompany’s deposits.

Thefollowing table sets forth certain information regarding our borrowings for theperiods indicated.

| ** **                                 | ** ** | **At or for the year ended** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | **June 30, 2007**                           | ** ** | **June 30, 2006** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)**                  | ** ** |
| FHLB advances:                             |       |                                                  |       |   |   |   |   |   |   |
| Average balance outstanding for the period |       |                                                  | $          | 225,722 |   |   |   | $ | 312,709 |   |   |
| Maximum outstanding at any month end       |       |                                                  | 258,035    |   |   |   | 364,572 |   |   |
| Balance outstanding at end of the period   |       |                                                  | 190,063    |   |   |   | 282,717 |   |   |
| Average interest rate for the period       |       |                                                  | 4.05       | % |   |   | 4.02 | % |   |
| Interest rate at the end of the period     |       |                                                  | 4.19       | % |   |   | 4.24 | % |   |
| Repurchase agreements:                     |       |                                                  |       |   |   |   |   |   |   |
| Average balance outstanding for the period |       |                                                  | $          | 22,767 |   |   |   | $ | 4,959 |   |   |
| Maximum outstanding at any month end       |       |                                                  | 30,000     |   |   |   | 20,000 |   |   |
| Balance outstanding at end of the period   |       |                                                  | 20,000     |   |   |   | 20,000 |   |   |
| Average interest rate for the period       |       |                                                  | 4.99       | % |   |   | 4.61 |   |   |
| Interest rate at  the end of the period    |       |                                                  | 4.52       | % |   |   | 4.56 |   |   |

 

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

**TrustPreferred Securities.****  **Effectivewith the acquisition of Chester Valley, the Company assumed the liability for$10.5 million of Junior Subordinated Debentures to the Chester Valley StatutoryTrust, a 

20

----

Pennsylvania BusinessTrust, in which the Company owns all of the common equity as a result of theacquisition of Chester Valley. The Trust issued $10.0 million of TrustPreferred Securities to investors, which are secured by the Junior SubordinatedDebentures and the guarantee of the Company. These These Trust PreferredSecurities were redeemed by the Company on March 26, 2007 in accordancewith 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.

**Accounting forDerivative Instruments and Hedging**

The Company may from time to time utilize derivativeinstruments such as interest rate swaps, interest rate collars, interest ratefloors, interest rate swaptions or combinations thereof to assist in itsasset/liability management. In accordance with SFAS No. 133, “Accountingfor Derivative Instruments,” the Company documents its hedge relationships,including identification of the hedging instruments and the hedged items, aswell as its risk management objectives and strategies for undertaking thehedge. The Company also assesses, both at inception and at least quarterly thereafter,whether the derivative instruments that are used in hedging transactions arehighly effective in offsetting the changes in either the fair value or cashflows of the hedged item. For fair value hedges, both the effective andineffective portions of the changes in the fair value of the derivative, alongwith the gain or loss on the hedged item that is attributable to the hedgedrisk, are recorded in the statement of operations within interest income orinterest expense. For cash flow hedges, the effective portion of the change inthe fair value of the derivative is recorded in accumulated other comprehensiveincome. When the hedged item impacts the statement of operations, the gain orloss included in accumulated other comprehensive income is reported on the sameline in the statement of operations as the hedged item. In addition, theineffective portion of the changes in the fair value of derivatives used ascash flow hedges is reported in the statement of operations.

As part of the Merger, the Company assumed theresponsibility for a $20 million notional interest rate swap whereby theCompany paid a variable rate and received a fixed rate. The interest rate swaphad been used to hedge certain Federal Home Loan Bank borrowings of the formerChester Valley. On the date of the Merger, the interest rate swap and thehedged borrowings were marked to fair value in purchase accounting. In September 2005,the hedged borrowings were repaid and $10 million notional amount of theinterest rate swap was unwound with the counter-party. After performing theappropriate documentation of the derivative instrument, the Company designatedthe remaining $10 million notional amount interest rate swap as a fair valuehedge of certain existing borrowings of Willow Financial Bank. The swap had theeffect of converting a fixed rate borrowing to an adjustable rate borrowing.During the quarter ended December 31, 2005, the derivative instrumentceased to be a highly effective hedge; therefore, the Company discontinuedhedge accounting resulting in a pre-tax charge to the statement of operationsof $47 thousand. The interest rate swap was unwound in February 2006without resulting in any additional impact to the statement of operations. Thebasis adjustment that was previously recorded on the hedged borrowing that isrecorded in the statement of financial condition is amortized as an increase ininterest expense over the remaining life of the borrowing using the interestmethod.

Additionally, in August 2003,Chester Valley purchased a $30.0 million notional amount 3.50% six monthLIBOR interest rate cap while simultaneously selling a $30.0 million notionalamount 6.00% 

21

----

six-monthLIBOR interest rate cap (“Interest Rate Corridor”) which expires in August 2008.Chester Valley paid a net premium, which entitled it to receive the differencebetween six-month LIBOR from 3.50% up to 6.00% applied to the $30.0 millionnotional amount. Upon consummation of the Merger, the Company assumed theInterest Rate Corridor and designated it to hedge certain borrowings of WillowFinancial Bank, which were variable in nature and indexed to six-month LIBOR.The Interest Rate Corridor was being used to hedge the cash flows of thisborrowing. Prior to October 23, 2006, the Interest Rate Corridor reducedthe negative impact on earnings of the borrowings in a rising interest rateenvironment. The fair market value of the Interest Rate Corridor had twocomponents: the intrinsic value and the time value of the option. The InterestRate Corridor was marked-to-market quarterly, with changes in the intrinsicvalue of the Interest Rate Corridor, net of tax, included as a separatecomponent of other comprehensive income, and the change in the time value ofthe option included directly as interest expense as required under SFAS 133. Inaddition, the ineffective portion, if any, would have been expensed in theperiod in which ineffectiveness 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 the consolidatedstatements of income.

**REGULATION**

Set forth below is a briefdescription of certain laws and regulations, which are applicable to WillowFinancial Bancorp and Willow Financial Bank, including our business segment,PCIS. The description of these laws and regulations, as well as descriptions oflaws and regulations contained elsewhere herein, does not purport to becomplete and is qualified in its entirety by reference to the applicable lawsand regulations.

**General**

Willow Financial Bank, asa federally chartered savings institution, is subject to federal regulation andoversight by the Office of Thrift Supervision extending to all aspects of itsoperations. Willow Financial Bank also is subject to regulation and examinationby the Federal Deposit Insurance Corporation, which insures the deposits ofWillow Financial Bank to the maximum extent permitted by law, and requirementsestablished by the Federal Reserve Board. Federally chartered savingsinstitutions are required to file periodic reports with the Office of Thrift Supervisionand are subject to periodic examinations by the Office of Thrift Supervisionand the Federal Deposit Insurance Corporation. Federal laws and regulationsdetermine the investment and lending authority of savings institutions, andsuch institutions are prohibited from engaging in any activities not permittedby such laws and regulations. Such regulation and supervision primarily isintended for the protection of depositors and not for the purpose of protectingstockholders.

The Office of ThriftSupervision regularly examines Willow Financial Bank and prepares reports forconsideration by its Board of Directors on any deficiencies that it may find inthe Bank’s operations. The Federal Deposit Insurance Corporation also has theauthority to examine Willow Financial Bank in its role as the administrator ofthe Deposit Insurance Fund. Willow Financial Bank’s relationship with its 

22

----

depositorsand borrowers also is regulated to a great extent by both federal and, to alesser extent, state laws, especially in such matters as the ownership ofsavings accounts and the form and content of Willow Financial Bank’s mortgagerequirements. The Office of Thrift Supervision’s enforcement authority over allsavings institutions and their holding companies includes, among other things,the ability to assess civil money penalties, to issue cease and desist orremoval orders and to initiate injunctive actions. In general, theseenforcement actions may be initiated for violations of laws and regulations andunsafe or unsound practices. Other actions or inactions may provide the basisfor enforcement action, including misleading or untimely reports filed with theOffice of Thrift Supervision. Any change in such laws or regulations, whetherby the Federal Deposit Insurance Corporation, Office of Thrift Supervision orCongress, could have a material adverse impact on us and Willow Financial Bankand our operations.

**Willow FinancialBancorp, Inc.**

Willow Financial Bancorp is a registered savings andloan holding company under Section 10 of the Home Owners’ Loan Act, asamended and subject to Office of Thrift Supervision examination and supervisionas well as certain reporting requirements. In addition, Willow Financial Bankis subject to certain restrictions in dealing with Willow Financial Bancorp andwith other persons affiliated with the Bank.

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

**Willow FinancialBank**

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

Under current FederalDeposit Insurance Corporation regulations, insured institutions are assigned toone of three capital groups which are based solely on the level of aninstitution’s capital—“well capitalized,” “adequately capitalized,” and “undercapitalized”—whichare defined in the same manner as 

23

----

theregulations establishing the prompt corrective action system discussed below.Effective January 1, 2007, the previous nine risk classifications havebeen consolidated into four risk categories, which reflect varying levels ofsupervisory concern, from those, which are considered to be healthy to those,which are considered to be of substantial supervisory concern. The riskcategories were created with rates during the last six months of fiscal 2007ranging from five basis points for well capitalized, healthy institutions, suchas Willow Financial Bank, to 43 basis points for undercapitalized institutionswith substantial supervisory concerns.

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

The Federal DepositInsurance Corporation may terminate the deposit insurance of any insureddepository institution, including Willow Financial Bank, if it determines aftera hearing that the institution has engaged or is engaging in unsafe or unsoundpractices, is in an unsafe or unsound condition to continue operations, or hasviolated any applicable law, regulation, order or any condition imposed by anagreement with the Federal Deposit Insurance Corporation. It also may suspenddeposit insurance temporarily during the hearing process for the permanenttermination of insurance, if the institution has no tangible capital. Ifinsurance of accounts is terminated, the accounts at the institution at thetime of the termination, less subsequent withdrawals, shall continue to beinsured for a period of six months to two years, as determined by the FederalDeposit Insurance Corporation. Management is aware of no existingcircumstances, which would result in termination of Willow Financial Bank’sdeposit insurance.

**Deposit Insurance Reform.**   OnFebruary 8, 2006, President George W. Bush signed into law legislationthat merged the Bank Insurance Fund and the Savings Association Insurance Fundto form the Deposit Insurance Fund, eliminated any disparities in bank andthrift risk-based premium assessments, reduced the administrative burden ofmaintaining and operating two separate funds and established certain newinsurance coverage limits and a mechanism for possible periodic increases. Thelegislation also gave the Federal Deposit Insurance Corporation greaterdiscretion to identify the relative risks all institutions present to theDeposit Insurance Fund and set risk-based premiums.

Majorprovisions in the legislation include:

·       mergingthe Savings Association Insurance Fund and Bank Insurance Fund, which becameeffective March 31, 2006;

·       maintainingbasic deposit and municipal account insurance coverage at $100,000 butproviding for a new basic insurance coverage for retirement accounts of$250,000. Insurance coverage for basic deposit and retirement accounts could beincreased for inflation every five years in $10,000 increments beginningin 2011;

·       providing the FederalDeposit Insurance Corporation with the ability to set the designated reserveratio within a range of between 1.15% and 1.50%, rather than maintaining 1.25%at all times regardless of prevailing economic conditions;

24

----

·       providing a one-timeassessment credit of $4.7 billion to banks and savings associations in existenceon December 31, 1996, which may be used to offset future premiums withcertain limitations; and

·       requiring the payment ofdividends of 100% of the amount that the insurance fund exceeds 1.5% of theestimated insured deposits and the payment of 50% of the amount that theinsurance fund exceeds 1.35% of the estimated insured deposits (when thereserve is greater than 1.35% but no more than 1.5%).

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

Under the tangible capitalrequirement, a savings bank must maintain tangible capital in an amount equalto at least 1.5% of adjusted total assets. Tangible capital is defined as corecapital less all intangible assets (including supervisory goodwill), plus aspecified amount of purchased mortgage-servicing rights.

Under the leverage capitalrequirement adopted by the Office of Thrift Supervision, savings banks mustmaintain “core capital” in an amount equal to at least 3.0% of adjusted totalassets. Core capital is defined as common stockholders’ equity (includingretained earnings), non-cumulative perpetual preferred stock, and minorityinterests in the equity accounts of consolidated subsidiaries, plus purchasedmortgage servicing rights valued at the lower of 90% of fair market value, 90%of original cost or the current amortized book value as determined undergenerally accepted accounting principles, and “qualifying supervisory goodwill,”less non-qualifying intangible assets.

Under the risk-based capitalrequirement, a savings bank must maintain total capital (which is defined ascore capital plus supplementary capital) equal to at least 8.0% ofrisk-weighted assets. A savings bank must calculate its risk-weighted assets bymultiplying each asset and off-balance sheet item by various risk factors,which range from 0% for cash and securities issued by the United StatesGovernment or its agencies to 100% for repossessed assets or loans more than90 days past due. Qualifying one- to-four family residential real estateloans and qualifying multi-family residential real estate loans (not morethan 90 days delinquent and having an 80% or lower loan-to-value ratio)are weighted at a 50% risk factor. Supplementary capital may include, amongother items, cumulative perpetual preferred stock, perpetual subordinated debt,mandatory convertible subordinated debt, intermediate-term preferred stock, andgeneral allowances for loan losses. The allowance for loan losses includable insupplementary capital is limited to 1.25% of risk-weighted assets. The amountof supplementary capital that can be included is limited to 100% of corecapital.

Certain exclusions fromcapital and assets are required for the purpose of calculating total capital,in addition to the adjustments required for calculating core capital. Suchexclusions consist of equity investments (as defined by regulation) and thatportion of land loans and non-residential construction loans in excess of an80% loan-to-value ratio and reciprocal holdings of qualifying capitalinstruments. However, in calculating regulatory capital, institutions mustexclude unrealized losses and gains on securities available for sale, net oftaxes, reported as a separate component of capital calculated according to U.S.generally accepted accounting principles.

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

25

----

FinancialBancorp also must submit to the Office of Thrift Supervision quarterly statusreports. The Company and Bank are in compliance with these regulatory capitalratios.

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

Under currently applicableOffice of Thrift Supervision policy, savings institutions must value securitiesavailable for sale at amortized cost for regulatory capital purposes. Thismeans that in computing regulatory capital, savings institutions should addback any unrealized losses and deduct any unrealized gains, net of incometaxes, on debt securities reported as a separate component of capitalcalculated according to U.S. generally accepted accounting principles.

At June 30, 2007,Willow Financial Bank exceeded all of its regulatory capital requirements,including capital requirements provided for with the approval of the Merger,with tangible, core and risk-based capital ratios of 8.5%, 8.5% and 14.0%,respectively.

The Office of ThriftSupervision and the Federal Deposit Insurance Corporation generally areauthorized to take enforcement action against a savings bank that fails to meetits capital requirements, which action may include restrictions on operationsand banking activities, the imposition of a capital directive, a cease-and-desistorder, civil money penalties or harsher measures such as the appointment of areceiver or conservator or a forced merger into another institution. Inaddition, under current regulatory policy, a savings bank that fails to meetits capital requirements is prohibited from paying any dividends.

**Prompt Corrective Action.****  **Under the Federal Deposit InsuranceCorporation Improvement Act of 1991, the federal banking regulators arerequired to take prompt corrective action if an insured depository institutionfails to satisfy certain minimum capital requirements, including a leveragelimit, a risk-based capital requirement, and any other measure of capitaldeemed appropriate by the federal banking regulator for measuring the capitaladequacy of an insured depository institution. All institutions, regardless oftheir capital levels, are restricted from making any capital distribution orpaying management fees if the institution would thereafter fail to satisfy theminimum levels for any of its capital requirements.

Under the Federal DepositInsurance Corporation Improvement Act an institution is deemed to be (a) “wellcapitalized” if it has total risk-based capital of 10.0% or more, has a Tier 1risk-based capital ratio of 6.0% or more, has a Tier 1 leverage capital ratioof 5.0% or more and is not subject to any order or final capital directive tomeet and maintain a specific capital level for any capital measure, (b) “adequatelycapitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratioof 4.0% or more (3.0% under certain circumstances) and does not meet thedefinition of “well capitalized,” (c) “undercapitalized” if it has a totalrisk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capitalratio that is less than 4.0% or a Tier 1 leverage capital ratio that is lessthan 4.0% (3.0% under certain circumstances), (d) “significantlyundercapitalized” if it has a total risk-based capital ratio that is less than6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1leverage capital ratio that is less than 3.0%, and (e) “criticallyundercapitalized” if it has a ratio of tangible equity to total assets that isequal to or less than 2.0%. Under specified circumstances, a federal bankingagency may reclassify a well capitalized institution as adequately capitalizedand may require an adequately capitalized institution or an undercapitalizedinstitution to comply with supervisory actions as if it were in the next lowercategory (except that the Federal Deposit 

26

----

InsuranceCorporation may not reclassify a significantly undercapitalized institution ascritically undercapitalized).

An institution generallymust file a written capital restoration plan which meets specifiedrequirements with its appropriate federal banking agency within 45 days ofthe date that the institution receives notice or is deemed to have notice thatit is undercapitalized, significantly undercapitalized or critically undercapitalized.A federal banking agency must provide the institution with written notice ofapproval or disapproval within 60 days after receiving a capitalrestoration plan, subject to extensions by the agency. An institution that isrequired to submit a capital restoration plan must concurrently submit aperformance guaranty by each company that controls the institution. Inaddition, undercapitalized institutions are subject to various regulatoryrestrictions, and the appropriate federal banking agency also may take anynumber of discretionary supervisory actions.

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

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

**Capital Distributions.****  **Office of Thrift Supervisionregulations govern capital distributions by savings institutions, which includecash dividends, stock repurchases and other transactions charged to the capitalaccount of a savings institution to make capital distributions. A savingsinstitution must file an application for Office of Thrift Supervision approvalof the capital distribution if any of the following occur or would occur as aresult of the capital distribution (1) the total capital distributions forthe applicable calendar year exceed the sum of the institution’s net income forthat year to date plus the institution’s retained net income for the precedingtwo years, (2) the institution would not be at least adequatelycapitalized following the distribution, (3) the distribution would violateany applicable statute, regulation, agreement or Office of Thrift Supervision-imposedcondition, or (4) the institution is not eligible for expedited treatmentof its filings. If the filing of an application is not required, savingsinstitutions that are a subsidiary of a holding company (as well as certainother institutions) must still file a notice with the Office of ThriftSupervision at least 30 days before the board of directors declares adividend or approves a capital distribution.

**Branching by FederalSavings Institutions.****  **Officeof Thrift Supervision policy permits interstate branching to the full extentpermitted by statute (which is essentially unlimited). Generally, federal lawprohibits federal savings institutions from establishing, retaining oroperating a branch outside the state in which the federal institution has itshome office unless the institution meets the IRS’ domestic building and loantest (generally, 60% of a thrift’s assets must be housing-related) (“IRSTest”). The IRS Test requirement does not apply if: (a) the branch(es)result(s) from an emergency acquisition of a troubled savings institution(however, if the troubled savings institution is acquired by a bank holdingcompany, does not have its home office in the state of the bank holding companybank subsidiary and does not qualify under the IRS Test, its branching islimited to the branching laws for state-chartered banks in the statewhere the savings institution is located); (b) the law of the state wherethe branch would be located would permit the branch to be established if thefederal savings institution were chartered by the state in which its homeoffice is located; or (c) the branch was operated lawfully as a branchunder state law prior to the savings institution’s reorganization to a federalcharter.

Furthermore, the Office ofThrift Supervision will evaluate a branching applicant’s record of compliancewith the Community Reinvestment Act of 1977. An unsatisfactory CommunityReinvestment Act record may be the basis for denial of a branching application.

27

----

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

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

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

**Federal Home Loan BankSystem.****  **WillowFinancial Bank is a member of the Federal Home Loan Bank of Pittsburgh, whichis one of 12 regional Federal Home Loan Banks that administer the homefinancing credit function of savings institutions. Each Federal Home Loan Bankserves as a reserve or central bank for its members within its assigned region.It is funded primarily from proceeds derived from the sale of consolidatedobligations of the Federal Home Loan Bank System. It makes loans to members(i.e., advances) in accordance with policies and procedures established by itsboard of directors. At June 30, 2007, Willow Financial Bank had$190.1 million of Federal Home Loan Bank advances.

As amember, Willow Financial Bank is required to purchase and maintain stock in theFederal Home Loan Bank of Pittsburgh in an amount equal to at least 1% of itsaggregate unpaid residential mortgage 

28

----

loans, home purchase contracts or similar obligationsat the beginning of each year or 5% of the members’ aggregate amount ofoutstanding advances and 0.7% of the members’ unused borrowing capacity. At June 30,2007, Willow Financial Bank had $11.4 million in stock of the Federal HomeLoan Bank of Pittsburgh, which was in compliance with this requirement.

TheFederal Home Loan Banks are required to provide funds for the resolution oftroubled savings institutions and to contribute to affordable housing programsthrough direct loans or interest subsidies on advances targeted for communityinvestment and low- and moderate-income housing projects. Thesecontributions have adversely affected the level of Federal Home Loan Bankdividends paid and could continue to do so in the future and could also resultin the Federal Home Loan Banks imposing higher interest rates on advances tomembers. These contributions also could have an adverse effect on the value ofFederal Home Loan Bank stock in the future.

**Federal Reserve System.****  **Federal Reserve Board regulationsrequire all depository institutions to maintain non-interest earning reservesagainst their transaction accounts (primarily NOW and Super NOW checkingaccounts) and non-personal time deposits. At June 30, 2007, WillowFinancial Bank was in compliance with these reserve requirements. The balancesmaintained to meet the reserve requirements imposed by the Federal Reserve Boardmay be used to satisfy liquidity requirements that may be imposed by the Officeof Thrift Supervision.

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

**Affiliate Restrictions.****  **Section 11 of the Home Owners’Loan Act provides that transactions between an insured subsidiary of a holdingcompany and an affiliate thereof will be subject to the restrictions that applyto transactions between banks that are members of the Federal Reserve Systemand their affiliates pursuant to Sections 23A and 23B of the Federal ReserveAct.

Generally,Section 23A and Office of Thrift Supervision regulations issued inconnection therewith limit the extent to which a savings institution or itssubsidiaries may engage in certain “covered transactions” with affiliates to anamount equal to 10% of the institution’s capital and surplus, in the case ofcovered transactions with any one affiliate, and to an amount equal to 20% ofsuch capital and surplus, in the case of covered transactions with allaffiliates. Section 23B applies to “covered transactions” and certainother transactions and requires that all such transactions be on terms andunder circumstances that are substantially the same, or at least as favorableto the savings institution or its subsidiary, as those prevailing at the time forcomparable transactions with nonaffiliated companies. A “covered transaction”is defined to include a loan or extension of credit to an affiliate; a purchaseof investment securities issued by an affiliate; a purchase of assets from anaffiliate, with certain exceptions; the acceptance of securities issued by anaffiliate as collateral for a loan or extension of credit to any party; or theissuance of a guarantee, acceptance or letter of credit on behalf of anaffiliate. Section 23B transactions also apply to the provision ofservices and the sale of assets by a savings association to an affiliate.

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

29

----

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

**Federal SecuritiesLaw**

The Company’s common stockis registered with the SEC under the Securities Exchange Act of 1934, asamended. It is therefore subject to the information, proxy solicitation,insider trading restrictions and other requirements of the Securities ExchangeAct of 1934, as amended.

**Sarbanes-OxleyAct of 2002**

On July 30, 2002, the President signed into lawthe Sarbanes-Oxley Act of 2002 implementing legislative reforms intendedto address corporate and accounting fraud. In addition to the establishment ofa new accounting oversight board which enforces auditing, quality control andindependence standards and is funded by fees from all publicly traded companies,the Sarbanes-Oxley Act restricts provision of both auditing andconsulting services by accounting firms. To ensure auditor independence, anynon-audit services being provided require pre-approval by the Company’s auditcommittee. In addition, the audit partners must be rotated. The Sarbanes-OxleyAct requires chief executive officers and chief financial officers, or theirequivalent, to certify to the accuracy of periodic reports filed with the SEC,subject to civil and criminal penalties if they knowingly or willfully violatethis certification requirement. In addition, under the Sarbanes-OxleyAct, counsel will be required to report evidence of a material violation of thesecurities laws or a breach of fiduciary duty by a company to its chiefexecutive officer or its chief legal officer, and, if such officer does notappropriately respond, to report such evidence to the audit committee or othersimilar committee of the board of directors or the board itself.

Longer prison terms will also be applied to corporateexecutives who violate federal securities laws, the period during which certaintypes of suits can be brought against a company or its officers has beenextended, and bonuses issued to top executives prior to restatement of acompany’s financial statements are subject to disgorgement if such restatementwas due to corporate misconduct. Executives are also prohibited from insidertrading during retirement plan “blackout” periods, and loans to companyexecutives are restricted. In addition, a provision directs that civilpenalties levied by the SEC as a result of any judicial or administrativeaction under the Act be deposited to a fund for the benefit of harmedinvestors. The Federal Accounts for Investor Restitution (“FAIR”) provisionalso requires the SEC to develop methods of improving collection rates. Thelegislation accelerated the time frame for disclosures by public companies, asthey must immediately disclose any material changes in their financialcondition or operations. Directors and executive officers must also provideinformation for most changes in ownership in a company’s securities within twobusiness days of the change.

The Sarbanes-OxleyAct increased the oversight of, and codified certain requirements relating toaudit committees of public companies and how they interact with the Company’s “registeredpublic accounting firm” (“RPAF”). Audit committee members must be independentand are barred from accepting consulting, advisory or other compensatory feesfrom the issuer. In addition, companies must disclose whether at least onemember of the committee is a “financial expert” (as such term is defined by theSEC) and if not, why not. Under the Sarbanes-Oxley Act, a RPAF isprohibited from performing statutorily mandated audit services for a company ifsuch company’s chief executive officer, chief financial officer, comptroller,chief accounting officer or any person serving in equivalent positions has beenemployed by such firm and participated in the audit of such company during theone-year period preceding the audit initiation date. The Sarbanes-OxleyAct also prohibits any officer or director of a company or any 

30

----

otherperson acting under their direction from taking any action to fraudulentlyinfluence, coerce, manipulate or mislead any independent public or certifiedaccountant engaged in the audit of a company’s financial statements for thepurpose of rendering the financial statement’s materially misleading. TheSarbanes-Oxley Act also required the SEC to prescribe rules requiringinclusion of an internal control report and assessment by management in theannual report to shareholders, which became effective for the Company for thefiscal year ended June 30, 2005. The Sarbanes-Oxley Act requires theRPAF that issues the audit report to attest to and report on management’sassessment of the company’s internal controls. In addition, the Sarbanes-OxleyAct requires that each financial report required to be prepared in accordancewith (or reconciled to) U.S. generally accepted accounting principles and filedwith the SEC reflect all material correcting adjustments that are identified bya RPAF in accordance with U.S. generally accepted accounting principles and therules and regulations of the SEC.

**Regulation of WIS**

**General**

As noted above, while WIS is no longer a subsidiary ofthe Company, it operates as a business segment of the Company, and its resultscontinue to be included in the Company’s consolidated financial statements. WISis subject to regulation by a number of federal regulatory agencies that arecharged with safeguarding the integrity of the securities and other financialmarkets and with protecting the interests of customers participating in thosemarkets. The SEC is the federal agency that is primarily responsible for the regulationof broker-dealers and investment advisers doing business in the UnitedStates. The Federal Reserve Board promulgates regulations applicable tosecurities credit transactions involving broker-dealers and certain otherinstitutions. Much of the regulation of broker-dealers, however, has beendelegated to self-regulatory organizations (“SROs”), principally the NASD (andits subsidiaries NASD Regulation, Inc.), and the other national securitiesexchanges. These SROs, which are subject to oversight by the SEC, adopt rules (whichare subject to approval by the SEC) that govern the industry, monitor dailyactivity and conduct periodic examinations of member broker-dealers.

WIS is also subject to the Uniting and StrengtheningAmerica by Providing Appropriate Tools Required to Intercept and ObstructTerrorism Act of 2001 (the “USA Patriot Act’), signed into law on October 26,2001. The USA Patriot Act requires financial institutions to adopt andimplement policies and procedures designed to prevent and defeat moneylaundering. WIS believes it is in compliance with the USA Patriot Act.

Securities firms are also subject to regulation bystate securities commissions in the states in which they are required to beregistered. WIS is registered as a broker-dealer with the SEC and in all50 states and in the District of Columbia, and is a member of, and subject toregulation by, a number of SROs, including the NASD.

As a result of federal and state registration and SROmemberships, WIS is subject to overlapping schemes of regulation that cover allaspects of its securities business. Such regulations cover matters includingcapital requirements, uses and safe-keeping of clients’ funds, conduct ofdirectors, officers and employees, record-keeping and reportingrequirements, supervisory and organizational procedures intended to assurecompliance with securities laws and to prevent improper trading on materialnonpublic information, employee-related matters, including qualificationand licensing of supervisory and sales personnel, limitations on extensions ofcredit in securities transactions, clearance and settlement procedures,requirements for the registration, underwriting, sale and distribution ofsecurities, and rules of the SROs designed to promote high standards of commercialhonor and just and equitable principles of trade. A particular focus of theapplicable regulations concerns the relationship between broker-dealersand their customers. As a result, the many aspects of the broker-dealercustomer relationship are subject to regulation including, in some instances, “suitability”determinations as to certain customer transactions, 

31

----

limitations on the amountsthat may be charged to customers, timing of proprietary trading in relation tocustomers’ trades and disclosures to customers.

WIS also is subject to “Risk Assessment Rules” imposedby the SEC which require, among other things, that certain broker-dealersmaintain and preserve certain information, describe risk management policiesand procedures and report on the financial condition of certain affiliateswhose financial and securities activities are reasonably likely to have amaterial impact on the financial and operational condition of the broker-dealers.Certain “Material Associated Persons” (as defined in the Risk Assessment Rules)of the broker-dealers and the activities conducted by such MaterialAssociated Persons may also be subject to regulation by the SEC.

WIS is registered as an investment adviser with theSEC. As an investment adviser registered with the SEC, it is subject to therequirements of the Investment Advisers Act of 1940 and the SEC’s regulationsthereunder, as well as certain state securities laws and regulations. Suchrequirements relate to, among other things, limitations on the ability of an investmentadviser to charge performance-based or non-refundable fees to clients,record-keeping and reporting requirements, disclosure requirements,limitations on principal transactions between an adviser or its affiliates andadvisory clients, as well as general anti-fraud prohibitions. The statesecurities law requirements applicable to registered investment advisers are incertain cases more comprehensive than those imposed under the federalsecurities laws.

In the event ofnon-compliance with an applicable regulation, governmental regulators and theNASD may institute administrative or judicial proceedings that may result incensure, fine, civil penalties (including treble damages in the case of insidertrading violations), the issuance of cease-and-desist orders, thederegistration or suspension of the non-compliant broker-dealer orinvestment adviser, the suspension or disqualification of the broker-dealer’sofficers or employees or other adverse consequences. With the sale of PCIS toUvest, Uvest is now responsible for any such penalties or orders imposed on WISsubsequent to effective date of the sale, which was February 28, 2006.

**TAXATION**

**Federal Taxation**

**General.****  **The Company is subject to federalincome taxation in the same general manner as other corporations with someexceptions listed below. The following discussion of federal taxation is onlyintended to summarize certain pertinent federal income tax matters and is not acomprehensive description of the applicable tax rules. Tax years 2004, 2005 and2006 are open under the statute of limitations and subject to review by theInternal Revenue Service.

The Company files a consolidated federal income taxreturn, which includes the Bank. Accordingly, it is anticipated that any cashdistributions made by it would be treated as cash dividends, and not as a non-taxablereturn of capital to stockholders for federal and state tax purposes.

**Methodof Accounting.****  **Forfederal income tax purposes, income and expenses are reported on the accrualmethod of accounting and the Company files its federal income tax return usinga June 30 fiscal year end.

**BadDebt Reserves.****  **TheSmall Business Job Protection Act of 1996 (the “1996 Act”) eliminated the useof the reserve method of accounting for bad debt reserves by savingsinstitutions, effective for taxable years beginning after 1995. Prior to the1996 Act, the Bank was permitted to establish a reserve for bad debts and to makeadditions to the reserve. These additions could, within specified formulalimits, be deducted in arriving at taxable income. As a result of the 1996 Act,savings associations must use the specific charge-off method in computing theirbad debt deduction beginning with their 1996 federal tax return. In addition,federal legislation requires the recapture (over a six year period) of theexcess of tax 

32

----

bad debt reserves at December 31,1995 over those established as of December 31, 1987. The Bank has no excessreserves subject to recapture as of June 30, 2007.

**TaxableDistributions and Recapture.****  **Prior to the 1996 Act, bad debt reserves created priorto January 1, 1988 were subject to recapture into taxable income if theBank failed to meet certain thrift asset and definitional tests. New federallegislation eliminated these thrift related recapture rules. However, undercurrent law, pre-1988 reserves remain subject to recapture should theBank make certain non-dividend distributions or ceases to maintain a bankcharter.

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

**MinimumTax.****  **TheCode imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base ofregular taxable income plus certain tax preferences (“alternative minimumtaxable income” or “AMTI”). The AMT is payable to the extent such AMTI is inexcess of regular income tax. Net operating losses can offset no more than 90%of AMTI. Certain payments of alternative minimum tax may be used as creditsagainst regular tax liabilities in future years. The Company has not beensubject to the AMT nor does it have any such amounts available as credits forcarryover.

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

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

**State and LocalTaxation**

**PennsylvaniaTaxation.****  **WillowFinancial Bancorp is subject to the Pennsylvania Corporate Net Income Tax andCapital Stock and Franchise Tax. The Corporation Net Income Tax rate for fiscal2007 is 9.99% and is imposed on the Company’s unconsolidated taxable income forfederal purposes with certain adjustments. In general, the Capital Stock Tax isa property tax imposed at the rate of approximately 0.489% of a corporation’scapital stock value, which is determined in accordance with a fixed formulabased upon average net income and net worth.

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

33

----

**Subsidiaries**

As of June 30, 2007, the Company’s sole directsubsidiary was Willow Financial Bank. At such date, Willow Financial Bank hadfour direct subsidiaries, including Willow Grove Investment Corporation, aDelaware corporation which holds and manages certain securities investments,and Willow Grove Insurance Agency, LLC, a Pennsylvania limited liabilitycompany formed to conduct permitted fixed-rate annuity sales. As of June 30,2007, Willow Financial Bank’s aggregate investment in these two subsidiarieswas $282.9 million. As a result of the Merger on August 31, 2005,D&S Service Corporation (“D&S Service”) and First Financial Investments(“FFI”), which previously were subsidiaries of Chester Valley, are nowoperating as active subsidiaries of Willow Financial Bank. D&S Service hasparticipated in the development for sale of residential properties, inparticular condominium conversions, and development of commercial propertieslocated in or within close proximity of Chester Valley’s market area and FFIconducts retail investment service activities. D&S Service also operatestwo wholly owned subsidiaries, Wildman Projects and D&F Projects, Inc.As of June 30, 2007, the Bank had $1.7 million invested in D&SService and its subsidiaries.

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

**Item 1A.**                RiskFactors

***The Company’soperations are subject to interest rate risk and variations in interest ratesmay negatively affect financial performance.***

Our earnings andcash flows are largely dependent upon our net interest income. Net interestincome is the difference between interest income earned on interest-earningassets such as loans and securities and interest expense paid oninterest-bearing liabilities such as deposits and borrowed money. Changes in thegeneral level of interest rates may have an adverse effect on our business,financial condition and result of operations. Interest rates are highlysensitive to many factors that are beyond our control, including generaleconomic conditions and policies of various governmental and regulatoryagencies and, in particular, the Federal Reserve Board. Changes in monetarypolicy, including changes in interest rates, influence the amount of interestincome that the Bank receives on loans and securities and the amount ofinterest that the Bank pays on deposits and borrowings. Changes in monetarypolicy and interest rates also can adversely affect:

·       ourability to originate loans and obtain deposits;

·       thefair value of our financial assets and liabilities; and

·       theaverage duration of our securities portfolio.

34

----

If the interest rates paidon deposits and other borrowings increase at a faster rate than the interestrates received on loans and other investments, our net interest income, andtherefore earnings, could be adversely affected. Earnings could also beadversely affected if the interest rates received on loans and otherinvestments fall more quickly than the interest rates paid on deposits andother borrowings. The Company measure interest rate risk under various ratescenarios using specific criteria and assumptions. A summary of thisprocess, along with the results of our net portfolio value simulations and gapanalysis is presented within “Quantitative and Qualitative Disclosures AboutMarket Risk” in Item 7A of this Annual Report on Form 10-K.

***The Company may be unable to successfully implementits business strategy.***

In recent years, ourbusiness plan has focused on the goals of changing the Bank’s operations to afull-service community bank model, growing our franchise and maintaining a highlevel of asset quality. Our acquisition of Chester Valley Bancorp in August 2005significantly advanced our progress in achieving our goals relative to changingthe Bank to a full-service community bank and growing our franchise. TheComapny expects to continue to build and “fill-in” our existing Bank branchnetwork through acquisitions, if prudently available, and additional de novobranch offices. No assurance can be given that the Company will ultimatelysucceed in our business plan. Our efforts will depend upon, among otherfactors, (i) our ability to retain and grow our existing base of depositsin an efficient manner, (ii) maintaining and expanding our commercial andconsumer banking relationships in order to grow our loan portfolio, (iii) attractingand retaining experienced commercial lenders and managerial employees, (iv) maintainingan efficient cost structure for our operations, (v) maintaining assetquality and (vi) effectively expanding our branch network in southeasternPennsylvania. The failure to achieve any of these factors could limit theimplementations of our businesses strongly and adversely affect our financialcondition and results of operations.

***The Company issubject to lending risk and could suffer losses in our loan portfolio despiteits underwriting practices.***

There are inherent risksassociated with the Company’s lending activities. There are risks inherent inmaking any loan, including those related to dealing with individual borrowers,nonpayment, uncertainties as to the future value of collateral and changes ineconomic and industry conditions. The Company attempts to closely manage itscredit risk through loan underwriting and application approval procedures,monitoring of large loan relationship and periodic independent reviews ofoutstanding loans by our lending department and third party loan reviewspecialists. The Company cannot assure that such approval and monitoringprocedures will reduce these credit risks.

***The Company’s loanportfolio includes commercial and multi-family real estate, commercial businessand construction loans, which generally have a higher degree of risk of lossthan single-family residential loans.***

As of June 30, 2007,approximately 39.1% of the Company’s total loan portfolio consisted ofcommercial real estate and multi-family real estate loans and constructionloans. In addition, 8.4% of the Company’s loan portfolio at June 30, 2007consisted of commercial business loans. The Company is focused on increasingthese types of loans in the future. These types of loans involve increasedrisks because the borrower’s ability to repay the loan typically depends on thesuccessful operation of the business or the property securing the loan.Additionally, these loans are made to small or middle-market business customerswho may be more vulnerable to economic conditions and who may not haveexperienced a complete business or economic cycle. These types of loans arealso typically larger than single-family residential mortgage loans or consumerloans. Furthermore, since these types of loans frequently have relatively largebalances, the deterioration of one or more of these loans could cause asignificant increase in non-performing loans and or non-performing assets. Anincrease in non-performing 

35

----

loanswould result in a reduction in interest income recognized on loans. An increasein non-performing loans also could require us to increase the provision forlosses on loans and increase loan charge-offs, both of which would reduce our netincome. All of these could have a material adverse effect on the Company’sfinancial condition and results of operations.

***Adverse economicand business conditions in our primary market area could cause an increase inloan delinquencies and non-performing assets which could adversely affect theCompany’s financial condition and results of operations.***

The substantial majorityof our real estate loans are secured by properties located in Bucks, Montgomeryand Chester Counties, Pennsylvania, and Philadelphia and its suburbs insoutheastern Pennsylvania, central and southern New Jersey and Delaware. TheCompany’s results of operations and financial condition may be adverselyaffected by changes in prevailing economic conditions, particularly in thePhiladelphia metropolitan area, including decreases in real estate values,adverse local employment conditions, and other significant local events. Anydeterioration in the local economy could result in borrowers not being able torepay their loans, the value of the collateral securing the Company’s loans toborrowers declining and the quality of the loan portfolio deteriorating. Thiscould result in an increase in delinquencies and non-performing assets orrequire the Company to record loan charge-offs and/or increase the Company’sprovisions for loan losses, which would reduce the Company’s earnings.

***The Company’s allowance for losses on loans may beinsufficient to cover actual losses on loans.***

The Company maintains anallowance for losses on loans at a level believed adequate by us to absorbcredit losses inherent in the loan portfolio. The allowance for losses on loansis a reserve established through a provision for losses on loans charged toexpense that represents our estimate of probable incurred losses within theloan portfolio at each statement of condition date and is based on the reviewof available and relevant information. The level of the allowance for losses onloans reflects, among other things, our consideration of the Company’shistorical experience, levels of and trends in delinquencies, the amount ofclassified assets, the volume and type of lending, and current and anticipatedeconomic conditions, especially as they relate to the Company’s primary marketarea. The determination of the appropriate level of the allowance for losses onloans inherently involves a high degree of subjectivity and requires us to makesignificant estimates of current credit risks and future trends. Our allowancefor loan losses may be insufficient to cover actual losses experienced onloans. Changes in economic conditions affecting borrowers, new informationregarding existing loans, identification of additional problem loans and otherfactors, both within and outside of our control, may require an increase in theallowance for losses on loans. In addition, bank regulatory agenciesperiodically review our allowance for losses on loans and may require anincrease in the provision for losses on loans or the recognition of furtherloan charge offs, based on judgments different from ours. Also, if charge offsin future periods exceed the allowance for losses on loans, the Company willneed additional provisions to increase our allowance for losses on loans. Anyincreases in the allowance for losses on loans will result in a decrease in netincome and possibly capital, and may have a material adverse effect on ourfinancial condition and results of operations.

***The Companyoperates in a highly competitive industry and market area with other financialinstitutions offering products and services similar to those the Companyoffers.***

The Company competes withsavings associations, national banks, regional banks and other community banksin making loans, attracting deposits and recruiting and retaining talentedemployees, many of which have greater financial and technical resources thanus. The Company also competes with securities and brokerage companies, mortgagecompanies, insurance companies, finance companies, money market mutual funds,credit unions and other non-bank financial service providers. Many of thesecompetitors are not subject to the same regulatory restrictions to which theCompany is subject, yet are 

36

----

able toprovide customers with a feasible alternative to traditional banking services.The competition in our market for making commercial and construction loans hasresulted in more competitive pricing as well as intense competition for skilledcommercial lending officers. These trends could have a material adverse effecton our ability to grow (irrespective of the limitations imposed by thesupervisory agreements) and remain profitable. In addition, if the Companyexperiences an inability to recruit and retain skilled commercial lendingofficers, including experienced construction lenders, it could pose asignificant barrier to retaining and growing our customer base. The competitionin our market for attracting deposits also has resulted in more competitivepricing.

***The Company depends on the skills and performance ofmanagement.***

The Company depends heavily on its management team toprovide leadership and to implement its strategic plan. The Company’s seniormanagement team provides valuable financial expertise and administrativeguidance. The loss of any member of our senior management team could impair theCompany’s ability to succeed. The Company can give no assurances, however, thatthese executive officers will continue in their capacities for any specificperiods of time. The loss of services of any member of the Company’s seniormanagement team may make it difficult for the Company to implement our businessstrategy and obtain and retain customers. In addition, if any of the Company’sexecutive officers decides to leave, it may be difficult to replace him or her,and the Company would lose the benefit of the knowledge he or she gained duringhis or her tenure.

The Company’s futuresuccess depends largely on its ability to identify, attract, hire, train,retain and motivate other highly skilled technical, managerial, lending andprofessional personnel. Competition for such employees is intense and there isa risk that the Company will not be able to successfully attract, assimilate orretain sufficiently qualified personnel. If the Company fails to attract andretain the necessary technical, managerial, sales and marketing, customerservice personnel and experienced professionals, its ability to successfullyimplement its business strategy as well as the Company’s results of operationsand financial condition could be adversely affected.

***The Company issubject to extensive government regulation and supervision which couldadversely affect its operations.***

The Company is subject toextensive federal and state regulations and supervision. Banking regulationsare primarily intended to protect depositors’ funds, federal deposit insurancefunds and the banking system as a whole, not stockholders. These regulationsaffect the Company’s lending practices, capital structure, investmentpractices, dividend policy and growth, among other things. Congress and federalagencies continually review banking laws, regulations and policies for possiblechanges. Changes to statutes, regulations or regulatory policies, includingchanges in interpretation or implementation of statutes, regulations orpolicies, could affect the Company in substantial and unpredictable ways. Suchchanges could subject the Company to additional costs, limit the types offinancial services and products the Company may offer and/or increase theability of non-banks to offer competing financial services and products, amongother things. Failure to comply with law, regulations or policies could resultin sanctions by regulatory agencies, civil money penalties and/or reputationdamage, which could have a material adverse effect on the Company’s business,financial condition and results of operations.

***The Company’s management identified material weaknessesin its internal control over financial reporting.***

As required by Section 404of the Sarbanes-Oxley Act of 2002, the Company’s management has conducted anassessment of the Company’s internal control over financial reporting. Thisassessment resulted in the identification of certain significant deficienciesthat, in the aggregate, represent a material weakness in the Company’s internalcontrol over financial reporting. Consequently, the Company’s management hasconcluded that the Corporation’s internal control over financial reporting wasnot 

37

----

effectiveas of June 30, 2007. A description of these items is included in Part II,Item 9A. “Controls and Procedures.” A material weakness is a significantdeficiency, or combination of significant deficiencies, that results in morethan a remote likelihood that a material misstatement of the Company’s annualor interim financial statements will not be prevented or detected. The netimpact of the deficiencies identified was to reduce net income and dilutedearnings per share by $917 thousand and $0.06, respectively, from theamounts previously reported by the Company in its press release dated August 8,2007 which was included as an exhibit to the Company’s Current Report on Form8-K as filed with the SEC on August 9, 2007 (File No. 0-49706). Inaddition, the Company has revised its net income, earnings per share and otherdata for each of the first three quarters in fiscal 2007 from previouslyreported amounts. See “Selected Quarterly Financial Data” at page 59. TheCompany’s management has developed appropriate remediation steps to correct thedeficiencies which were identified. The Company cannot be certain itsremediation effects will ensure that the Company’s management designs,implements and maintains adequate controls over the Company’s financialprocesses and reporting in the future or will be sufficient to address and eliminatethe material weakness identified. The Company’s inability to remedy theidentified material weaknesses or any additional deficiencies or materialweaknesses that may be identified in the future could, among other things,cause the Company to fail to file its periodic reports with the SEC in a timelymanner or require it to incur additional costs or to divert managementresources. Due to its inherent limitations, even effective internal controlover financial reporting can provide only reasonable assurance with respectfinancial statement preparation and presentations. These limitations may notprevent or detect all misstatements or fraud, regardless of theireffectiveness. In addition, the management has also performed an evaluation ofthe effectiveness of the Company’s disclosure controls and procedures. Based onthis evaluation and the identification of the material weakness in its internalcontrol over financial reporting, the Company’s management has concluded thatthe Company’s disclosure controls and procedures were not effective as of June 30,2007. See Item 9A. “Controls and Procedures” located in Part II ofthis report for further discussion regarding the Company’s disclosure controlsand procedures and internal controls.

**Item 1B.**               UnresolvedStaff Comments

Not applicable.

38

----

**Item 2.**                        Properties

As of June 30,2007, the Company and the Bank operated from the following locations:

| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                       | ** ** | **At June 30, 2007**  | ** ** |
|----------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                                                                 | ** ** | **Owned or   Leased** | ** ** | **Lease   expiration date** | ** ** | **Net book   value**            | ** ** | **Deposits** | ** ** |
| ** **                                                                 | ** ** | ** **                 | ** ** | ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| *Executive office and branch office*:                                      |       |                       |       |                             |       |                                 |       |   |   |   |   |   |   |
| 170 South Warner Road  Wayne, PA 19087                                     |       |                       | Leased     |                             |       | December 2015                   |       |   | $ | 979 |   |   | $ | 76,903 |   |
| *Former operations center*:                                                |       |                       |       |                             |       |                                 |       |   |   |   |   |   |   |
| 101 Witmer Road  Horsham, PA 19044-2200                                    |       |                       | Leased     |                             |       | December 2008                   |       |   | n/a |   |   | n/a |   |
| *Branch offices*:                                                          |       |                       |       |                             |       |                                 |       |   |   |   |   |   |   |
| Welsh and Norristown  Roads  Maple Glen, PA 19002-8030                     |       |                       | Leased     |                             |       | January 2026                    |       |   | 286 |   |   | 115,927 |   |
| 1555 W. Street Road  Warminster, PA 18974-3103                             |       |                       | Leased     |                             |       | December 2010                   |       |   | 17 |   |   | 34,089 |   |
| 1141 Ivyland Road  Warminster, PA 18974-2048                               |       |                       | Leased     |                             |       | June 2009                       |       |   | 3 |   |   | 23,231 |   |
| 9 Easton Road  Willow Grove, PA 19090-0905                                 |       |                       | Owned      |                             |       | n/a                                  |       |   | 748 |   |   | 93,259 |   |
| 701 Twining Road  Dresher, PA 19025-1894                                   |       |                       | Leased     |                             |       | January 2026                    |       |   | 16 |   |   | 57,661 |   |
| 761 Huntingdon Pike  Huntingdon Valley, PA 19006-8399                      |       |                       | Leased     |                             |       | January 2026                    |       |   | 10 |   |   | 49,271 |   |
| 2 N. York Road  Hatboro, PA 19040-3201                                     |       |                       | Leased     |                             |       | September 2007                  |       |   | 5 |   |   | 30,647 |   |
| 1331 Easton Road  Roslyn, PA 19001-2426                                    |       |                       | Leased     |                             |       | December 2008                   |       |   | 17 |   |   | 12,691 |   |
| 11730 Bustleton Avenue  Philadelphia, PA 19116-2516                        |       |                       | Leased     |                             |       | February 2014                   |       |   | 13 |   |   | 34,609 |   |
| 122 N. Main Street  North Wales, PA 19454-3115                             |       |                       | Leased     |                             |       | February 2010                   |       |   | 38 |   |   | 11,889 |   |
| 8200 Castor Avenue  Philadelphia, PA 19152-2719                            |       |                       | Leased     |                             |       | December 2009                   |       |   | 55 |   |   | 21,461 |   |
| 735 Davisville Road  Southampton, PA 18966-3276                            |       |                       | Leased     |                             |       | May 2011                        |       |   | 118 |   |   | 16,236 |   |
| 1452 Buck Road  C-8 Village Shires Center  Holland, PA 18966-2626          |       |                       | Leased     |                             |       | September 2007                  |       |   | 9 |   |   | 10,309 |   |
| 9869 Bustleton Avenue  Belair Shopping Center  Philadelphia, PA 19115-2611 |       |                       | Leased     |                             |       | July 2012                       |       |   | 157 |   |   | 12,490 |   |
| 102 Airport Road  Airport Village Shopping Center  Coatesville, PA 19320   |       |                       | Owned      |                             |       | n/a                                  |       |   | 210 |   |   | 29,861 |   |
|                                                                            |            |                            |            |                                  |            |                                      |            |  |  |  |  |  |  |  |  |

39

----

 

| 119 Pennsylvania Avenue  Avondale, PA 19311                                           |   |   | Owned  |   |   | n/a                 |   |   | $      | 462    |   |   | $      | 9,746     |   |
|---------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|---------------------|--------|--------|--------|--------|--------|--------|--------|-----------|--------|
| 82 Quarry Road  Brandywine Square Shopping Center  Downingtown, PA 19335              |   |   | Leased |   |   | August 2011    |   |   | 49     |   |   | 35,314 |   |
| 112 East Lincoln Highway  Coatesville, PA 19320(1)                                    |   |   | Leased |   |   | January 2026   |   |   | 8      |   |   | 32,825 |   |
| 414 Lancaster Avenue  Devon, PA 19333                                                 |   |   | Leased |   |   | January 2026   |   |   | 7      |   |   | 22,199 |   |
| 100 East Lancaster  Avenue  Downingtown, PA 19335                                     |   |   | Leased |   |   | January 2026   |   |   | 61     |   |   | 64,372 |   |
| 300 Simpson Drive  Chester Springs, PA 19425                                          |   |   | Leased |   |   | January 2018   |   |   | 56     |   |   | 13,166 |   |
| 601 North Pottstown Pike  Exton, PA 19341                                             |   |   | Leased |   |   | January 2026   |   |   | 18     |   |   | 63,418 |   |
| 200 West Lancaster  Avenue  Frazer, PA 19355                                          |   |   | Leased |   |   | January 2026   |   |   | 64     |   |   | 46,895 |   |
| 838 East Baltimore Pike  Marlborough Square Shopping Center   Kennet Square, PA 19348 |   |   | Owned  |   |   | n/a                 |   |   | 530    |   |   | 24,848 |   |
| 3909 Lincoln Highway  Caln Village Shopping Center  Downingtown, PA 19335             |   |   | Leased |   |   | September 2007 |   |   | 27     |   |   | 47,441 |   |
| 16 East Market Street  West Chester, PA 19382                                         |   |   | Leased |   |   | September 2007 |   |   | n/a    |   |   | 16,951 |   |
| 1197 Wilmington Pike  Westtown Village Shopping Center  West Chester, PA 19382        |   |   | Leased |   |   | November 2009  |   |   | 82     |   |   | 75,061 |   |
| 220 E. Street Rd  Feasterville, PA 19053                                              |   |   | Leased |   |   | January 2022   |   |   | 450    |   |   | 10,285 |   |
| *WIS office*:                                                                         |   |   |   |   |   |                |   |   |   |   |   |   |   |
| One Liberty Place,  Suite 3050  Philadelphia, PA 19103                           |   |   | Leased |   |   | May 2009       |   |   | n/a    |   |   | n/a    |   |
| Total                                                                                 |   |   |   |   |   |                |   |   | $      | 4,495  |   |   | $      | 1,093,055 |   |

----

(1)          TheCompany owns an adjacent building with a current book value of $0 and iscurrently subject to an Agreement of Sale.

(2)   The Companyhas executed a lease for an additional branch location in Oxford, PA, which openedin September 2008.

**Item 3.**                        LegalProceedings

As previously described inthe company’s prospectus/joint proxy statement dated April 27, 2005 andincluded in its registration statement on Form S-4 (file No. 333-123622)filed in connection with the Merger, FFB previously received a subpoena fromthe Regional Municipal Securities Counsel in the Philadelphia Office of theSecurities and Exchange Commission (the “SEC”). The subpoena arose out of a 

40

----

non-publicSEC investigation titled “Hummelstown General Authority,” which Authorityissued non-rated revenue bonds now in default, underwritten by the firm of aformer director of Chester Valley and FFB. The SEC subpoena requested theproduction of certain documents concerning FFB’s involvement with non-ratedmunicipal securities, including those issued to finance the Whitetail GolfCourse by the Dauphin County General Authority and the Hummelstown GeneralAuthority, through the former director’s firm, and related matters. FFBpreviously produced documents to the SEC and certain officers of FFB providedtestimony to the SEC in response to the SEC’s voluntary request for assistancein this matter. On August 3, 2006, the SEC filed a complaint in federalcourt against the former director, his wife, and the former director’s firm.The Bank is not named as a defendant in the complaint filed by the SEC.

FFB is a 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 on November 9,2005, asserting the following claims against FFB: Breach of Trust Indenture andFiduciary Duties (Count 1), Breach of Fiduciary Duties (Count 2), CivilConspiracy (Count 3), and Concerted Action (Count 4). On September 19,2005, Red Lion Area School District (“Red Lion”) filed a complaint in the Courtof Common Pleas, York County, Pennsylvania, against*inter alia*, FFB.*RedLion Area School District v. Bradbury et. al.*, No. 2005­SU­1656­Y01;No. 2005­SU­2544­Y01. This case has been transferred to the Court ofCommon Pleas of Montgomery County, Pennsylvania, and an amended complaint wasfiled on October 18, 2006. The amended complaint asserts the followingclaims against FFB: Declaratory Judgment (Count 15), Breach of Trust Indenture(Count 16), Civil Conspiracy (Count 17), Civil Conspiracy—Alternative LegalBasis (Count 18), Breach of Common Law Duties as Trustee (Count 19), TortiousAction in Concert/Aiding and Abetting Fraud (Count 20), Breach of TrustIndenture (Count 21), Breach of Fiduciary Duties (Count 22), Vicarious Liabilityand Respondeat Superior (Count 23), Unjust Enrichment (Count 24), and UnjustEnrichment (Count 25). On March 16, 2006, Perkiomen Valley School District(“Perkiomen”) filed a complaint in the Court of Common Pleas, MontgomeryCounty, Pennsylvania, against,*inter alia*,FFB*Perkiomen Valley School District v.First Financial Bank et.al.*, No. 06­06533. The complaintasserts the following claims against FFB: Breach of Trust Indenture (Count 1),Breach of Fiduciary Duties (Count 2), Vicarious Liability and RespondeatSuperior (Count 3), Civil Conspiracy (Count 4), and Concert ofAction (Count 5). The actions have been consolidated for discovery andcase management purposes, but not for trial. The Bank’s answers wereprovided on September 6, 2007, with respect to the Red Lion matter, and September 10,2007, with respect to the Boyertown and Perkiomen matters. Discovery is in itsinitial stages. The Company believes the above noted lawsuits are without meritand intends to vigorously 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.

Other than the abovereferenced litigation, the Company is involved in various legal proceedingsoccurring in the ordinary course of business. Management of the Company, basedon discussions with litigation counsel, believes that such proceedings will nothave a material adverse effect on the financial condition or operations of theCompany. There can be no assurance that any of the outstanding legalproceedings to which the Company is a party will not be decided adversely tothe Company’s interests and have a material adverse effect on the financialcondition and operations of the Company.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

Not applicable

41

----

**PART II**

**Item5.**                        Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

(a)   Our common stock is traded on the NASDAQGlobal Select Market (NASDAQ) under the symbol WFBC. At September 24, 2007there were 2,503 registered shareholders of record, not including the number ofpersons or entities whose stock is held in nominee or “street” name throughvarious brokerage firms and banks. On January 23, 2007, the Company’sBoard of Directors authorized a 5% stock dividend which was paid on February 23,2007 to shareholders of record after the close of business on February 9,2007. The following table shows the quarterly high and low trading prices ofour stock and the amount of cash dividends declared per share for our past twofiscal years. The market prices and dividends for periods prior to February 23,2007 have been adjusted to give retroactive effect to the 5% stock dividend.

| ** **               | ** ** | **Stock Price** | ** ** | **Cash dividends** | ** ** |
|--------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **               | ** ** | **High**             | ** ** | **Low**                 | ** ** | **per share** | ** ** |
| Quarter ended:           |       |                 |       |                    |       |   |   |   |   |
| June 30, 2007       |       | $                    | 13.00      |                    | $          | 11.25 |   |   | $ | 0.115 |   |   |
| March 31, 2007      |       | 14.22                |       | 11.55                   |       |   | 0.115 |   |   |
| December 31, 2006   |       | 15.74                |       | 13.70                   |       |   | 0.115 |   |   |
| September 30, 2006  |       | 16.20                |       | 14.10                   |       |   | 0.115 |   |   |
| June 30, 2006       |       | $                    | 17.36      |                    | $          | 15.15 |   |   | $ | 0.115 |   |   |
| March 31, 2006      |       | 16.95                |       | 14.50                   |       |   | 0.115 |   |   |
| December 31, 2005   |       | 15.22                |       | 14.00                   |       |   | 0.115 |   |   |
| September 30,  2005 |       | 15.20                |       | 14.09                   |       |   | 0.115 |   |   |

 

Theinformation for all equity based and individual compensation arrangements isincorporated by reference from Item 12 hereof.

(b)   Not applicable

(c)   Purchases of Equity Securities

Thefollowing table represents the repurchasing activity of the share repurchaseprogram during the fourth quarter of fiscal 2007:

| **Period**                                              | ** ** | ** ** | ** **  | **Total  Number of  Shares  Purchased** | ** ** | **Average  Price Paid  per Share** | ** ** | **Total Number  of Shares  Purchased as  Part of Publicly  Announced  Plans or  Programs** | ** ** | **Maximum  Number of  Shares that  May Yet Be  Purchased  Under the  Plans or  Programs** | ** ** |
|---------------------------------------------------------|------------|------------|-------------|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| Month #1  April 1, 2007 – April 30, 2007 |       |       | —      |                                         |       |                                         | $          | n/a                                                                                                                      |       |                                                                                                                    |       |   |   |   |   | 808,363 |   |   |
| Month #2  May 1, 2007 – May 31, 2007     |       |       | 148,300     |                                         |       |                                         | 11.62      |                                                                                                                     |       |                                                                                                                    | 148,300    |   |   |   | 660,063 |   |   |
| Month #3  June 30, 2007 – June 30, 2007  |       |       | 56,000      |                                         |       |                                         | 12.68      |                                                                                                                     |       |                                                                                                                    | 56,000     |   |   |   | 604,063 |   |   |
| **Total**                                               | ** ** | ** ** | **204,300** | ** **                                   | ** ** | ** **                                   | **$**      | **11.91**                                                                                                                | ** ** | ** **                                                                                                              | ** ** | **204,300** | ** ** | ** ** | ** ** | **604,063** | ** ** | ** ** |

----

*Notes to thistable:*

(a)           On January 24,2007, the Company issued a press release announcing that the Board of Directorsauthorized a share repurchase program (the “Program”).

(b)          The Company wasauthorized to repurchase 5% or 873,263 shares of the outstanding shares.

(c)           The Program has anexpiration date of January 23, 2009.

42

----

**Item6.**                        SelectedFinancial Data

| ** **                       | ** ** | **At June 30,**            | ** ** |
|----------------------------------|------------|--------------------------------------|------------|
| ** **                       | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| Total assets                     |       | $                                    | 1,550,344  |   | $ | 1,577,060 |   | $ | 959,255 |   | $ | 921,592 |   | $ | 845,124 |   |
| Cash and cash  equivalents       |       | 58,728                               |       | 37,219 |   | 20,609 |   | 39,445 |   | 98,040 |   |
| Securities held  to maturity     |       | 88,363                               |       | 105,561 |   | 164,451 |   | 98,513 |   | 17,320 |   |
| Securities  available for sale   |       | 188,339                              |       | 196,925 |   | 148,517 |   | 234,207 |   | 291,885 |   |
| Loans held for  sale             |       | 8,075                                |       | 2,635 |   | 1,795 |   | 1,136 |   | 5,293 |   |
| Loans receivable,  net           |       | 1,036,098                            |       | 1,063,882 |   | 584,187 |   | 524,189 |   | 413,799 |   |
| Deposits                         |       | 1,093,055                            |       | 1,018,390 |   | 602,678 |   | 603,115 |   | 586,643 |   |
| Borrowings                       |       | 235,588                              |       | 338,866 |   | 237,400 |   | 206,168 |   | 132,557 |   |
| Total  stockholders’ equity |       | 205,335                              |       | 203,398 |   | 107,043 |   | 103,776 |   | 117,130 |   |
|                                  |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                                | ** ** | **For the year ended June 30,**                    | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                | ** ** | **(Dollars in thousands, except per share  data)** | ** ** |
| Interest income                                           |       | $                                                  | 86,273     |   | $ | 81,530 |   | $ | 49,679 |   | $ | 40,628 |   | $ | 46,445 |   |
| Interest expense                                          |       | 41,268                                             |       | 32,238 |   | 18,749 |   | 15,074 |   | 18,746 |   |
| Net interest  income                                      |       | 45,005                                             |       | 49,292 |   | 30,930 |   | 25,554 |   | 27,699 |   |
| Provision for  loan losses                                |       | 653                                                |       | 3,205 |   | 1,232 |   | 426 |   | 1,034 |   |
| Net interest  income after provision for loan losses |       | 44,352                                             |       | 46,087 |   | 29,698 |   | 25,128 |   | 26,665 |   |
| Non-interest  income                                      |       | 12,498                                             |       | 7,647 |   | 3,477 |   | 3,983 |   | 3,492 |   |
| Non-interest  expense                                     |       | 45,059                                             |       | 37,402 |   | 23,397 |   | 20,390 |   | 19,058 |   |
| Income before  income taxes                               |       | 11,791                                             |       | 16,332 |   | 9,778 |   | 8,721 |   | 11,099 |   |
| Income tax  expense                                       |       | 3,396                                              |       | 5,256 |   | 3,052 |   | 2,610 |   | 3,610 |   |
| Net income                                                |       | 8,395                                              |       | 11,076 |   | 6,726 |   | 6,111 |   | 7,489 |   |
| Earnings per  share—diluted(1)                       |       | $                                                  | 0.54       |   | $ | 0.77 |   | $ | 0.70 |   | $ | 0.59 |   | $ | 0.68 |   |
| Earnings per  share—basic(1)                         |       | 0.55                                               |       | 0.79 |   | 0.67 |   | 0.63 |   | 0.71 |   |
| Cash dividends  declared per share(1)                     |       | 0.46                                               |       | 0.46 |   | 0.44 |   | 0.36 |   | 0.29 |   |
| Dividend payout ratio                                     |       | 85.19                                              | %          | 59.74 | % | 65.67 | % | 61.02 | % | 42.65 | % |

 

43

----

 

| ** **                                                                    | ** ** | **At or for the year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Return on average assets                                                      |       | 0.55                                                                     | %          | 0.74 | % | 0.70 | % | 0.73 | % | 0.93 | % |
| Return on average equity                                                      |       | 4.03                                                                     |       | 5.96 |   | 6.33 |   | 5.56 |   | 6.10 |   |
| Average interest-earning  assets to average interest-bearing liabilities |       | 104.1                                                                    |       | 104.4 |   | 121.3 |   | 124.2 |   | 127.1 |   |
| Interest rate spread(2)                                                       |       | 3.20                                                                     |       | 3.62 |   | 3.09 |   | 2.94 |   | 2.91 |   |
| Interest rate margin(3)                                                       |       | 3.33                                                                     |       | 3.72 |   | 3.30 |   | 3.17 |   | 3.55 |   |
| Non-performing  assets to total  assets(4)                                    |       | 0.25                                                                     |       | 1.00 |   | 0.33 |   | 0.40 |   | 0.48 |   |
| Allowance for loan  losses to:                                                |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Non-performing  loans                                                         |       | 317.1                                                                    |       | 106.4 |   | 227.5 |   | 188.0 |   | 143.9 |   |
| Total loans less  deferred fees                                               |       | 1.16                                                                     |       | 1.55 |   | 1.05 |   | 0.99 |   | 1.27 |   |
| Average stockholders’  equity to average assets                     |       | 13.57                                                                    |       | 12.47 |   | 10.88 |   | 13.10 |   | 15.19 |   |
| Tangible stockholders’  equity to end of period assets                   |       | 6.18                                                                     |       | 6.09 |   | 11.07 |   | 11.43 |   | 13.52 |   |
| Total regulatory capital  to risk-weighted assets(5)                     |       | 14.04                                                                    |       | 13.18 |   | 17.70 |   | 17.72 |   | 19.61 |   |

----

(1)          The earnings anddividends per share and amounts for periods prior to February 23, 2007have been adjusted to give retroactive effect to the 5% stock dividend.

(2)          The weighted averageyield on interest-earning assets less the weighted average cost ofinterest-bearing liabilities.

(3)          This represents netinterest income as a percentage of average interest-earning assets.

(4)          Non-performing assetsequal non-accrual loans, troubled debt restructurings plus accruing loans 90 ormore days past due and real estate owned.

(5)          This ratio relates tothe Bank only.

44

----

**Item7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussionis intended to assist in understanding our financial condition, and the resultsof operations for Willow Financial Bancorp, Inc., and its subsidiaryWillow Financial Bank, for thefiscal years ended June 30, 2007, 2006 and 2005. The information in thissection should be read in conjunction with the Company’s financial statementsand the accompanying notes included elsewhere herein.

**General**

Net income is largelydriven by net interest income, which is the difference between the incomeearned on interest-earning assets and the interest paid on interest-bearingliabilities and the relative amount of our interest-earning assets tointerest-earning liabilities. Non-interest income and expenses, theprovision for loan losses and income tax expense also affect the Company’sresults of operations.

**Critical Accounting Policies**

The following discussionand analysis of the Company’s financial condition and results of operations isbased upon consolidated financial statements, which have been prepared inaccordance with U.S. generally accepted accounting principles. The preparationof these financial statements requires management to make estimates and judgmentsthat affect the reported amounts of assets and liabilities, revenues andexpenses and related disclosures of contingent assets and liabilities at thedate of the financial statements. Actual results may differ from theseestimates under different assumptions or conditions.

Inmanagement’s opinion, the most critical accounting policies affecting theconsolidated financial statements are:

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

2.                *Realization of deferred income tax items*.   Includedin other assets is a “net deferred tax asset”, which is an estimate of netdeferred tax assets and deferred tax liabilities. These estimates involvesignificant judgments and assumptions by management, which may have a materialeffect on the carrying value of this asset for financial reporting purposes.For a more detailed description of these items and estimates, see Note 14(Income Taxes) to the audited consolidated financial statements at and for thefiscal year ended June 30, 2007.

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

The Notes to ConsolidatedFinancial Statements identify other significant accounting policies used in thedevelopment and presentation of the financial statements. This discussion andanalysis, the significant accounting policies and other financial statementdisclosures identify and address key variables and other qualitative andquantitative factors that are necessary for an understanding and evaluation ofthe Company and its results of operations.

45

----

**Changes in Financial Condition**

***General.******  ***Total assetsdecreased by $26.7 million, or 1.7% at June 30, 2007 from$1.6 billion at June 30, 2006. The net loan portfolio decreased $27.8 millionor 2.6% while total deposits increased by $74.7 million or 7.3%.

***Cash and Cash Equivalents.******  ***Cash and cashequivalents, which consist of cash on hand and in other banks in interest-earningand non-interest earning accounts, amounted to $58.7 million and $37.2 millionat June 30, 2007 and 2006, respectively. The increase in cash and cashequivalents of $21.5 million or 57.8% was primarily the result of thegrowth in interest-bearing deposits, repayment of loan balances and sales andrepayments of investment securities.

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

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

***Loans.******  ***The net loanportfolio, which does not include loans held for sale, decreased $27.8 millionor 2.6% from $1.1 billion at June 30, 2006. The decrease wasprimarily the result of increased repayment levels within the construction andcommercial real estate loan portfolios, which decreased $19.9 million and $9.3million, respectively, at June 30, 2007 compared to June 30, 2006.The commercial real estate loan decrease includes the sale of a non-performingcommercial real estate loan of $3.5 million and the liquidation of $2.0 millionin real estate of a previous non-performing loan. In addition, single familyresidential loans decreased $25.3 million at June 30, 2007 compared to June 30,2006 as a part of management’s strategy to reduce reliance on long-term singlefamily residential mortgage loans. Commercial business loans increased by $7.5million from June 30, 2006 to June 30, 2007. This increase occurreddespite the charge-off of a $2.9 million commercial business borrowingrelationship. At June 30, 2007, home equity loans and lines of creditincreased $13.2 million compared to June 30, 2006.

With the inverted (longterm rates are lower than short term rates) and/or flat yield curve experiencedduring the year, a number of loans within the commercial real estate portfoliowere refinanced through other lenders who offered extended terms withoutrecourse. Additionally, the construction loan portfolio included largerresidential projects, which sold at a more rapid pace than anticipated and thedemand for new construction was not as robust as a result of a slowing in thehousing market. The Company plans to focus its growth in commercial lendingwith a focus on small businesses, middle market commercial loans, commercialreal estate lending, as well as consumer lending.

The allowance for loanlosses decreased to $12.2 million at June 30, 2007 compared to$16.7 million at June 30, 2006, due primarily to charge-offs recordedduring the year. The current fiscal year provision for loan losses decreasedfrom fiscal 2006 by approximately $2.6 million due largely to an $11.9 milliondecrease in non-performing loans. During the current fiscal year, the Companyrecorded net charge-offs of $5.2 million due largely to the charge-off of twoloan relationships which were categorized as non-accrual at June 30, 2006.

46

----

***Loans Held forSale.******  ***Mortgage loans originated or purchasedwith the intention of being sold into the secondary market are classified asheld for sale and are carried at the lower of aggregate cost or fair value withany unrealized loss reflected in the consolidated statements of income. At June 30,2007, $8.1 million of fixed-rate, single-family residentialmortgages were classified as held for sale compared to $2.6 million inloans classified as held for sale at June 30, 2006. The increase of $5.5 millionresulted primarily from an increase in the Bank’s expansion of this businessline as well as the timing of the origination of the loans and the ultimatedelivery to the purchaser of the loans. In order to mitigate the risk of losson the sale of these loans, the Company generally commits these loans for sale,on a best efforts basis, to a third party at the time that the borrower locksthe loan with the Company.

***Intangible Assets.******  ***At June 30,2007, intangible assets aggregated $109.5 million as compared to$107.0 million at June 30, 2006. Intangible assets include a coredeposit intangible of $10.9 million, which resulted from the acquisition ofChester Valley. The core deposit intangible is being amortized using anaccelerated method over a 12-year life. Intangible assets also includegoodwill, which primarily represents the excess cost over fair value of assetsacquired over liabilities as a result of the Chester Valley acquisition. Thegoodwill that resulted from the Chester Valley acquisition was approximately$93.2 million. As a result of the BeneServ acquisition, goodwill of $1.0million and customer intangibles of $3.5 million were recorded at June 30,2007. The customer intangible balance is being amortized using a straight linemethod over a 10-year life. The remaining balance of the goodwill relatesto a branch acquisition in 1994 approximated $848 thousand at June 30,2007. Goodwill is measured for impairment at least annually. The Company hasnot recorded any impairment losses as a result of this analysis.

***Deposits.******  ***During theyear ended June 30, 2007, total deposits increased by $74.7 million or 7.3%.The increase resulted primarily from an increase in money market demand depositaccounts as the Company has been successful in migrating customer money marketbalances from its business segment, WIS, as well as an increase in certificatesof deposit resulting from customer preference for higher rate deposit accounts.Core deposits, which we define as savings, checking, NOW and money marketaccounts, increased by $41.6 million as a result of the migration of WISdeposits noted above. Checking accounts totaled $267.3 million or 24.4% oftotal deposits at June 30, 2007 compared to $277.2 million, or 27.2%of total deposits at June 30, 2006.

The Company will continue to deploy a strategy toincrease core deposit accounts and balances through targeted marketing,cross-selling of our existing customer base and expansion of our commercialbusiness lending, which typically results in the opening of a checking account.

***Federal Home LoanBank Advances.******  ***Advances from the FHLB provide theCompany with an additional source to fund interest-earning asset growth and area tool in meeting the Company’s asset/liability strategies. At June 30,2007, the total amount of these borrowings was $190.1 million, a decreaseof $92.7 million or 32.8% from the $282.7 million outstanding at June 30,2006. This decrease was the direct result of repayments as the excess cashgenerated from the deposit growth, investment securities sales and repayments,and loan repayments was utilized to repay certain FHLB advances.

***Trust PreferredSecurities.***   Effective with the acquisitionof Chester Valley, the Company assumed the liability for $10.5 million ofJunior Subordinated Debentures to the Chester Valley Statutory Trust, aPennsylvania Business Trust, in which the Company owned all of the common equityas a result of the acquisition of Chester Valley. The Trust issued $10.0million of Trust Preferred Securities to investors, which were secured by theJunior Subordinated Debentures and the guarantee of the Company. These TrustPreferred Securities were redeemed by the Company on March 26, 2007 inaccordance with the Trust Agreement.

On March 31, 2006,the Company issued $25.8 million of Junior Subordinated Debentures to WillowFinancial 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 

47

----

three-monthLibor plus 1.31% to investors, which are secured by the Junior SubordinatedDebentures and the guarantee of the Company. The Junior Subordinated Debenturesare treated as debt of the Company but qualify as Tier I capital of the Bank tothe extent of the amount of the proceeds which are invested in the Bank. TheTrust Preferred Securities are callable by the Company on or afterSeptember 30, 2011. The Trust Preferred Securities must be redeemed by theCompany upon their maturity in the year 2036.

***Accounting for Derivative Instruments and Hedging.***   TheCompany may from time to time utilize derivative instruments such as interestrate swaps, interest rate collars, interest rate floors, interest rateswaptions or combinations thereof to assist in its asset/liability management.In accordance with SFAS No. 133, “Accounting for Derivative Instruments,”the Company documents its hedge relationships, including identification of thehedging instruments and the hedged items, as well as its risk managementobjectives and strategies for undertaking the hedge. The Company also assesses,both at inception and at least quarterly thereafter, whether the derivativeinstruments that are used in hedging transactions are highly effective inoffsetting the changes in either the fair value or cash flows of the hedgeditem. For fair value hedges, both the effective and ineffective portions of thechanges in the fair value of the derivative, along with the gain or loss on thehedged item that is attributable to the hedged risk, are recorded in thestatement of operations within interest income or interest expense. For cashflow hedges, the effective portion of the change in the fair value of thederivative is recorded in accumulated other comprehensive income. When thehedged item impacts the statement of operations, the gain or loss included inaccumulated other comprehensive income is reported on the same line in thestatement of operations as the hedged item. In addition, the ineffectiveportion of the changes in the fair value of derivatives used as cash flowhedges is reported in the statement of operations.

As part of the Merger, theCompany 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 FHLB borrowings of the formerChester Valley. On the date of the Merger, the interest rate swap and thehedged borrowings were marked to fair value as a result of purchase accounting.In September 2005, the hedged borrowings were repaid and the $10 millionnotional amount of the interest rate swap was unwound with the counter-party.After performing the appropriate documentation of the derivative instrument,the Company designated the remaining $10 million notional amount interest rateswap as a fair value hedge of certain existing borrowings of Willow Financial Bank.The swap had the effect of converting a fixed rate borrowing to an adjustablerate borrowing. During the quarter ended December 31, 2005, the derivativeinstrument ceased to be a highly effective hedge; therefore, the Companydiscontinued hedge accounting resulting in a pre-tax charge to income of $47thousand. The interest rate swap was unwound in February 2006 without .anyadditional impact to operations. The basis adjustment that was previouslyrecorded on the hedged borrowing that is recorded in the statement of financialcondition is amortized as an increase in interest expense over the remaininglife of the borrowing using the interest method.

Additionally, inAugust 2003, Chester Valley purchased a $30.0 million notional amount3.50% six month LIBOR interest rate cap while simultaneously selling a$30.0 million notional amount 6.00% six-month LIBOR interest rate cap(“Interest Rate Corridor”) which expires in August 2008. Chester Valleypaid a net premium, which entitled it to receive the difference betweensix-month LIBOR from 3.50% up to 6.00% applied to the $30.0 million notionalamount. Upon consummation of the Merger, the Company assumed the Interest RateCorridor and designated it to hedge certain borrowings of Willow FinancialBank, which were variable in nature and indexed to six-month LIBOR. TheInterest Rate Corridor was being used to hedge the cash flows of thisborrowing. Prior to October 23, 2006, the Interest Rate Corridor reducedthe negative impact on earnings of the borrowings in a rising interest rateenvironment. The fair market value of the Interest Rate Corridor had twocomponents: the intrinsic value and the time value of the option. The InterestRate Corridor was marked-to-market quarterly, with changes in the intrinsicvalue of the Interest Rate Corridor, net of tax, included as a separatecomponent of other comprehensive income, and the change in the time value ofthe option included directly as interest 

48

----

expenseas required under SFAS 133. In addition, the ineffective portion, if any, wouldhave been expensed in the period in which ineffectiveness was determined. OnOctober 23, 2006, the Company unwound the Interest Rate Corridor andrecognized a gain of $804 thousand 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.

***Stockholders’ Equity.******  ***AtJune 30, 2007, total stockholders’ equity amounted to $205.3 millionor 13.2% of total assets compared to $203.4 million, or 12.9% of assets atJune 30, 2006. During the year, the Company paid aggregate cash dividendsof $6.9 million.

49

----

**Average Balances, Net Interest Income, Yields Earnedand Rates Paid**

The following tablepresents the average daily balances for various categories of assets andliabilities, and income and expense related to those assets and liabilities forthe years ended June 30, 2007, 2006 and 2005. The table also shows theaverage yields and costs on interest-earning assets and interest-bearingliabilities for each of those years. Loans receivable include non-accrualloans. To adjust nontaxable loans and securities to a taxable equivalent, a34.0%, 35.0% and 31.2% effective rate has been used for the fiscal years endingJune 30, 2007, 2006, and 2005, respectively. The adjustment of tax-exemptloans and securities to a tax equivalent yield in the table below may beconsidered to include non-GAAP financial information. Management believes thatit is a standard practice in the banking industry to present net interestmargin, net interest rate spread and net interest income on a fully taxequivalent basis. Therefore, management believes, these measures provide usefulinformation to investors by allowing them to make peer comparisons. A GAAPreconciliation also is included below.

| ** **                                                                             | ** ** | **At June 30,**            | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **2007**                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | **Average  Balance**                 | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** |
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-earning  assets:                                                              |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans  receivable—taxable                                                         |       | $ 1,033,823                     |       |   | $ 68,597 |   |   |   | 6.64 | % |   | $  984,603 |   |   | $ 64,947 |   |   |   | 6.60 | % |   | $ 567,677 |   |   | $ 34,536 |   |   |   | 6.08 | % |   |
| Loans  receivable—tax free                                                        |       | 16,926                               |       |   | 1,271 |   |   |   | 7.51 |   |   | 11,910 |   |   | 808 |   |   |   | 6.78 |   |   | — |   |   | — |   |   |   | — |   |   |
| Securities—taxable                                                                |       | 287,299                              |       |   | 15,485 |   |   |   | 5.39 |   |   | 316,811 |   |   | 14,983 |   |   |   | 4.73 |   |   | 341,346 |   |   | 13,878 |   |   |   | 4.07 |   |   |
| Securities—tax  free                                                              |       | 9,553                                |       |   | 689 |   |   |   | 7.21 |   |   | 11,477 |   |   | 1,041 |   |   |   | 9.07 |   |   | 19,783 |   |   | 1,286 |   |   |   | 6.50 |   |   |
| Interest-bearing  deposits                                                             |       | 23,081                               |       |   | 756 |   |   |   | 3.28 |   |   | 14,122 |   |   | 304 |   |   |   | 2.15 |   |   | 19,502 |   |   | 363 |   |   |   | 1.86 |   |   |
| Total interest-earning  assets                                                         |       | 1,370,682                            |       |   | 86,798 |   |   |   | 6.33 |   |   | 1,338,923 |   |   | 82,083 |   |   |   | 6.13 |   |   | 948,308 |   |   | 50,063 |   |   |   | 5.28 |   |   |
| Non-interest-earning  assets                                                           |       | 165,007                              |       |   |   |   |   |   |   |   |   | 151,834 |   |   |   |   |   |   |   |   |   | 21,500 |   |   |   |   |   |   |   |   |   |
| Total assets                                                                           |       | $ 1,535,689                     |       |   |   |   |   |   |   |   |   | $ 1,490,757 |   |   |   |   |   |   |   |   |   | $ 969,808 |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                         |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                               |       | $ 1,034,956                     |       |   | 28,698 |   |   |   | 2.77 |   |   | $  947,289 |   |   | 18,476 |   |   |   | 1.95 |   |   | $ 607,724 |   |   | $ 9,933 |   |   |   | 1.63 |   |   |
| FHLB borrowings                                                                        |       | 225,722                              |       |   | 9,042 |   |   |   | 4.01 |   |   | 314,920 |   |   | 12,659 |   |   |   | 4.02 |   |   | 250,299 |   |   | 8,816 |   |   |   | 3.52 |   |   |
| Repurchase  agreements                                                                 |       | 22,767                               |       |   | 1,167 |   |   |   | 5.13 |   |   | 4,959 |   |   | 228 |   |   |   | 4.60 |   |   | — |   |   | — |   |   |   | — |   |   |
| Trust preferred  securities                                                            |       | 33,256                               |       |   | 2,361 |   |   |   | 7.10 |   |   | 15,589 |   |   | 875 |   |   |   | 5.61 |   |   | — |   |   | — |   |   |   | — |   |   |
| Total interest-bearing  liabilities                                                    |       | 1,316,701                            |       |   | 41,268 |   |   |   | 3.13 |   |   | 1,282,757 |   |   | 32,238 |   |   |   | 2.51 |   |   | 858,023 |   |   | 18,749 |   |   |   | 2.19 |   |   |
| Non-interest-bearing  liabilities:                                                     |       | 10,666                               |       |   |   |   |   |   |   |   |   | 22,056 |   |   |   |   |   |   |   |   |   | 5,936 |   |   |   |   |   |   |   |   |   |
| Total  stockholders’ equity                                                       |       | 208,322                              |       |   |   |   |   |   |   |   |   | 185,944 |   |   |   |   |   |   |   |   |   | 105,849 |   |   |   |   |   |   |   |   |   |
| Total liabilities  and equity                                                          |       | $ 1,535,689                     |       |   |   |   |   |   |   |   |   | $ 1,490,757 |   |   |   |   |   |   |   |   |   | $ 969,808 |   |   |   |   |   |   |   |   |   |
| Net interest-earning  assets                                                           |       | $    53,981      |       |   |   |   |   |   |   |   |   | $    56,166 |   |   |   |   |   |   |   |   |   | $ 166,305 |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                                   |       |                                 |       |   | $ 45,530 |   |   |   |   |   |   |   |   |   | $ 49,845 |   |   |   |   |   |   |   |   |   | $ 31,314 |   |   |   |   |   |   |
| Net interest rate  spread                                                              |       |                                 |       |   |   |   |   |   | 3.20 | % |   |   |   |   |   |   |   |   | 3.62 | % |   |   |   |   |   |   |   |   | 3.09 | % |   |
| Net interest  margin                                                                   |       |                                 |       |   |   |   |   |   | 3.33 | % |   |   |   |   |   |   |   |   | 3.72 | % |   |   |   |   |   |   |   |   | 3.30 | % |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |       |                                 |       |   |   |   |   |   | 104 | % |   |   |   |   |   |   |   |   | 104 | % |   |   |   |   |   |   |   |   | 111 | % |   |

 

50

----

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

| ** **  | ** ** | **Year Ended June 30,** | ** ** |
|-------------|------------|----------------------------------------|------------|
| ** **  | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **  | ** ** | **Interest  Income**                   | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** | **Interest  Income** | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** | **Interest  Income** | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** |
| ** **  | ** ** | **(Dollars in Thousands)**   | ** ** |
| Loans(a)    |       | $                                      | 69,538     |   |   | $ | 330 |   |   | $ | 69,868 |   | $ | 65,472 |   |   | $ | 283 |   |   | $ | 65,755 |   | $ | 34,536 |   |   | $ | — |   |   | $ | — |   |
| Investments |       | 16,735                                 |       |   | 195 |   |   | 16,930 |   | 16,058 |   |   | 270 |   |   | 16,328 |   | 15,143 |   |   | 384 |   |   | 15,527 |   |
| Total       |       | $                                      | 86,273     |   |   | $ | 525 |   |   | $ | 86,798 |   | $ | 81,530 |   |   | $ | 553 |   |   | $ | 82,083 |   | $ | 49,679 |   |   | $ | 384 |   |   | $ | 15,527 |   |

----

(a)    The Company did not have tax-exempt loans in fiscal 2005.

**Rate/Volume Analysis**

Thefollowing table shows the effect of changing rates and volumes on net interestincome on a tax equivalent basis for the years ended June 30, 2007 and 2006,compared to the prior fiscal year. Information provided shows the effect on netinterest income of (1) rates (changes in rate times prior volume), (2) volume(changes in volume times prior rate) and (3) rate/volume (changes in rate timeschange in volume).

| ** **                                                   | ** ** | **Increase (decrease) in net interest  income for the year ended June 30,  2007 compared to the year ended   June 30, 2006 due to ** | ** ** | **Increase (decrease) in net interest   income for the year ended June 30,  2006 compared to the year ended  June 30, 2005 due to ** | ** ** |       |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                   | ** ** | ** **                                                                                                                                                                                                                                    | ** ** | ** **                                                                                                                                                                                                                                    | ** ** | **Rate/**  | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate/** | ** ** | **Increase/** | ** ** |   |
| ** **                                                   | ** ** | **Rate**                                                                                                                                                                                                                                      | ** ** | **Volume**                                                                                                                                                                                                                                    | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)**                                                                                                                                                                                                          | ** ** |                                                                                                                                                                                                                                          |
| Interest-earning assets:                                     |       |                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                          |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                             |       | $                                                                                                                                                                                                                                             | 466        |                                                                                                                                                                                                                                          | $          | 3,589      |   | $ | 56 |   |   | $ | 4,111 |   |   | $ | 2,952 |   | $ | 25,349 |   |   | $ | 2,930 |   |   |   | $ | 31,231 |   |   |   |
| Securities                                                   |       | 1,865                                                                                                                                                                                                                                         |       | (1,534                                                                                                                                                                                                                                        | )          | (179       | ) |   | 152 |   |   | 2,852 |   | (1,335 | ) |   | (368 | ) |   |   | 1,149 |   |   |   |
| Interest-bearing deposits                                    |       | 158                                                                                                                                                                                                                                           |       | 193                                                                                                                                                                                                                                           |       | 101        |   |   | 452 |   |   | 57 |   | (100 | ) |   | (16 | ) |   |   | (59 | ) |   |   |
| Total net change in income on interest-earning assets        |       | 2,489                                                                                                                                                                                                                                         |       | 2,248                                                                                                                                                                                                                                         |       | (22        | ) |   | 4,715 |   |   | 5,861 |   | 23,914 |   |   | 2,546 |   |   |   | 32,321 |   |   |   |
| Interest-bearing  liabilities:                               |       |                                                                                                                                                                                                                                          |       |                                                                                                                                                                                                                                          |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                     |       | 7,794                                                                                                                                                                                                                                         |       | 1,710                                                                                                                                                                                                                                         |       | 719        |   |   | 10,223 |   |   | 1,702 |   | 5,189 |   |   | 817 |   |   |   | 7,708 |   |   |   |
| FHLB Advances                                                |       | (31                                                                                                                                                                                                                                           | )          | (3,595                                                                                                                                                                                                                                        | )          | 9          |   |   | (3,617 | ) |   | 1,251 |   | 2,275 |   |   | 323 |   |   |   | 3,849 |   |   |   |
| Repurchase agreements                                        |       | 27                                                                                                                                                                                                                                            |       | 819                                                                                                                                                                                                                                           |       | 93         |   |   | 939 |   |   | — |   | — |   |   | 1,358 |   |   |   | 1,358 |   |   |   |
| Trust preferred Securities                                   |       | 231                                                                                                                                                                                                                                           |       | 991                                                                                                                                                                                                                                           |       | 263        |   |   | 1,485 |   |   | — |   | — |   |   | 875 |   |   |   | 875 |   |   |   |
| Total net change in expense on interest-bearing  liabilities |       | 8,021                                                                                                                                                                                                                                         |       | (75                                                                                                                                                                                                                                           | )          | 1,084      |   |   | 9,030 |   |   | 2,953 |   | 7,464 |   |   | 3,373 |   |   |   | 13,790 |   |   |   |
| Change in net  interest income                               |       | $                                                                                                                                                                                                                                             | (5,532     | )                                                                                                                                                                                                                                             | $          | 2,323      |   | $ | (1,106 | ) |   | $ | (4,315 | ) |   | $ | 2,908 |   | $ | 16,450 |   |   | $ | (827 | ) |   |   | $ | 18,531 |   |   |   |
|                                                              |            |                                                                                                                                                                                                                                               |            |                                                                                                                                                                                                                                               |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

51

----

**Results ofOperations**

***General.******  ***Net income for the year ended June 30, 2007was $8.4 million, a decrease of $2.7 million or 24.2%. The decreaseresulted primarily from an increase in non-interest expense of $7.7 million,partially offset by an increase in non-interest income of $4.9 million and adecrease in income tax expense of $1.9 million.

Net income for the year ended June 30, 2006 was$11.1 million, an increase of $4.4 million or 64.7% from the year endedJune 30, 2005. The increase resulted primarily from an increase in netinterest income of $18.4 million and an increase in non-interest income of$4.2 million. Each of these were partially offset by an increase in theprovision for loan losses of $2.0 million, an increase in operating expenses of$14.0 million or 59.9% and an increase in income tax expense of $2.2million. The improvement was largely driven by the Merger, which was effectiveafter the close of business on August 31, 2005.

***Net InterestIncome.******  ***Net interest income decreased by$4.3 million or 8.7% to $45.0 million for the year endedJune 30, 2007 as compared to $49.3 million for the year endedJune 30, 2006. This decrease was due primarily to an increase in theaverage cost of interest-bearing liabilities to 3.12% for the year endedJune 30, 2007 from 2.51% for the year ended June 30, 2006 while theyield on average earning assets increased by only 20 basis points. One factorthat influences net interest income is the interest rate spread (i.e., thedifference between the average yields on interest-earning assets and theaverage rates paid on interest-bearing liabilities). The average interestrate spread computed on a fully tax equivalent basis for the years endedJune 30, 2007, 2006 and 2005 was 3.21%, 3.62% and 3.09%, respectively. Thenet interest margin (i.e., net interest income expressed as a percentage ofaverage interest-earning assets) was 3.33%, 3.72% and 3.30% for the samethree respective fiscal years.

Net interest income increased by $18.4 million or59.4% to $49.3 million for the year ended June 30, 2006 as comparedto $30.9 million for the year ended June 30, 2005. The significantimprovement largely resulted from the Merger and the balance sheet de-leveragingstrategy deployed by the Company. Chester Valley’s balance sheet was assetsensitive (assets reprice quicker than liabilities) during a year in which theFederal Reserve aggressively raised short-term rates. Additionally, the Companyreceived the full benefit of the additional earning assets from the acquisitionfor ten months. The balance sheet de-leveraging allowed the Company to selllower yielding investment securities while repaying higher costing borrowings.

***Interest Income.******  ***Interestincome includes the interest earned on loans and investment securities, as wellas yield adjustments for the premiums, discounts and deferred fees or costsrecorded in connection with the acquisition of these assets. Total interestincome for the year ended June 30, 2007 was $86.3 million compared to$81.5 million and $49.7 million for fiscal 2006 and 2005,respectively.

The increase in interest income in fiscal 2007compared to fiscal 2006 was $4.7 million or 5.8% due primarily to anincrease in the average balance of outstanding loans of $54.2 million.Additionally, the yield on loans increased approximately four basis points infiscal 2007 compared to fiscal 2006. The increase in the average yield of theloan portfolio was largely the result of a change in the mix of the loanportfolio reflecting the Company’s reduced reliance on long-term single-familyresidential mortgage loans and increase in home equity loans and lines ofcredit, along with the interest rate sensitive assets acquired from ChesterValley at a time in which the Federal Reserve was aggressively raisingshort-term interest rates. Also contributing to the increase was an approximate57 basis point increase in the average yield in the investment securitiesportfolio, partially offset by a decrease of $22.5 million in the averagebalance of investment securities.

The increase in interest income in fiscal 2006compared to fiscal 2005 was $31.9 million or 64.1% due primarily to anincrease in the average balance of outstanding loans of $428.8 million as aresult of the Merger. Additionally, the yield on loans increased approximately52 basis points, as Chester Valley’s loans were re-pricing at a time when theFederal Reserve aggressively increased short-term rates. Also 

52

----

contributing to theincrease was an approximate 68 basis point increase in the average yield in theinvestment portfolio as the Company completed a de-leveraging strategy byliquidating approximately $95.9 million of investment securities with anaverage yield of 3.96%. The above factors were partially offset by reducedlevels in the average balance of investment securities.

***Interest Expense.******  ***Interestexpense consists of the interest paid to depositors on their interest-bearingdeposit accounts as well as interest paid on borrowings. For the fiscal yearended June 30, 2007, total interest expense was $41.3 millioncompared to $32.2 million and $18.7 million, for the fiscal yearsended June 30, 2006 and 2005, respectively.

For the fiscal year ended June 30, 2007, interestexpense increased by $8.9 million, or 27.6% compared to the fiscal yearended June 30, 2006. This increase was due primarily to a $10.2 million,or 55.3%, increase in interest expense on deposits, which was partially offsetby a $2.1 million, or 15.7% decrease in interest expense on borrowings. Thisincrease in interest expense on deposits was due primarily to the increase in averagedeposits of $87.7 million, or 9.3%. In addition, the average cost of depositsincreased by 82 basis points in fiscal 2007 as compared to fiscal 2006. Thisincrease was partially offset by a reduction of $53.7 million or 16.0% inaverage borrowings for the year ended June 30, 2007 compared to the yearended June 30, 2006.

For the fiscal year ended June 30, 2006, interestexpense increased by $13.5 million, or 71.9% compared to the fiscal yearended June 30, 2005. This increase was due primarily to an increase inaverage interest-bearing liabilities resulting from the Merger. Average depositand borrowings balances increased $318.4 million and $106.4 million,respectively, in fiscal 2006 compared to fiscal 2005. Additionally, theCompany’s cost of funds increased approximately 32 basis points in fiscal 2006compared to fiscal 2005, as the Federal Reserve aggressively raised short-termrates coupled with the competition for deposits in the Bank’s market area,which led the Bank to raise its interest rate paid on money market balances andcertificates of deposits. Additionally, the trust preferred security assumed inthe Merger was a floating rate borrowing, for which the rate increasedthroughout the year.

***Provision for LoanLosses.******  ***In order to maintain the allowance forloan losses at a level that management deems adequate to absorb known andunknown losses which are both probable and can be reasonably estimated, aprovision for loan losses is recorded through charges to earnings. Thedetermination of the adequacy of the allowance is based upon the Company’sregular review of credit quality and is based upon, but not limited to, thefollowing factors: an evaluation of our loan portfolio, loss experience,current economic conditions, volume, growth, composition of the loan portfolioand other relevant factors. The balance of the allowance for loan losses is anestimate and actual losses may vary from these estimates. Management assessesthe allowance for loan losses at least quarterly and makes any necessary adjustmentsto maintain the allowance for losses at a level deemed adequate. For the yearsended June 30, 2007, 2006 and 2005, the provisions for loan losses were$653 thousand, $3.2 million, and $1.2 million, respectively. The decreasedamount of the provision in fiscal 2007 compared to fiscal 2006 was dueprimarily to the decrease in non-performing assets of $11.9 million, which werepartially offset by net charge-offs of $5.2 million. The increased provision infiscal 2006 compared to fiscal 2005 was due primarily to the increase innon-performing assets of $12.7 million.

At June 30, 2007, the balance in the allowancefor loan losses was $12.2 million compared to $16.7 million atJune 30, 2006, with the decrease resulting from $5.2 million in netcharge-offs during fiscal 2007. The percentage of the allowance for losses toloans, net of deferred fees, decreased to 1.16% at June 30, 2007 comparedto 1.55% at June 30, 2006.

Management believes the allowance for loan loss wasadequate at June 30, 2007 and represents all known and inherent losses inthe portfolio that are both probable and reasonably estimable. No assurance canbe given as to the amount or timing of additional provisions for loan losses inthe future as a result of potential increases in the amount of the Company’snon-performing loans in the remainder of the 

53

----

Company’s loan portfolio.Regulatory agencies, in the course of their regular examinations, review theallowance for losses and carrying value of non-performing assets. No assurancecan be given that these agencies might not require changes to the allowance forlosses in the future.

***Non-InterestIncome.******  ***Non-interest income is comprised ofinvestment services income, account service fees and charges, loan servicingfees, realized gains and losses on assets available or held for sale, increasesin the cash surrender value of bank owned life insurance (“BOLI”) and with theacquisition of BeneServ, insurance premiums. Total non-interest income for theyears ended June 30, 2007, 2006, and 2005 was $12.5 million,$7.6 million and $3.5 million, respectively.

The increase in non-interest income of $4.9 million, or63.4%, during fiscal 2007 compared to fiscal 2006 was due primarily to a $1.1million difference in the amount of gain(loss) recognized on the sale ofsecurities available-for-sale, a gain of $804 thousand recorded during thequarter ended December 31, 2006 on the unwinding of an interest ratecorridor, increased investment services income of $687 thousand, $637 thousandfor income from the insurance operations of BeneServ, increased service chargesand fees of $438 thousand, and $286 thousand in gains on the sale of realestate owned. The increase in service charges and fees was due primarily togrowth in the deposit base. The increase in investment services income was theresult of growth in the trust operations and the sales of retail investmentproducts through the branch network.

The increase in non-interest income of $4.2 millionduring fiscal 2006 compared to fiscal 2005 was due primarily to investmentservices income of $2.6 million received from the acquisition of WIS andChester Valley’s Trust division in the Merger. These were two new lines ofbusiness for the Company. Service charges and fees increased by $2.6 million or106.8% in fiscal 2006 due primarily to increased deposit fees associated withthe growth in checking accounts from the Merger as well as increases in theoverdraft protection fees for which Chester Valley was further along inimplementation and thus had a higher volume of users. Gains on loans availablefor sale declined $223 thousand due primarily to lower loan volumes resultingfrom the rising interest rate environment. This was largely offset by anincrease in other income of $169 thousand, which resulted primarily from incomeon the BOLI acquired from Chester Valley. As noted previously, the Companyimplemented a de-leveraging strategy in which it incurred approximately $919thousand in losses in the sale of investment securities.

***Non-InterestExpense.******  ***The primary components of non-interestexpense are compensation and employee benefits, occupancy and equipment expenses,data processing costs, deposit account services, professional fees and avariety of other expenses. For the years ended June 30, 2007, 2006, and2005, non-interest expense totaled $45.1 million, $37.4 million and$23.4 million, respectively. Non-interest expense increased $7.8 million,or 20.8% from the year ended June 30, 2006 to the comparable period endedJune 30, 2007.

Salaries and employee benefit expenses totaled$24.3 million, $20.1 million and $13.1 million, respectively,for the fiscal years ended June 30, 2007, 2006, and 2005. For the yearended June 30, 2007, compensation costs increased by $4.2 millionpartially as a result of operating our expanded branch office network for afull 12 months after the acquisition of Chester Valley on August 31, 2005as well as new hirings in the lending and wealth management areas during theyear ended June 30, 2007 along with normal salary increases. AtJune 30, 2007, the Company had 374 full-time employees compared to 312 atJune 30, 2006. In addition, $519 thousand of compensation costs wererecorded during fiscal 2007 due to severance payments and costs associated withthe retirement of three Board members as well as certain employee reductions.For the year ended June 30, 2006, compensation and benefit costs increasedapproximately $7.0 million or 53.9% due primarily to an increased numberof employees as a result of the Merger.

Occupancy and equipment expenses were$8.1 million, $6.0 million, and $2.6 million for the fiscalyears ended June 30, 2007, 2006, and 2005, respectively. During fiscalyear 2007, occupancy costs increased 

54

----

partially as a result ofoperating our expanded branch office network for 12 full months after theacquisition of Chester Valley and also due to additional rental costs incurredat the corporate headquarters building and rental expense associated withcertain Bank buildings sold in a sale/leaseback transaction. During fiscal year2006, these costs increased $3.4 million due to the addition of 13 branchlocations from the Merger as well as the Company’s relocation to a newcorporate headquarters and operations building in February 2006. In fiscal2006, the approximate occupancy cost of $237 thousand for the headquartersbuilding was offset by a sale-leaseback of certain of the Bank’s branches forwhich the cash proceeds were invested in loans or repaid borrowings. TheCompany’s rent expense increased from $2.0 million in fiscal 2006 to $2.9million in fiscal 2007 and is expected to remain relatively stable at $3.0million in fiscal 2008 based on current leases.

Advertising expenses for fiscal 2007, 2006 and 2005were $2.0 million, $1.5 million and $978 thousand, respectively. Theincrease in fiscal year 2007 was a result of the Bank’s re-branding effortsduring the year associated with the change in the Bank’s name. The increaseduring fiscal 2006 was due primarily to direct mail campaigns to the combinedcompany’s customer base as the Company commissioned a study of its customerbase and found there were significant opportunities to cross-sell its existingproducts.

For the fiscal years ended June 30, 2007, 2006,and 2005, amortization of intangible assets was $2.0 million, $1.9 million and$57 thousand respectively. The significant increase in fiscal 2006 was theresult of the amortization of the core deposit intangible recorded as a resultof the Merger. The asset is being amortized using an accelerated method over atwelve-year period. Amortization of intangible assets is expected to be $2.1million for the fiscal year ending June 30, 2008.

Data processing expenses were $1.5 million, $1.2million, and $960 thousand, respectively, for fiscal 2007, 2006 and 2005.The increase in each year resulted from increased accounts and a rate increasein the Company’s third-party data processing contract.

Professional fees were $2.4 million, $2.3 million and$1.4 million for fiscal 2007, fiscal 2006 and fiscal 2005, respectively.In fiscal 2007, professional fees were relatively stable as compared to fiscal2006. The increase in the fiscal 2006 resulted primarily from increasedconsulting costs related to the integration of the Sarbanes-Oxley 404compliance for the combined company, an analysis of our customer base, andassistance with the development of the combined company’s strategic plan andbranding initiatives.

For the fiscal years ended June 30, 2007, 2006,and 2005, other expenses, which include miscellaneous operating items, were $4.6 million,$4.2 million and $4.2 million, respectively.

***Income Tax Provision.******  ***Income taxexpense amounted to $3.4 million for the year ended June 30, 2007.This compares to a tax expense of $5.3 million, and $3.1 million forthe years ended June 30, 2006 and 2005, respectively. The effective taxrates for fiscal 2007, 2006 and 2005 were 28.8%, 32.2% and 31.2%, respectively.The decrease in the income tax expense and the effective tax rate for the yearended June 30, 2007 was primarily related to an overall decline in incomebefore income taxes resulting in a lower statutory rate, as well as an increasein the balance of tax-exempt securities and related income.

**Liquidity and Commitments**

The Company’s primary sources of funds are fromdeposits, principal amortization of loans, loan and securities prepayments andrepayments, interest income from loans, mortgage-backed securities andother investments, and other funds provided from operations. While scheduledpayments from the amortization of loans and mortgage-backed securitiesand maturing investment securities are relatively predictable sources of funds,deposit flows and loan prepayments can be greatly influenced by generalinterest rates, economic conditions and competition. We also maintain excessfunds in short-term, interest-bearing assets that provide additionalliquidity. We have also utilized outside borrowings, primarily from the FHLB ofPittsburgh as an additional funding source.

55

----

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

During the current fiscalyear, the Company utilized principal repayments on investment securities andloans to reduce its use of borrowings from the FHLB. Outstanding borrowingsfrom the FHLB have decreased to $190.1 million at June 30, 2007 ascompared to $282.7 million at June 30, 2006. Under terms of theborrowing agreement with the FHLB, the Bank pledges certain assets such asresidential mortgage loans and mortgage-backed securities as well asstock in the FHLB as collateral for these advances. At June 30, 2007, theBank had $464.4 million in additional borrowing capacity available fromthe FHLB.

Prior to the Merger, theCompany had not in the past used any significant off-balance sheet financingarrangement for liquidity or other purposes. Our financial assets withoff-balance sheet risk are limited to obligations to fund loans to borrowerspursuant to existing loan commitments. Additionally, the Company has not hadany transactions, arrangements or other relationships with any unconsolidated,limited purpose entities that could affect its liquidity or capital resources,nor do we currently intend to engage in trading commodity contracts. With theMerger and the resulting increased size of the combined companies, the Companymay, from time to time, utilize certain derivative financial instruments toassist in its asset/liability strategies and has in fact assumed the liabilityfor certain interest rate derivatives entered into by Chester Valley.

The Company fullyanticipates that it will continue to have sufficient funds and alternativefunding sources to meet its current commitments.

TheCompany’s contractual obligations as of June 30, 2007 are as follows:

| ** **              | ** ** | **Payments Due by Period:** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
| ** **              | ** ** | **Total**                                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** |
| ** **              | ** ** | **(Dollars in thousands)**       | ** ** |
| Federal Home Loan  Debt |       | $                                          | 190,063    |   |   | $ | 14,636 |   |   | $ | 36,491 |   | $ | 52,917 |   |   | $ | 86,019 |   |   |
| Operating Leases        |       | 29,170                                     |       |   | 2,791 |   |   | 4,927 |   | 4,059 |   |   | 17,393 |   |   |
| Total Obligations       |       | $                                          | 219,233    |   |   | $ | 17,427 |   |   | $ | 41,418 |   | $ | 56,976 |   |   | $ | 103,412 |   |   |

 

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

 

**Impactof Inflation and Changing Prices**

The financial statements, accompanying notes, andrelated financial data presented herein have been prepared in accordance withU.S. generally accepted accounting principles, which require the measurement offinancial position and operating results in terms of historical dollars withoutconsidering the changes in purchasing power of money over time due toinflation. The impact of inflation is reflected in the increased cost of ouroperations. Most of our assets and liabilities are monetary in nature;therefore, the impact of interest rates has a greater impact on our performancethan the effects of general levels of inflation. Interest rates do notnecessarily move in the same direction or to the same extent as the prices ofgoods and services.

56

----

**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.

Thefollowing gap table shows the amount as of June 30, 2007 of the Bank’s assetsand liabilities projected to mature or re-price within various time periods.This table includes certain assumptions management has made that affect therate at which loans will prepay as well as the duration of core deposits.Changes in interest rates may affect these assumptions, which would impact ourgap position.
|                                                                                                                               | ** ** | **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 

57

----

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, is an analysis of the interest rate risk position as measured byNPV and sensitivity based upon various rate scenarios. These values wereobtained from an internal model produced by the Bank as required by OTSregulation as total assets now exceed $1.0 billion. Due to the level ofinterest rates, no values are calculated for hypothetical rate scenarios ofdown 300 basis points at June 30, 2007. It only provides an estimate ofeconomic value at a point in time and the economic value of the same portfoliounder the above referenced interest rate scenarios.

58

----

**Estimatedchange in 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 |   |
|                                        |            |                                   |            |  |  |  |  |  |  |  |  |  |

 

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

***Recent Accounting Pronouncements***

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

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

59

----

Measurements.”The Company 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”). SFAS157 establishes a framework for measuring fair value in accordance with U.S.generally accepted accounting principles, and enhances disclosures about fairvalue measurements. SFAS 157 applies when other accounting pronouncementsrequire fair value measurements; it does not require new fair valuemeasurements. SFAS 157 is effective for financial statements issued for fiscalyears beginning after November 15, 2007, and for interim periods withinthose years. The Company is currently assessing the implications of thisStatement on its financial statements.

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

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

*FASB Interpretation48, Accounting for Uncertainty in Income Tax Positions*

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Tax Positions.” This interpretation clarifies the application of FASBStatement No. 109 by establishing a threshold condition that a taxposition must meet for any part of the benefit of that position to berecognized in the financial statements. In addition to recognition, theinterpretation provides guidance on the measurement, derecognition,classification, and disclosure of tax positions and is effective for fiscalyears beginning after December 15, 2006. The Company has evaluated thisinterpretation and determined that it will have no material impact on resultsof its future operations and financial condition.

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

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

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

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

60

----

fiscalyears beginning after December 15, 2007, with early adoption permitted asof the beginning of an entity’s fiscal year. The Bank has recorded a liabilityof $246 thousand within other liabilities on its consolidated statements offinancial condition to account for the settlement of the future benefitobligation.

**Selected QuarterlyFinancial Data**

Thefollowing table presents selected quarterly operating data for the fiscal yearsended June 30, 2007 and 2006. The earnings per share amounts for periodsprior to March 31, 2007 have been adjusted to give retroactive effect tothe 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 |   |

 

61

----

Theresults for the first through third quarters of the current fiscal year asreported on the Company’s Form 10-Q have been adjusted by the followingamounts:

| ** **                     | ** ** | **For the quarter ended**                                        | ** ** |
|--------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **03/31/07**                                                                    | ** ** | **12/31/06** | ** ** | **09/30/06** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest  income(a)      |       | $                                                                               | (115.0     | ) | $ | (87.0 | ) | $ | (109.0 | ) |
| Total interest  expense(a)     |       | 347.0                                                                           |       | 386.0 |   | 273.0 |   |
| Net interest  income           |       | (462.0                                                                          | )          | (473.0 | ) | (382.0 | ) |
| Provision for  loan losses     |       | —                                                                          |       | — |   | — |   |
| Total  non-interest income(b)  |       | 18.0                                                                            |       | 131.0 |   | 32.0 |   |
| Total  non-interest expense(c) |       | (286.0                                                                          | )          | 143.0 |   | (241.0 | ) |
| Income tax  expense(d)         |       | (54.0                                                                           | )          | (169.0 | ) | (352.0 | ) |
| Net income                     |       | (104.0                                                                          | )          | (316.0 | ) | (303.0 | ) |
| Earnings per share:            |       |                                                                            |       |   |   |   |   |
| Basic                          |       | $                                                                               | (0.01      | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| Diluted                        |       | $                                                                               | (0.01      | ) | $ | (0.02 | ) | $ | (0.02 | ) |

----

(a)           Adjustments relate toitems identified in various reconciliations for which reconciling items werenot investigated in a timely manner.

(b)          Adjustments relateprimarily to the change in the fair market value of various interest rate swapsas well as proceeds received from a previously impaired bond.

(c)           Adjustments relateprimarily to adjustments of stale-dated items identified in reconciliations aswell the accrual for paid time off.

(d)          Adjustments relate tothe tax effect of the above noted items at a marginal tax rate of 34%.

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.

62

----

**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 material misstatement.An audit includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat 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 financial positionof the Company as of June 30, 2007 and 2006, and the results of theiroperations and their cash flows for each of the years in the three-year periodended June 30, 2007, in conformity with U.S. generally accepted accountingprinciples.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the Company’s internal control overfinancial reporting 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 adverse opinionon the effectiveness of the Company’s internal control over financialreporting.
| /s/  KPMG LLP              |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |   |
| September 28, 2007    |   |

 

63

----

**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 andoperating effectiveness of internal control based on the assessed risk. Ouraudit also included performing such other procedures as we considered necessaryin the circumstances. We believe that our audit provides a reasonable basis forour opinion.

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. Acompany's internal 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 of financialstatement account reconciliations primarily related to the support for themanual posting of certain accounting entries and the clearing of reconcilingitems in a timely manner and (2) improper application of accounting resourcesto effectively evaluate the financial reporting impact of significant mattersincluding, but not limited to, interest rate swap transactions. We also haveaudited, 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 

64

----

consolidated financialstatements, and this report does not affect our report dated September 28,2007, which expressed an unqualified opinion on those consolidated financialstatements. 

In ouropinion, 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 *Internal Control—IntegratedFramework* issued by COSO.
| /s/  KPMG LLP              |   |
|----------------------------|--------|
| Philadelphia, Pennsylvania |   |
| September 28, 2007    |   |

 

65

----

**Willow Financial 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 Financial Statements

66

----

**Willow Financial 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 Financial Statements

67

----

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

| ** **                                                | ** ** | **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 |   |

 

68

----

**Willow Financial Bancorp, Inc. Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (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                                                     | )          | 505 |   | — |   |
| Other  comprehensive income (loss)                                                                     |       | 137                                                      |       | (2,289 | ) | 1,110 |   |
| Net income                                                                                             |       | 8,395                                                    |       | 11,076 |   | 6,726 |   |
| Comprehensive  income                                                                                  |       | $ 8,532                                             |       | $ 8,787 |   | $ 7,836 |   |

 

See accompanying Notes to Consolidated Financial Statements.

69

----

**Willow Financial 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 Financial Statements.

70

----

**1.**                 Description ofBusiness and Basis of Financial Statement Presentation

Effective at 11:59 p.m.,September 21, 2006, Willow Grove Bancorp, Inc. and Willow Grove Bankchanged their names to Willow Financial Bancorp, Inc. and Willow FinancialBank, respectively. As contained  herein,references to the Company include both Willow Financial Bancorp, Inc. andWillow Grove Bancorp, Inc. and references to the Bank include both WillowFinancial Bank and Willow Grove Bank. Coincident with the name change, theCompany’s trading 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 forWillow Financial Bank (the “Bank”). The Bank, which was originally organized in1909, is a federally chartered savings bank and wholly owned subsidiary of theCompany. The Bank’s business consists primarily of making commercial businessand consumer loans as well as real estate loans, both commercial and residential,funded primarily by retail and business deposits along with borrowings.

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

The Merger has beenaccounted for using the purchase method of accounting, which requires that ourfinancial statements include activity of Chester Valley only subsequent to theacquisition date of August 31, 2005. Accordingly, our consolidatedfinancial statements and the information herein include the combined results ofthe former Chester Valley and its former subsidiaries, Chester Valley and WIS, since September 1, 2005.

Effective February 28,2006, the Bank completed the sale of all outstanding shares of capital stock ofPCIS to Uvest BD-A, Inc., a North Carolina Corporation and registeredbroker-dealer (“Uvest”) for consideration of $100 but providing that suchshares may be repurchased for $100 at any time after the closing date of thestock sale. Concurrently with the execution of the sale of PCIS, the partiesentered into a related Sub-Clearing and Brokerage Services Agreement, whichprovides that an affiliate of Uvest will provide securities clearing andcertain supervisory and compliance services for PCIS, and a Financial ServicesAgreement between PCIS and the Bank which provides that the Bank will beentitled to 90% of the revenue generated by the securities brokerage activitiesconducted at the PCIS office and will bear substantially all operational andoverhead expenses. Upon consummation of the sale of PCIS stock to 

71

----

Uvest,PCIS is no longer a subsidiary of the Company. However, under the provisions ofFinancial Accounting Standards Board Interpretation No. 46R, “Consolidationof Variable Interest Entities”, the results of PCIS, which now conductsbusiness as Willow Investment Services (“WIS”) continue to be consolidated inthe Company’s financial statements. The affiliation agreement with Uvest hasthe primary 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 priceincludes a payment of $4.2 million at closing plus an additional amount up to$1.3 million in payments through the three-year anniversary date of theacquisition, subject to the achievement of certain performance thresholds. BeneServis an insurance 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. TheCompany 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 Companyinclude its consolidated entities, Willow Financial Bank, the Bank’ssubsidiaries, and its business segment, WIS, unless the context of thereference indicates otherwise.

The accompanyingconsolidated financial statements include the accounts of the Company and itswholly owned subsidiary, Willow Financial Bank. The accounts of the Bank includeits wholly owned subsidiaries, Willow Grove Investment Corporation, WillowGrove Insurance Agency, LLC, BeneServ, D&S Service Corporation, and FirstFinancial Investments. All material intercompany balances and transactions havebeen eliminated in consolidation. The Company follows accounting and reportingpractices which are in accordance with U.S. generally accepted accountingprinciples.

Certain amounts in prioryears are reclassified for comparability to the current year’s presentation. Suchreclassifications, when applicable, have no effect on net income. The Companyreclassified collateralized customer deposit balances at June 30, 2006from securities sold under agreements to repurchase to interest-bearingdeposits on the consolidated statements of financial condition.

**2.**                 Risks andUncertainties

In the normal course ofits business, the Company encounters two significant types of risk: economicand regulatory. There are three main components of economic risk: interest raterisk, credit risk and market risk. The Company is subject to interest rate riskto the degree that its interest-bearing liabilities mature or re-price atdifferent speeds, or on a different basis, from its interest-earningassets. The Company’s primary credit risk is the risk of default on the Company’sloan portfolio that results from the borrower’s inability to make contractuallyrequired payments. The Company’s lending activities are concentrated inPennsylvania. The largest concentration of the Company’s loan portfolio islocated in southeastern 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. Market risk reflects changes in the value of collateral underlyingloans, the valuation of real estate held by the Company, the valuation of loansheld for sale, securities available for sale and mortgage servicing assets. TheCompany is subject to certain Federal banking laws and regulations as furtherdescribed herein and in note 18. Compliance with regulations causes theCompany to incur significant costs. In addition, the possibility of futurechanges to such regulations presents the risk that future additional costs willbe incurred that may impact the Company.

**3.**                 Acquisition ofChester 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 

72

----

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 tablesummarizes the purchase accounting adjustments resulting from the Merger:

**ChesterValley Acquisition 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 tablesummarizes the pro forma operating results of Willow Financial Bancorp, Inc.had the acquisition of Chester Valley occurred on July 1, 2005.

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

| 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 fornon-recurring items at an effective tax rate of 35%.

73

----

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 theacquisition of BeneServ, Inc. to be immaterial to the consolidatedfinancial statements.

**4.**                 Summaryof Significant Accounting Policies

***Use of Estimates***

In preparing theconsolidated financial statements, the Company is required to make estimatesand assumptions that affect the reported amounts of assets and liabilities asof the date of the statement of financial condition and revenue and expense forthe period. Actual results could differ significantly from those estimates.Material estimates that are particularly susceptible to significant change inthe near-term include the determination of the allowance for loan losses andincome taxes. Management believes that the allowance for loan losses and thebalances in income tax accounts are adequate. Various regulatory agencies, asan integral part of their examination process, periodically review the Bank’sallowance for loan losses and valuations of real estate owned. Such agenciesmay require the Bank to recognize additions to the allowance or adjustments tothe valuations based on their judgments about information available to them atthe time of their examination.

***Cash and Cash Equivalents***

For purposes of theconsolidated statements of cash flows, cash and cash equivalents include cashand interest-bearing deposits with original maturities of three months orless.

***Loans Held for Sale***

Mortgage loans originatedand intended for sale in the secondary market are carried at the lower of costor market calculated on an aggregate basis, with any unrealized lossesreflected in the consolidated statements of income. Loans transferred fromloans held for sale to loans receivable are transferred at the lower of cost ormarket value at the date of transfer. Gains are recognized upon delivery to thepurchaser 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 lossin value is other than temporary. The term “other than temporary” is notintended to indicate that the decline is permanent, but indicates that 

74

----

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

***Allowance for Loan Losses***

The allowance for loanlosses is maintained at a level that management believes is adequate to coverknown and inherent losses in the loan portfolio that are both probable andreasonable to estimate at each reporting date. Management establishes the loanloss allowance in accordance with guidance provided by the Securities andExchange Commission’s Staff Accounting Bulletin 102 (SAB 102). Thedetermination of the adequacy of the allowance is based upon an evaluation ofthe portfolio, loss experience, current economic conditions, volume, growth,composition of the portfolio, and other relevant factors. The Company useshistorical loss factors for each loan type and, for loans that we considerhigher risk for all but single-family mortgage loans and guaranteedconsumer loans, qualitative factors are also considered. This componentestablishes a range for factors such as, but not limited to, delinquencytrends, asset classification trends and current economic conditions. Managementthen assesses these conditions and establishes, to the best of its ability, theallowance for loan losses from within the range calculated, based upon thefacts known at that time. The methodology does not imply that any portion ofthe allowance for loan loss is restricted, but the allowance for loan lossapplies 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 certain directorigination costs are deferred and amortized over the contractual life of therelated 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 pastdue after one payment has been missed. Loans are charged off when they reach “loss”status in accordance with the Bank’s asset classification policy. There arethree classifications 

75

----

forproblem assets: “substandard,” “doubtful,” and “loss.” Substandard assets haveone or more defined weaknesses and are characterized by the distinctpossibility that the Bank will sustain some loss if the deficiencies are notcorrected. Doubtful assets have weaknesses of substandard assets with theadditional characteristic that the weaknesses make collection or liquidation infull on the basis of current existing facts, conditions and values,questionable, and there is a high probability of loss. An asset classified asloss is considered uncollectible and of such little value that continuance asan asset of the institution is not warranted.

***Property and Equipment***

Property and equipment arestated at cost, less accumulated depreciation and amortization. The Companycomputes depreciation and amortization using the straight-line method over theestimated useful lives of the assets, which range from three to 40 years.Significant renovations and additions are capitalized. Leasehold improvementsare depreciated over the shorter of the useful lives of the assets or therelated lease term. When assets are retired or otherwise disposed of, the costand related accumulated depreciation are removed from the accounts and anyresulting gain or loss is reflected in income for the period. The cost ofmaintenance and repairs is charged to expense as incurred.

***Goodwill and Other Intangibles***

Goodwill represents theexcess cost over fair value of assets acquired over liabilities as a result ofthe Merger and earlier branch acquisitions. Included in other intangibles arecore deposit intangibles, a measure of the value of checking and savingsdeposits acquired in the Merger accounted for under the purchase method. Thecore deposit intangible is being amortized to expense over a fourteen-year lifeusing a method that approximates a level yield method. A customer intangiblerecorded as a result of the acquisition of BeneServ is being amortized toexpense over a ten-year life using a straight line basis. The Company followsthe provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,”and performs impairment tests of the intangible assets at least annually andimpairment losses are recognized if the carrying value of the intangibleexceeds its fair value. The Company has not recorded any impairment losses as aresult of this analysis in 2007, 2006 or 2005.

***Income Taxes***

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

***Earnings Per Share***

Earnings per share (“EPS”)consists of two separate components, basic EPS and diluted EPS. Basic EPS iscomputed by dividing net income by the weighted average number of common sharesoutstanding for each period presented, see Note 6. Diluted EPS iscalculated by dividing net income by the weighted average number of commonshares outstanding plus dilutive common stock equivalents (“CSEs”). CSEsconsist of dilutive stock options granted through the Company’s stock optionplans and unvested common stock awards.

76

----

***Stock Based Compensation***

On July 1,2005, the Company adopted Statements of Financial Accounting Standards(SFAS) No. 123R, “Share-based Payment.” This Statement establishesthe standards for accounting for share-based payment transactions in which anenterprise receives employee services in exchange for equity instruments of theenterprise or liabilities that are based on the fair value of the enterprise’sequity instruments or that may be settled by the issuance of such equityinstruments. SFAS No. 123R requires an entity to recognize the grant-datefair-value of stock options and other equity-based compensation issued toemployees in the statement of operations. The revised Statement generallyrequires that an entity account for those transactions using the fair-valuebased method and eliminates an entity’s ability to account for share-basedcompensation transactions using the intrinsic value method of accountingprovided in Accounting Principles Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees,” which was permitted under Statement No. 123,as originally issued. Prior to July 1, 2005, the Company did not recognizeemployee equity-based compensation costs in net income. The adoption ofSFAS No. 123R had the following impact on reported amounts comparedwith amounts that would have been reported using the intrinsic value methodunder previous accounting:

 

| ** **                                  | ** ** | **Year ended June 30, 2005**                            | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | ** **                                                                  | ** ** | ** ** | ** ** | **Pro Forma** | ** ** |
| ** **                                  | ** ** | **As**                                                                      | ** ** | **Pro Forma** | ** ** | **if under** | ** ** |
| ** **                                  | ** ** | **Reported**                                                                | ** ** | **Adjustments** | ** ** | **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 AccountingPronouncements***

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

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).This Statement permits entities to choose to measure many financial instrumentsand certain other items at fair value. SFAS 159 provides entities with theopportunity to reduce volatility in reported earnings caused by measuringrelated assets and liabilities differently. SFAS 159 is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of a fiscal year thatbegins on or before November 15, 2007, provided the entity also elects toapply the provisions of FASB Statement No. 157, “Fair Value Measurements.”The Company 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”). 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 

77

----

implications of this Statement on its financialstatements.

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

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

*FASB Interpretation 48, Accounting for Uncertainty inIncome Tax Positions*

In July 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Tax Positions.” This interpretation clarifies the application of FASBStatement No. 109 by establishing a threshold condition that a taxposition must meet for any part of the benefit of that position to be recognizedin the financial statements. In addition to recognition, the interpretationprovides guidance on the measurement, derecognition, classification, anddisclosure of tax positions and is effective for fiscal years beginning after December 15,2006. The Company has evaluated this interpretation and noted that it will haveno material impact on results of its future operations and financial condition.

*FASB Statement No, 155, Accounting for Certain HybridFinancial Instruments*

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

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

In June 2006, theEmerging Issues Task Force reached a consensus that, for endorsementsplit-dollar life insurance arrangements, an employer should recognize theliability for future benefits based on the substantive agreement with theemployee, since the postretirement benefit obligation is not effectivelysettled. An entity is permitted to apply the consensus by retrospectiveapplication to all prior periods in accordance with FASB StatementNo. 154, including its required disclosures. The consensus is effectivefor fiscal years beginning after December 15, 2007, with early adoptionpermitted as of the beginning of an entity’s fiscal year. The Bank has recordeda liability of $246 thousand within other liabilities on the consolidatedstatements of financial condition to account for the settlement of the futurebenefit obligation.

78

----

**5.**                 StockCompensation 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.

Thefollowing table provides information about options outstanding for the yearended June 30, 2007:

| ** **                                | ** ** | ** ** | ** ** | **Weighted** | ** ** | **Weighted**        | ** ** |
|-------------------------------------------|------------|------------|------------|--------------|------------|---------------------|------------|
| ** **                                | ** ** | ** ** | ** ** | **Average**  | ** ** | **Average**         | ** ** |
| ** **                                | ** ** | ** ** | ** ** | **Exercise** | ** ** | **Grant Date** | ** ** |
| ** **                                | ** ** | **Shares** | ** ** | **Price**    | ** ** | **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 expectsapproximately 7,500 of unvested options to be forfeited.

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

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

 

Thefollowing table provides information about options outstanding and exercisableoptions at June 30, 2007:

| ** **                         | ** ** | **Options**     | ** ** | **Exercisable** | ** ** |
|------------------------------------|------------|-----------------|------------|-----------------|------------|
| ** **                         | ** ** | **Outstanding** | ** ** | **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             |       |

 

79

----

Theweighted average remaining contractual life for options outstanding andweighted average exercise price per share for exercisable 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 stock options during the years ended June 30, 2007, 2006and 2005, respectively. The weighted average grant date fair value of optionsgranted was $2.61 and $2.89 for the years ended June 30, 2007 and 2006,respectively. The fair value for stock options granted during the year ended June 30,2007 was determined at the date of grant using a Black-Scholes options-pricingmodel. The fair value of option awards under the Option Plans is estimated onthe date of grant using the Black-Scholes valuation methodology, which isdependent upon certain 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 expectedaverage risk-free rate is based on the U.S. Treasury yield curve on the day ofgrant. The expected average life represents the weighted average period of timethat options granted are expected to be outstanding giving consideration tovesting schedules and historical option exercise experience. Expectedvolatility is based on historical volatilities of the Company’s common stock.The expected dividend yield is based on historical information.

The fair 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 2002Recognition and Retention Plan and Trust Agreement (the “2002 RRP”), andacquired 269,393 shares at a cost of $3.2 million. Pursuant to the termsof the 2002 RRP, 227,711 shares have been awarded to directors and management;however 20,160 shares have been forfeited. As of June 30, 2007, 197,128granted shares were vested pursuant to the terms of the 2002 RRP. At the November 9,2005 Annual Meeting, shareholders approved the 2005 Recognition and RetentionPlan and 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. 

80

----

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 ended June 30,2007, 2006 and 2005, respectively. Unrecognized compensation cost on unvested RRPshares and weighted average period to be recognized are $1.8 million and 2.0years, respectively. 

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

| ** **                           | ** ** | ** ** | ** ** | **Weighted**        | ** ** |
|--------------------------------------|------------|------------|------------|---------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **Average**         | ** ** |
| ** **                           | ** ** | ** ** | ** ** | **Grant Date** | ** ** |
| **RRP Shares**                  | ** ** | ** ** | ** ** | **RRP Shares** | ** ** | **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 intrinsicvalue of unvested RRP awards under the three plans at June 30, 2007 was$2,164,760.

**6.**                 EarningsPer 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.

Thefollowing is a reconciliation of the numerators and denominators of the basicand 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 |   |

 

81

----

**7.**                 InvestmentSecurities

HTMand AFS investment securities at June 30, 2007 and 2006 consisted of thefollowing:

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

 

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

 

82

----

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.

Theamortized cost and estimated fair value of investment securities held tomaturity, investment securities and available for sale 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 million as 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.

Providedbelow is a summary of investment securities classified as held to maturity and available-for-salewhich were in an unrealized loss position at June 30, 2007 and 2006.Approximately $3.4 million, or 66.0%, of the unrealized loss at June 30,2007 was comprised of securities in a continuous loss position for twelvemonths or more, which consisted of equity securities as compared to $255thousand, or 4.1%, at June 30, 2006. A significant portion of these equitysecurities represents mutual fund investments backed primarily by investmentsin adjustable-rate mortgage-backed securities. The Company does notintend to dispose of these securities and does not believe that they arepermanently impaired. Further, the Company 

83

----

believes the deterioration in value is attributable tochanges in market conditions as the loss relates to certain mutual fundinvestments and not the credit quality of the 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 | ) |   |

 

84

----

Management does notbelieve any individual unrealized loss as of June 30, 2007 represents an other-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**

Loansreceivable 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 loans receivable are loans on non-accrualstatus 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 beenrecognized on such non-accrual loans during the years ended June 30, 2007,2006 and 2005, had they been current in accordance with their original terms,was $224 thousand, $1.4 million, and $34 thousand, respectively. Therewere no loans that were 90 days or more delinquent for which the Companycontinued to accrue interest at June 30, 2007.

As of June 30, 2007, 2006 and 2005, the Companyhad impaired loans with a total recorded investment of $1.4 million, $12.8million, and $121 thousand, respectively. Average impaired loans were $7.0 million,$5.0 million and $414 thousand for the years ended June 30, 2007, 2006and 2005, respectively. Cash of $116 thousand, $281 thousand and$77 thousand was collected on these impaired loans during the years ended June 30,2007, 2006 and 2005, respectively. Interest income of $0, $196 thousand, and $0was recognized on such loans during the years ended June 20, 2007, 2006and 2005, respectively. As of June 30, 2007, 2006 and 2005, there were norecorded investments in impaired loans for which there was a related specificallowance for credit losses.

85

----

Thefollowing is a summary of the activity in the allowance for loan losses for theyears ended June 30, 2007, 2006 and 2005:

| ** **                        | ** ** | **For the year ended June 30,** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | **2007**                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                        | ** ** | **(Dollars in thousands)**                     | ** ** |
| Balance,  beginning of the period |       | $                                                        | 16,737     |   | $ | 6,113 |   | $ | 5,220 |   |
| Plus: Provisions for loan losses  |       | 653                                                      |       | 3,205 |   | 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.   Goodwilland Other Intangible Assets**

The Company recorded goodwill of $1.0 million during2007 relating to the acquisition of BeneServ and $93.2 million in 2006that resulted from the Merger. The remaining goodwill balance, which approximates$848 thousand at June 30, 2007, relates to a branch acquisition in 1994.The net other intangible balance of $14.4 million at June 30, 2007primarily resulted from the Merger as well as the customer intangible from theacquisition of BeneServ. The amortizationexpense of the other intangible assets for the fiscal year ended June 30,2007 was $2.0 million.

Theestimated aggregate amortization expense related to other intangibles for eachof the five succeeding calendar years is:

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

 

**10.   Propertyand Equipment**

Propertyand equipment by major classification are summarized as follows:

| ** **                         | ** ** | ** **                           | ** ** | **For the year ended  June 30,** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **Depreciable life**            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Land                               |       |                                 |       | $                                                    | 1,129      |   | $ | 1,129 |   |
| Buildings                          |       | 15  to 40 years                 |       | 6,849                                                |       | 5,710 |   |
| Furniture,  fixtures and equipment |       | 3 to  7 years                   |       | 10,806                                               |       | 6,649 |   |
| Total                              |       |                                 |       | 18,784                                               |       | 13,488 |   |
| Accumulated  depreciation          |       |                                 |       | (7,477                                               | )          | (3,424 | ) |
| Property and equipment,  net       |       |                                 |       | $                                                    | 11,307     |   | $ | 10,064 |   |

 

86

----

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

In February 2006, theBank completed a sale-leaseback of eight of its branch offices resulting in the receiptof approximately $11.1 million in cash and an excess over book value ofapproximately $722 thousand. The premium attributed to the former FirstFinancial branches of $194 thousand reduced oodwill while the balance ofsuch premium of $528 thousand is deferred and amortized as a reduction of rentexpense over the term of the leases.

**11.   Deposits**

Depositbalances by type consisted 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 | % |   |

 

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

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

 

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

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

 

87

----

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

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

 

**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.

88

----

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.**          IncomeTaxes

Incometax expense for the years ended June 30, 2007, 2006 and 2005 consisted ofthe 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 |   |

 

Theexpense (benefit) for income taxes differed from that computed at the statutoryfederal corporate rate for the years ended June 30, 2007, 2006 and 2005 asfollows:

| ** **                             | ** ** | **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 | % |   |

 

89

----

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

| ** **                                        | ** ** | **June 30,**                                        | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                        | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)**                     | ** ** |
| Deferred loan  fees                               |       |                                                     | $          | 84 |   |   | $ | 115 |   |
| Retirement plan  reserves                         |       |                                                     | 488        |   |   | 586 |   |
| Employee benefits                                 |       |                                                     | 234        |   |   | 222 |   |
| Uncollected  interest                             |       |                                                     | 78         |   |   | 274 |   |
| Book bad debt  reserves                           |       |                                                     | 4,274      |   |   | 6,024 |   |
| Unrealized loss  on available for sale securities |       |                                                     | 1,712      |   |   | 1,966 |   |
| Investment  impairment reserves                   |       |                                                     | 1,360      |   |   | 1,504 |   |
| Loan discounts                                    |       |                                                     | 66         |   |   | 325 |   |
| Sale/Leaseback                                    |       |                                                     | 159        |   |   | 167 |   |
| Purchase  accounting fair value adjustments       |       |                                                     | 88         |   |   | 292 |   |
| Fixed asset  write-downs                          |       |                                                     | —     |   |   | 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 of deferred tax assets is dependentupon a variety of factors, including the generation of future taxable income,the existence of taxes paid and recoverable, the reversal of deferred taxliabilities and tax planning strategies. Based upon these and other factors,management believes it is more likely than not that the Company will realize thebenefits of these deferred tax assets.

At June 30, 2007, the Company had $397 thousandin low income housing tax credit carry-forwards. These carry-forwards expire inJune 2017.

The Small Business Job Protection Act of 1996 (the“1996 Act”) eliminated the use of the reserve method of accounting for bad debtreserves by savings institutions, effective for taxable years beginning after1995. Prior to the 1996 Act, bad debt reserves created prior to January 1,1988 were subject to recapture into taxable income if the Bank failed to meetcertain thrift asset and definitional tests. New federal legislation eliminatedthese thrift related recapture rules. However, under current law, pre-1988reserves remain subject to recapture should the Bank make certain non-dividenddistributions or ceases to maintain a bank charter.

At June 30, 2007, theBank’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.

90

----

**15.**          BenefitPlans

*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. Effective January 1,2006, employees are permitted to contribute up to 25% of their salary to thisplan. The Company matches every dollar contributed up to 4% of salary, plus 50%of the amount of an employees’ salary reductions in excess of 4% of salary, butnot in excess of 6% of salary. The expense related to the 401(k) portionof this plan was $628 thousand, $255 thousand, and $70 thousand for the yearsended June 30, 2007, 2006 and 2005, respectively.

*Employee StockOwnership Plan*

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

*SupplementalRetirement Plans*

Effective June 30, 1998, the Company adoptednon-qualified supplemental retirement plans for the Company’s Board of Directors(the “Directors’ Plan”) and for the Company’s former president (the “President’sPlan”). The Directors’ Plan provided for fixed annual payments to qualifieddirectors for a period of ten years from retirement. Benefits to be paidaccrued at the rate of 20% per year on completion of six full years of service,with full benefit accrual at ten years of service. At the time these plans wereadopted credit was given for past service. The President’s Plan provides forpayments for a period of ten years beginning at retirement based on apercentage of annual compensation not to exceed an established cap. Fullbenefits become accrued at age 68 with partial vesting prior thereto. Bothplans provide for full payments in the event of a change in control of the Company.The Directors’ Plan and President’s Plan are intended to be, and are, unfunded.The accrued liability of the Directors’ Plan and the President’s Plan were $779thousand and $481 thousand and $965 thousand and $710 thousandat June 30, 2007 and 2006, respectively.

In November 2005, theCompany terminated its Directors Retirement Plan and the Directors IncentiveCompensation Plan, at which time the directors became fully vested in theiraccrued benefit as of October 31, 2005, under the Directors RetirementPlan. The Company’s former President has retired and is fully vested in thePresident’s Plan.

91

----

**16.**          Commitmentsand Contingencies

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

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

 

**FinancialInstruments 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 millionand $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 of business, the Company sellsloans in the secondary market. As is customary in such sales, the Companyprovides indemnification to the buyer under certain circumstances. Thisindemnification may include the obligation to repurchase loans by the Company,under certain circumstances. In most cases repurchases and losses are rare, andno provision is made for losses at the time of sale. When repurchases andlosses are probable and reasonably estimable, a provision is made in thefinancial 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 ofCredit 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.

92

----

**Legal Proceedings**

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

FFB is a party to three civil actions relating to someof the revenue bonds which are the subject of the SEC investigation describedabove. On August 30, 2005, a writ of summons was filed by the BoyertownArea School District (“Boyertown”) in the Court of Common Pleas, MontgomeryCounty, Pennsylvania commencing a civil action against,*inter alia,* FFB.*Boyertown Area School District v. First FinancialBank et. al.*, No. 05­21799. A complaint was filed on November 9,2005, asserting the following claims against FFB: Breach of Trust Indenture andFiduciary Duties (Count 1), Breach of Fiduciary Duties (Count 2), CivilConspiracy (Count 3), and Concerted Action (Count 4). On September 19,2005, Red Lion Area School District (“Red Lion”) filed a complaint in theCourt of Common Pleas, York County, Pennsylvania, against*inter alia*, FFB.*Red Lion Area 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 amendedcomplaint asserts the following claims against FFB: Declaratory Judgment (Count15), 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), Unjust Enrichment(Count 24), and Unjust Enrichment (Count 25). On March 16, 2006, PerkiomenValley School District (“Perkiomen”) filed a complaint in the Court of CommonPleas, Montgomery County, Pennsylvania, against,*inter alia*, FFB *PerkiomenValley School District v. First Financial Bank et.al.*, No. 06­06533.The complaint asserts the following claims against FFB: Breach of TrustIndenture (Count 1), Breach of Fiduciary Duties (Count 2), Vicarious Liabilityand Respondeat Superior (Count 3), Civil Conspiracy (Count 4), and Concert ofAction (Count 5). The actions have been consolidated for discovery andcase management purposes, but not for trial. The Bank’s answers wereprovided on September 6, 2007, with respect to the Red Lion matter, and September 10,2007, with respect to the Boyertown and Perkiomen matters. Discovery is in itsinitial stages. The Company believes the above noted lawsuits are without meritand intends to vigorously defend itself in the suits.

On June 16, 2007, Cincinnati Insurance Company (“Cincinnati”)commenced a declaratory judgment action in federal court against the Bank, RedLion, Boyertown, and Perkiomen seeking a declaration that Cinncinnati is notobligated to provide insurance coverage to the Bank in connection with the SECsubpoena and the litigation brought by Red Lion, Boyertown, and Perkiomen:*Cincinnati Insurance Company v. First Financial Banket al*., 07-02389 (E.D. Pa.). The Bank’s answer was provided onSeptember 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 

93

----

materialadverse effect on the financial condition or operations of the Company. Therecan be no assurance that any of the outstanding legal proceedings to which theCompany is a party will not be decided adversely to the Company’s interests andhave a material adverse effect on the financial condition and operations of theCompany.

**Other Commitments**

Inconnection with the operation of 29 of its banking offices and an operationscenter, the Company leases certain office space. The leases are classified asoperating leases, with rent expense of $2.9 million, $2.0 million, and $837thousand for the years ended June 30, 2007, 2006 and 2005, respectively.Minimum payments over the remainder of the leases are summarized as follows:

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

 

**17.**          Accountingfor Derivative Instruments and Hedging

The Company may from time to time utilize derivativeinstruments such as interest rate swaps, interest rate collars, interest ratefloors, interest rate swaptions or combinations thereof to assist in itsasset/liability management. In accordance with SFAS No. 133, “Accountingfor Derivative Instruments,” the Company documents its hedge relationships,including identification of the hedging instruments and the hedged items, aswell as its risk management objectives and strategies for undertaking thehedge. The Company also assesses, both at inception and at least quarterlythereafter, whether the derivative instruments that are used in hedgingtransactions are highly effective in offsetting the changes in either the fairvalue or cash flows of the hedged item. For fair value hedges, both theeffective and ineffective portions of the changes in the fair value of the derivative,along with the gain or loss on the hedged item that is attributable to thehedged risk, are recorded in the statement of operations within interest incomeor interest expense. For cash flow hedges, the effective portion of the changein 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 theresponsibility for a $20 million notional interest rate swap whereby theCompany paid a variable rate and received a fixed rate. The interest rate swaphad been used to hedge certain Federal Home Loan Bank borrowings of the formerChester Valley. On the date of the Merger, the interest rate swap and thehedged borrowings were marked to fair value in purchase accounting. In September 2005,the hedged borrowings were repaid and $10 million notional amount of theinterest rate swap was unwound with the counter-party. After performing theappropriate documentation of the derivative instrument, the Company designatedthe remaining $10 million notional amount interest rate swap as a fair valuehedge of certain existing borrowings of Willow Financial Bank. The swap had theeffect of converting a fixed rate borrowing to an adjustable rate borrowing.During the 

94

----

quarter ended December 31,2005, the derivative instrument ceased to be a highly effective hedge;therefore, the Company discontinued hedge accounting resulting in a pre-taxcharge of $47 thousand. The interest rate swap was unwound in February 2006without resulting in any additional impact to the statement of operations. Thebasis adjustment that was previously recorded on the hedged borrowing that isrecorded in the statement of financial condition is amortized as an increase ininterest expense over the remaining life of the borrowing using the interestmethod.

Additionally, in August 2003, Chester Valleypurchased a $30.0 million notional amount 3.50% six month LIBOR interest ratecap while simultaneously selling a $30.0 million notional amount 6.00%six-month LIBOR interest rate cap (“Interest Rate Corridor”) which was toexpire in August 2008. Chester Valley paid a net premium, which entitledit to receive the difference between six-month LIBOR from 3.50% up to 6.00%applied to the $30.0 million notional amount. Upon consummation of the Merger,the Company assumed the Interest Rate Corridor and designated it to hedgecertain borrowings of Willow Financial Bank, which were variable in nature andindexed to six-month LIBOR. The Interest Rate Corridor was being used to hedgethe cash flows of this borrowing. Prior to October 23, 2006, the InterestRate Corridor reduced the negative impact on earnings of the borrowings in arising interest rate environment. The fair market value of the Interest RateCorridor had two components: the intrinsic value and the time value of theoption. The Interest Rate Corridor was marked-to-market quarterly, with changesin the intrinsic value of the Interest Rate Corridor, net of tax, included as aseparate component of other comprehensive income, and the change in the timevalue of the option included directly as interest expense as required underSFAS 133. In addition, the ineffective portion, if any, would have beenexpensed in the period in which ineffectiveness was determined.

On October 23, 2006, the Company unwound theInterest Rate Corridor and recognized a gain of $804 thousand in the statementof operations upon repayment of the $30 million FHLB advance.

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.**          RegulatoryMatters

The Bank is subject to various regulatory capitalrequirements administered by the federal banking agencies. Failure to meetminimum capital requirements can initiate certain mandatory, and possiblyadditional discretionary actions by regulators that if undertaken, could have adirect material effect on the Company’s financial statements. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,the Bank must meet specific capital guidelines that involve quantitativemeasures of the Bank’s assets, liabilities, and certain off-balance sheet itemsas calculated under accounting practices. The Bank’s capital amounts andclassifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

95

----

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               |       | $                                    | 122,710    |                                                       |       | 8.5                                                                                                           | *%*        |   | $ | 21,734 |   |   | 1.5 | *%* |   | $ | 28,979 |   |   | 2.0 | *%* |   |
| (to tangible  assets)          |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |
| Core capital                   |       | 122,710                              |       |                                                       | 8.5        | *%*                                                                                                           |       | 57,958 |   |   | 4.0 | *%* |   | 72,447 |   |   | 5.0 | *%* |   |
| (to adjusted  tangible assets) |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |
| Tier I capital                 |       | 122,710                              |       |                                                       | 12.7       | *%*                                                                                                           |       | N/A |   |   | N/A | * * |   | 57,769 |   |   | 6.0 | *%* |   |
| (to risk-weighted  assets)     |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |
| Risk-based  capital            |       | 134,284                              |       |                                                       | 14.0       | *%*                                                                                                           |       | 77,025 |   |   | 8.0 | *%* |   | 96,282 |   |   | 10.0 | *%* |   |
| (to risk-weighted  assets)     |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |
| *As of  June 30, 2006*    | * *   | * *                             | * *   |                                                       | * *   | * *                                                                                                      |       | * * | * * |   | * * | * * |   | * * | * * |   | * * | * * |   |
| Tangible capital               |       | $                                    | 114,061    |                                                       |       | 7.8                                                                                                           | *%*        |   | $ | 22,028 |   |   | 1.5 | *%* |   | $ | 29,370 |   |   | 2.0 | *%* |   |
| (to tangible  assets)          |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |
| Core capital                   |       | 114,061                              |       |                                                       | 7.8        | *%*                                                                                                           |       | 58,711 |   |   | 4.0 | *%* |   | 73,426 |   |   | 5.0 | *%* |   |
| (to adjusted  tangible assets) |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |
| Tier I capital                 |       | 114,061                              |       |                                                       | 11.9       | *%*                                                                                                           |       | N/A |   |   | N/A | * * |   | 57,165 |   |   | 6.0 | *%* |   |
| (to risk-weighted  assets)     |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |
| Risk-based  capital            |       | 125,569                              |       |                                                       | 13.2       | *%*                                                                                                           |       | 76,220 |   |   | 8.0 | *%* |   | 95,274 |   |   | 10.0 | *%* |   |
| (to risk-weighted assets)      |       |                                 |       |                                                       |       | * *                                                                                                      |       |   |   |   |   | * * |   |   |   |   |   | * * |   |

 

In its letter approvingthe merger of Willow Financial Bank and First Financial Bank, the Office ofThrift Supervision (“OTS”), as one of the conditions for approval, indicatedthat, for the periods ending December 31, 2005, 2006, and 2007, WillowFinancial Bank must have tier one core capital ratios at least equal to 6.50%,6.75%, and 7.25%, respectively, and total risk-based capital equal to 11.97%,12.02% and 12.40%, respectively. Willow Financial Bank must also submit to theOffice of Thrift Supervision, quarterly status reports detailing its compliancewith the conditions on regulatory capital outlined in its approval letter. TheOffice of Thrift Supervision’s conditions for approval of the Bank Merger alsoindicated that, for the periods ending December 31, 2005, 2006, and 2007,Willow Financial Bancorp must have consolidated tangible capital ratios atleast equal to 5.14%, 5.59% and 6.12%, respectively. The Bank and the Company currentlyexceed all of these requirements.

**19.**          FairValue of Financial Instruments

The Company’s methods fordetermining the fair value of its financial instruments as well as significantassumptions and limitations are 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 

96

----

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 andassumptions were used to estimate the fair value of each major classificationof financial instruments at June 30, 2007 and 2006:

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

These financialinstruments have carrying values that approximate fair value.

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

Current quoted marketprices were used to determine fair value.

***Loans***

Fair values were estimatedfor portfolios of loans with similar financial characteristics. Loans weresegregated by type and each loan category was further segmented by fixed andadjustable-rate interest terms. The estimated fair value of the segregatedportfolios was calculated by discounting cash flows based on estimated maturityand prepayment speeds using estimated market discounted rates that reflectedcredit and interest risk inherent in the loans. The estimate of the maturitiesand prepayment speeds was based on the Company’s historical experience. Cashflows were discounted using market rates adjusted for portfolio differences.

***Loans Available for Sale***

The fair value of mortgageloans originated and intended for sale in the secondary market is based oncontractual cash flows using current market rates, calculated on an aggregatebasis.

***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.

*** ***

97

----

***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.

Thecarrying amounts and estimated fair values of the Company’s financialinstruments, including off-balance sheet financial instruments, at June 30,2007 and 2006, 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.**          ComprehensiveIncome (Loss)

Thetax effects allocated to each component of other comprehensive income (loss)are as follows:

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

 

98

----

 

| ** **                                                          | ** ** | **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.**          SegmentInformation

Under the definition of SFAS No. 131,“Disclosures About Segments of an Enterprise and Related  Information,” the Company has two operating segments at June 30, 2007 and 2006;Willow Financial Bank and WIS. The Willow Financial Bank segment primarilyprovides loan and deposit services to commercial and retail customers throughits network of 29 branch locations. The WIS segment, which was acquired onAugust 31, 2005 in connection with the Merger, operates a full serviceinvestment advisory and 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 |   |
|                       |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

99

----

**22.**          ParentCompany Financial Information (Willow Financial Bancorp, Inc.)

*Condensed Statements 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 |   |   |

 

*Condensed Statements 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 |   |

 

100

----

 

*Condensed Statements 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.**          RelatedParty Transactions

The Bank routinely entersinto transactions with its directors and officers. Such transactions are madein the ordinary course of business on substantially the same terms andconditions, including interest rates and collateral, as those prevailing at thesame time for comparable transactions with other customers, and do not, in theopinion of management, involve more than the normal credit risk or presentother unfavorable features. The aggregate amount of loans to such relatedparties was $137 thousand and $283 thousand at June 30, 2007 and 2006,respectively, and all such loans were performing in accordance with their termsat such dates.

101

----

**24.**          DividendPolicy

The Company’s ability topay dividends is dependent, in part, upon its ability to obtain dividends fromthe Bank. The future dividend policy of the Company is subject to thediscretion of the Board of Directors and will depend upon a number of factors,including future earnings, financial conditions, cash needs, and generalbusiness conditions. Holders of common stock will be entitled to receivedividends as and when declared by the Board of Directors of the Company out offunds legally available for that purpose. Such payment, however, will besubject to the regulatory restrictions set forth by the OTS. In addition, OTSregulations provides that, as a general rule, a financial institution may notmake a capital distribution if it would be undercapitalized after making thecapital distribution.During fiscal 2007, the Company paid cash dividends of $6.9 million, or $0.46per share.

**25.**          QuarterlyFinancial 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 |   |

 

102

----

Theresults for the first through third quarters of the current fiscal year asreported on the Company’s Form 10-Q have been adjusted by the followingamounts:

| ** **                     | ** ** | **For the quarter ended**                                    | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **03/31/07**                                                                | ** ** | **12/31/06** | ** ** | **09/30/06** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands,  except per share data)** | ** ** |
| Total interest  income(a)      |       | $                                                                           | (115.0     | ) | $ | (87.0 | ) | $ | (109.0 | ) |
| Total interest  expense(a)     |       | 347.0                                                                       |       | 386.0 |   | 273.0 |   |
| Net interest  income           |       | (462.0                                                                      | )          | (473.0 | ) | (382.0 | ) |
| Provision for  loan losses     |       | —                                                                      |       | — |   | — |   |
| Total  non-interest income(b)  |       | 18.0                                                                        |       | 131.0 |   | 32.0 |   |
| Total  non-interest expense(c) |       | (286.0                                                                      | )          | 143.0 |   | (241.0 | ) |
| Income tax  expense(d)         |       | (54.0                                                                       | )          | (169.0 | ) | (352.0 | ) |
| Net income                     |       | (104.0                                                                      | )          | (316.0 | ) | (303.0 | ) |
| Earnings per share:            |       |                                                                        |       |   |   |   |   |
| Basic                          |       | $                                                                           | (0.01      | ) | $ | (0.01 | ) | $ | (0.02 | ) |
| Diluted                        |       | $                                                                           | (0.01      | ) | $ | (0.02 | ) | $ | (0.02 | ) |

----

(a)           Adjustments relate toitems identified in various reconciliations for which reconciling items werenot investigated in a timely manner.

(b)          Adjustments relateprimarily to the change in the fair market value of various interest rate swapsas well as the recognition of a gain on a bond which was previously impairedbut was no longer impaired as a result of a change in circumstances.

(c)           Adjustments relateprimarily to the write-down of stale-dated items identified in reconciliationsas well the accrual for paid time off.

(d)          Adjustments relate tothe tax effect of the above noted items at a marginal tax rate of 34%.

(e)           A balance sheetreclassification of $9.9 million was recorded during the quarter endingJune 30, 2007 from retained earnings to additional paid-in capital toproperly reflect the stock dividend issued on February 23, 2007.

A balance sheetreclassification of $9.9 million was recorded from retained earnings toadditional paid-in capital to properly reflect the stock dividend issued onFebruary 23, 2007, revising the previously reported amounts.

**Item 9A.     Controls and Procedures**

**9Aa. DisclosureControls and Procedures**

Management evaluated, with the participation of theCompany’s Chief Executive Officer and Chief Financial Officer, theeffectiveness of its disclosure controls and procedures (as defined inRules 13a-15(e) or 15(d)-15(e) under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisreport. Based on such evaluation and the identification of the materialweaknesses in the Company’s internal control over financial reporting describedbelow, the Chief Executive Officer and Chief Financial Officer have concludedthat the Company’s disclosure controls and procedures were not effective as ofJune 30, 2007 to ensure that information required to be disclosed by theCompany in the reports that it files or submits under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and regulations.

In light of the material weaknesses described below,the Company performed additional analyses and other procedures to ensure thatthe consolidated financial statements included in this Form 10-Kwere 

103

----

prepared in accordancewith accounting principles generally accepted in the United States (“GAAP”). Asa result of these procedures, the Company concluded that the consolidatedfinancial statements included in this Form 10-K present fairly, inall material respects, the Company’s consolidated statements of financialcondition, income, changes in stockholders’ equity and comprehensive income andcash flows for the periods presented in conformity with GAAP.

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) underthe Exchange Act) occurred during the last fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

**9Ab. InternalControl over Financial Reporting**

**MANAGEMENT REPORTON EFFECTIVENESSOF INTERNAL CONTROL OVER FINANCIAL REPORTING**

Management of the Company and the Bank is responsiblefor establishing and maintaining adequate internal control over financialreporting as such term is defined in the Exchange Act. Under the supervisionand with the participation of management, including our Chief Executive Officerand Chief Financial Officer, we conducted an evaluation of the effectiveness ofour internal control over financial reporting based on the framework inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission.

In connection with thecompletion of our testing of the internal controls and a review of ourfinancial statements for the year ended June 30, 2007, two deficiencies ininternal control over financial reporting were identified that representmaterial weaknesses in our internal control over financial reporting as ofJune 30, 2007. These deficiencies are (1) inadequate review and analysis of financial statement accountreconciliations related to the support for the manual posting of accountingentries and the clearing of reconciling items in a timely manner and(2) improper application of accounting resources to effectively evaluatethe financial reporting impact of significant matters including, but notlimited to, interest rate swap transactions. These material weaknesses resultedin errors that were material to interest income, interest expense, non-interestincome, non-interest expense, additional paid-in capital and retained earnings,including the related income tax expense effect, in each of the first threequarters’ financial statements for fiscal year 2007, which have been restated,and in the preliminary June 30, 2007 financial statements, which have beencorrected prior to issuance of the financial statements included herein. Basedon our evaluation under the framework in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission,management concluded that our internal control over financial reporting was noteffective as of June 30, 2007.  Our independent auditor,KPMG LLP, the independent registered public accounting firm that audited thefinancial statements included in this report on Form 10-K, hasissued a report on of the Company’s internal control over financial reporting.Their report appears in Item 8.

**9Ac. RemediationPlan**

In response to thematerial weaknesses noted above, the Company has commenced the followingcorrective actions to remediate the material weaknesses on an ongoing basis:

·       TheCompany has conducted a thorough assessment of the design of the reconciliationprocess as it relates to the posting of manual entries. Effective with thethree-month period ending on September 30, 2007, the Company has revisedits reconciliation process to require that all manual entries contain theappropriate detailed support, and the processing of such entries be approved bythe Chief Accounting Officer and/or Chief Financial Officer. The approval ofcertain reconciliations in which the errors occurred will require the reviewand approval of the Chief Accounting Officer and/or Chief Financial Officer.Additionally, all reconciliation items are now 

104

----

required to be clearedwithin a 90-day period.  TheCompany believes that these procedures as well as certain other processenhancements will ensure accurate and timely completion of general ledgerreconciliations with a level of precision to detect errors that in the futurewould be material to the Company’s financial statements if not so detected.

·       Managementhas developed procedures they believe are sufficient to ensure that futureinterest rate swap transactions will have proper documentation to provide forhedge accounting treatment under Statement of Financial Accounting StandardsNo. 133 or will not be accounted for as hedge transactions.

TheCompany’s Board of Directors is actively monitoring the above remediationefforts and may direct additional measures as deemed appropriate.

| /s/ DONNA M. COUGHEY                     |     | /s/ JOSEPH T. CROWLEY     |
|------------------------------------------|----------|---------------------------|
| *President  and Chief Executive Officer* | * * | *Chief Financial Officer* |
| September 28,  2007                 |     | September 28, 2007   |

 

**Item 9B.**               OtherInformation

Not applicable.

**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance

The information required herein is incorporated byreference from the sections captioned “Information with Respect to Nominees forDirector, Continuing Directors and Executive Officers” and “BeneficialOwnership of Common Stock by Certain Beneficial Owners and Management—Section 16(a) BeneficialOwnership Reporting Compliance” in the Company’s Definitive Proxy Statement forthe 2007 Annual Meeting of Stockholders, which will be filed with the SEC (“DefinitiveProxy Statement”).

The Company has adopted acode of ethics policy, which applies to its principal executive officer,principal financial officer, principal accounting officer, as well as itsdirectors and employees generally. The Company will provide a copy of its codeof ethics to any person, free of charge, upon request. Any requests for a copyshould be made to our shareholder relations administrator, Willow FinancialBancorp, Inc., 170 South Warner Road, Suite 300, Wayne,Pennsylvania 19087.

**Item 11.**                 ExecutiveCompensation

The information required herein is incorporated byreference from the sections captioned “Management Compensation,” “CompensationCommittee Report” and “Compensation Committee Interlocks and InsiderParticipation” in the Company’s Definitive Proxy Statement.

The Compensation CommitteeReport included in the Definitive Proxy Statement should not be deemed filed orincorporated by reference into this filing or any other filing by the Companyunder the Exchange Act or Securities Act of 1933 except to the extent theCompany specifically incorporates said reports herein or therein by referencethereto.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

*SecurityOwnership of Certain Beneficial Owners and Management.*   Informationregarding security ownership of certain beneficial owners and management isincorporated by reference from “Beneficial Ownership of Common Stock by CertainBeneficial Owners and Management” in the Proxy Statement.

105

----

*EquityCompensation Plan Information.*   The followingtable provides information as of June 30, 2007 with respect to shares ofcommon stock that may be issued under our existing equity compensation plans,which consist of the 1999 and 2002 Stock Option Plans and 1999, 2002 and 2005Recognition and Retention Plans, all of which were approved by ourshareholders.

Thetable does not include information with respect to shares of common stocksubject to outstanding options granted under equity compensation plans assumedby us in connection with the acquisition of Chester Valley Bancorp on August 31,2005, which originally granted these options. Note 2 to the table sets forththe total number of shares of common stock issuable upon the exercise ofassumed options as of June 30, 2007 and the weighted average exerciseprice of those options. No additional options may be granted under thoseassumed plans.

| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |       | 1,069,013  | (1)                                                                                                                                                       |       |                                                                                                             | $          | 10.39                                                                                                                                                                                                                 | (1)        |   |   | 667,189 |   |   |
| Equity  compensation plans not approved by security holders |       |       | n/a        |                                                                                                                                                      |       |                                                                                                             | n/a        |                                                                                                                                                                                                                  |       |   | n/a |   |   |
| Total                                                       |       |       | 1,069,013  |                                                                                                                                                      |       |                                                                                                             | $          | 10.39                                                                                                                                                                                                                 |       |   |   | 667,189 |   |   |

----

(1)          Includes 166,520 sharessubject to restricted stock grants which were not vested as of June 30,2007. The weighted-average exercise price excludes such restricted stockgrants.

(2)          Thetable does not include information for equity compensation plans assumed by usin connection with the acquisition of Chester Valley Bancorp which originallyestablished those plans. As of June 30, 2007, a total of 264,863 shares ofCommon Stock were issuable upon exercise of outstanding options under thoseassumed plans and the weighted average exercise price of those outstandingoptions was $10.19 per share. No additional options may be granted under anyassumed plans.

**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

The information requiredherein is incorporated by reference from the sections captioned “ManagementCompensation—Related-Party Transactions” and “Information with Respect toNominees for Director, Continuing Directors and Executive Officers” in theDefinitive Proxy Statement.

**Item 14.**                 PrincipalAccounting Fees and Services

The information required herein is incorporated byreference from the section captioned “Ratification of Appointment ofIndependent Registered Public Accounting Firm—Audit Fees” in the DefinitiveProxy Statement.

106

----

**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)           Documents Filed as Part ofthis Report.

(1)          Thefollowing financial statements are incorporated by reference from Item 8hereof:
| Consolidated Statements of  Financial Condition                                           |   |   |   |
|-------------------------------------------------------------------------------------------|--------|--------|--------|
| Consolidated  Statements of Income                                                        |   |   |   |
| Consolidated  Statements of Changes in Stockholders’ Equity and Comprehensive Income |   |   |   |
| Consolidated  Statements of Cash Flows                                                    |   |   |   |
| Notes  to Consolidated Financial Statements                                               |   |   |   |

 

(2)          All schedules for whichprovision is made in the applicable accounting regulations of the SEC areomitted because of the absence of conditions under which they are required orbecause the required information is included in the consolidated financialstatements and related notes thereto.

(3)          Thefollowing exhibits are filed as part of this Form 10-K, and thislist includes the Exhibit Index.
| Exhibit Index | ** ** | ** **                                                                                                                                                                                                                                                         | ** ** | **Description** |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1                |       | Articles of Incorporation, as amended, of Willow  Financial Bancorp, Inc.(1)                                                                                                                                                                                  |
| 3.2                |       | Amended and Restated Bylaws of Willow Grove  Bancorp, Inc. (as amended through August 31, 2005)(2)                                                                                                                                                  |
| 4.0                |       | Form of Stock Certificate of Willow Grove  Bancorp, Inc.(3)                                                                                                                                                                                              |
| 4.1                |       | Indenture, dated as of March 31, 2006, between  Willow Grove Bancorp, Inc. and U.S. Bank National Association, as  trustee(4)                                                                                                                       |
| 4.2                |       | Amended and Restated Declaration of Trust of Willow  Grove Statutory Trust I, dated as March 31, 2006, among Willow Grove  Bancorp, Inc., as sponsor, U.S. Bank National Association, as  institutional trustee, and the administrators named therein(4) |
| 4.3                |       | Guarantee Agreement, dated as of March 31,  2006, between Willow Grove Bancorp, Inc. and U.S. Bank National  Association, as guarantee trustee(4)                                                                                                        |
| 10.1               |       | Employment Agreement, dated July 15, 2005, by  and among Willow Grove Bancorp, Inc., Willow Grove Bank and Donna M.  Coughey(2)                                                                                                                          |
| 10.2               |       | Retirement and Severance Agreement by and among  Willow Grove Bancorp, Inc., Willow Grove Bank and Frederick A.  Marcell Jr.(5)                                                                                                                          |
| 10.3               |       | Employment Agreement, dated July 15, 2005, by  among Willow Grove Bancorp, Inc., Willow Grove Bank and Joseph T.  Crowley(2)                                                                                                                             |
| 10.4               |       | Employment Agreement, dated November 25, 2002,  between First Financial Bank and Michael J. Sexton(6)*                                                                                                                                                        |
| 10.5               |       | Form of Employment Agreement entered into  between Willow Grove Bank and Ammon J. Baus(7)*                                                                                                                                                               |
| 10.6               |       | Form of Employment Agreement entered into  between Willow Grove Bank and each of Matthew D. Kelly and Colin N. Maropis(8)                                                                                                                                     |
| 10.7               |       | Form of Change in Control Severance Agreement  between Willow Grove Bank and William Byrne(8)                                                                                                                                                                 |
| 10.8               |       | Supplemental Retirement Agreement(9)*                                                                                                                                                                                                                              |
| 10.9               |       | Non-Employee Directors’ Retirement Plan (as  amended 2002) and amendment No. 1 thereto(10)*                                                                                                                                                              |
| 10.10              |       | 1999 Stock Option Plan(11)*                                                                                                                                                                                                                                        |
| 10.11              |       | 1999 Recognition and Retention Plan and Trust  Agreement(11)*                                                                                                                                                                                                      |

107

----

 
| 10.12 |   | 2002 Stock Option Plan(12)*                                                                                                                                                                             |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13 |   | 2002 Recognition and Retention Plan and Trust  Agreement(12)*                                                                                                                                           |
| 10.14 |   | Deferred Compensation Plan(13)*                                                                                                                                                                         |
| 10.15 |   | Chester Valley Bancorp Inc. 1993 Stock Option Plan,  as amended(14)*                                                                                                                                    |
| 10.16 |   | Chester Valley Bancorp Inc. 1997 Stock Option Plan,  as amended(15)*                                                                                                                                    |
| 10.17 |   | Form of First Financial Bank Executive Survivor  Income Agreement by and between First Financial Bank and each of Donna M.  Coughey, G. Richard Bertolet, Matthew D. Kelly and Colin N. Maropis(8) |
| 10.18 |   | First Financial Bank Executive Deferred Compensation  Plan, as amended and restated effective January 1, 2003, and amendments  thereto(16)                                                         |
| 10.19 |   | First Financial Bank 2005 Executive Deferred  Compensation Plan, and amendments thereto(16)                                                                                                             |
| 10.20 |   | First Financial Bank Board of Directors Deferred  Compensation Plan, as amended and restated effective January 1, 2003,  and amendments thereto(16)                                                |
| 10.21 |   | First Financial Bank 2005 Board of Directors  Deferred Compensation Plan, and amendments thereto(16)                                                                                                    |
| 10.22 |   | Change in Control Severance Agreement Between Willow  Grove Bank and Allen L. Wagner(17)                                                                                                                |
| 10.23 |   | Change in Control Severance Agreement, dated  January 18, 2006, between Willow Grove Bank and Neil  Kalani(18)                                                                           |
| 10.24 |   | Change in Control Severance Agreement, dated  January 18, 2006, between Willow Grove Bank and Patrick  Killeen(18)                                                                       |
| 10.25 |   | Willow Grove Bancorp, Inc. 2006 Supplemental  Executive Retirement Plan(19)                                                                                                                        |
| 10.26 |   | 2005 Recognition and Retention Plan and Trust  Agreement(20)                                                                                                                                            |
| 10.27 |   | Agreement between the Company, the Bank and Thomas  J. Sukay, dated December 8, 2006(21)                                                                                                           |
| 10.28 |   | Memorandum Agreement between the Company, the Bank  and William M. Wright, dated December 27, 2006(21)                                                                                             |
| 10.29 |   | Employment Agreement, dated June 8, 2007,  between Willow Financial Bank and Thomas J. Saunders(22)                                                                                           |
| 10.30 |   | Amended and Restated Employment Agreement, dated  June 8, 2007, between Willow Financial Bank and G. Richard  Bertolet(22)                                                                    |
| 21.0  |   | Subsidiaries of the Registrant—Reference is made to  “Item 1. Business—Subsidiaries” for the required information                                                                   |
| 23.0  |   | Consent of KPMG LLP                                                                                                                                                                                     |
| 31.1  |   | Section 1350 Certification of the Chief  Executive Officer                                                                                                                                         |
| 31.2  |   | Section 1350 Certification of the Chief  Financial Officer                                                                                                                                         |
| 32.1  |   | Section 906 Certification of the Chief  Executive Officer                                                                                                                                          |
| 32.2  |   | Section 906 Certification of the Chief  Financial Officer                                                                                                                                          |

----

                 * Management contract or compensatory plan orarrangement required to be filed as an exhibit to this Form 10-Kpursuant to Item 15(b) hereof.

       (1) Incorporated by reference from the Company’s Form 8-K,dated as of September 21, 2006 and filed with the SEC on September 22,2006 (SEC File No. 000-49706).

       (2) Incorporated by reference from the Company’s Form 8-K,dated as of August 31, 2005 and filed with the SEC on September 1,2005 (SEC File No. 000-49706).

108

----

       (3) Incorporated by reference from the Company’s Registration Statementon Form S-1 filed on December 14, 2001, as amended, anddeclared effective on February 11, 2002 (Registration No. 333-75106).

       (4) Exhibit not included pursuant to Item 601(b)(4)(iii) ofRegulation S-K. The Company will provide a copy of such exhibit to the SEC uponrequest.

       (5) Incorporated by reference from the Company’s Current Report on Form 8-K/A,dated as of January 20, 2005 and filed with the SEC on January 26,2005 (SEC File No. 0-49706).

       (6) Incorporated by reference from Exhibit 10L to the Annual Reporton Form 10-K of Chester Valley Bancorp Inc. for the fiscal yearended June 30, 2003 and filed with the SEC on September 12, 2003 (SECFile No. 0-18833).

       (7) Incorporated by reference from the Company’s Form 10-Qfor the quarter ended March 31, 2004, filed with the SEC on May 14,2004 (SEC File No. 000-49706).

       (8) Incorporated by reference from the Company’s Form 10-Kfor the year ended June 30, 2005, filed with the SEC on September 19,2005 (SEC File No. 000-49706)

       (9) Incorporated by reference from the registration statement on Form S-1filed by the Company’s predecessor, a federal corporation also known as WillowGrove Bancorp, Inc. (the “Mid-Tier”) on September 18, 1998, asamended, and declared effective on November 12, 1998 (Registration No. 333-63737).

(10) Incorporated by reference from the Company’s Form 10-Qfor the quarter ended September 30, 2002, filed with the SEC on November 14,2002 (SEC File No. 000-49706) and the Company’s Form 8-K,dated as of October 25, 2005 and filed with the SEC on October 31,2005 (SEC File No. 000-49706)

(11) Incorporated by reference from the Definitive Proxy Statement onSchedule 14A filed by the Mid-Tier on June 23, 1999 (SEC File No. 000-25191).

(12) Incorporated by reference from the Company’s Definitive ProxyStatement on Schedule 14A filed on October 9, 2002 (SEC File No. 000-49706).

(13) Incorporated by reference from the Company’s Form 10-Qfor the quarter ended December 31, 2003, filed with the SEC on February 12,2004 (SEC File No. 000-49706).

(14) Incorporated by reference from Chester Valley’s RegistrationStatement on Form S-4/A (Commission File No. 333-50077)filed with the Commission on April 28, 1998.

(15) Incorporated by reference from Chester Valley’s RegistrationStatement on Form S-8 filed with the Commission on January 19,2001 (File No. 333-54020).

(16) Incorporated by reference from the Company’s Form 8-K,dated as of October 25, 2005 and filed with the SEC on October 31,2005 (SEC File No. 000-49706).

(17) Incorporated by reference from the Company’s Form 8-K,dated as of January 5, 2006 and filed with the SEC on January 11, 2006(SEC File No. 000-49706).

(18) Incorporated by reference from the Company’s Form 8-K,dated as of January 18, 2006 and filed with the SEC on January 20,2006 (SEC File No. 000-49706).

(19) Incorporated by reference from the Company’s Form 8-K,dated as of March 28, 2006 and filed with the SEC on April 3, 2006(SEC File No. 000-49706).

(20) Incorporated by reference from the Company’s Definitive ProxyStatement on Schedule 14A filed on October 5, 2005 (SEC File No. 000-49706).

109

----

(21)  Incorporated by reference from the Company’s Form 10-Qfor the quarter ended December 31, 2006, filed with the SEC on February 9,2007 (SEC File No. 000-49706).

(22) Incorporated by reference from the Company’s Form 8-K,dated as of June 8, 2007 and filed with the SEC on June 13, 2007 (SECFile No. 000-49706).

(b)          *Exhibits*

The exhibits listedunder (a)(3) of this Item 15 are filed herewith.

(c)           Reference is made to(a)(2) of this Item 15.

110

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|        | ** ** | **WILLOW FINANCIAL  BANCORP, INC.** |
|--------|------------|------------------------------------------|
|   |       | By:                                      | /s/ DONNA M. COUGHEY |
|   |       |                                     | Donna M. Coughey |
|   |       |                                     | *President and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.
| /s/ DONNA M. COUGHEY                              |     |   | September 28, 2007 |
|---------------------------------------------------|----------|--------|-------------------------|
| Donna M. Coughey                                  |     |   |                    |
| *President, Chief Executive Officer and Director* | * * |   |                    |
| /s/ JOSEPH T. CROWLEY                             |     |   | September 28, 2007 |
| Joseph T. Crowley                                 |     |   |                    |
| *Chief Financial Officer*                         | * * |   |                    |
| /s/ NEELESH KALANI                                |     |   | September 28, 2007 |
| Neelesh Kalani                                    |     |   |                    |
| *Chief Accounting Officer*                        | * * |   |                    |
| /s/ MADELEINE WING ADLER                          |     |   | September 28, 2007 |
| Madeleine Wing Adler                              |     |   |                    |
| *Director*                                        | * * |   |                    |
| /s/ JOHN J. CUNNINGHAM, III                  |     |   | September 28, 2007 |
| John J. Cunningham, III                      |     |   |                    |
| *Director*                                        | * * |   |                    |
| /s/ GERARD F. GRIESSER                            |     |   | September 28, 2007 |
| Gerard F. Griesser                                |     |   |                    |
| *Director*                                        | * * |   |                    |
| /s/ CHARLES F. KREMP, 3RD                         |     |   | September 28, 2007 |
| Charles F. Kremp, 3rd                             |     |   |                    |
| *Director*                                        | * * |   |                    |
| /s/ WILLIAM W. LANGAN                             |     |   | September 28, 2007 |
| William W. Langan                                 |     |   |                    |
| *Director*                                        | * * |   |                    |

111

----

 
| /s/ ROSEMARY C. LORING, ESQ.   |     |   | September 28, 2007 |
|-------------------------------------|----------|--------|-------------------------|
| Rosemary C. Loring, Esq.       |     |   |                    |
| *Chair of the Board*                | * * |   |                    |
| /s/ FREDERICK  A. MARCELL, JR. |     |   | September 28, 2007 |
| Frederick A. Marcell Jr.            |     |   |                    |
| *Director*                          | * * |   |                    |
| /s/ ROBERT J. MCCORMACK             |     |   | September 28, 2007 |
| Robert J. McCormack                 |     |   |                    |
| *Director*                          | * * |   |                    |
| /s/ JAMES E. MCERLANE               |     |   | September 28, 2007 |
| James E. McErlane                   |     |   |                    |
| *Director*                          | * * |   |                    |
| /s/ A. BRENT O’BRIEN           |     |   | September 28, 2007 |
| A. Brent O’Brien               |     |   |                    |
| *Director*                          | * * |   |                    |
| /s/ SAMUEL H. RAMSEY, III      |     |   | September 28, 2007 |
| Samuel H. Ramsey, III          |     |   |                    |
| *Director*                          | * * |   |                    |
| /s/ EMORY S. TODD                   |     |   | September 28, 2007 |
| Emory S. Todd                       |     |   |                    |
| *Director*                          | * * |   |                    |
| /s/ WILLIAM B. WEIHENMAYER          |     |   | September 28, 2007 |
| William B. Weihenmayer              |     |   |                    |
| *Director*                          | * * |   |                    |

 

112

----