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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

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

** **

**Forthe fiscal year ended JUNE 30, 2008**

** **

**-or-**

 

**o****        Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934.**

 

**For the transition periodfrom               to**

 

**Commission File Number: 0-49706**

 

**WILLOW FINANCIAL BANCORP, INC.**

(Exact Name of Registrant asSpecified in its Charter)

 

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

 

**170 SOUTH WARNER ROAD**

**WAYNE, PENNSYLVANIA 19087**

(Address of PrincipalExecutive Offices)

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 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 if disclosureof delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

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

 

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

 

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

 

The aggregate market value ofthe voting stock held by non-affiliates of the Registrant based on the closingprice of $8.39 on December 31, 2007, the last business day of theRegistrant’s second quarter was $117,410,759 (17,490,474 shares outstandingless 3,496,343 shares held by affiliates at $8.39 per share). Althoughdirectors and executive officers of the Registrant and certain employee benefitplans were assumed to be “affiliates” of the Registrant for purposes of thecalculation, the classification is not to be interpreted as an admission ofsuch status.

 

As of the close of businesson September 5, 2008 there were 15,672,988 shares of the Registrant’sCommon Stock outstanding.

 

 

 

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**WillowFinancial Bancorp, Inc.**

**FORM 10-K**

**For theFiscal Year Ended June 30, 2008**

**INDEX**

 
| PART I   |   |                                                                                                              |   |
|---------------|--------|-------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.       |   | Business                                                                                                          | 1      |
| Item 1A.      |   | Risk Factors                                                                                                      | 24     |
| Item 1B.      |   | Unresolved Staff Comments                                                                                         | 28     |
| Item 2.       |   | Properties                                                                                                        | 29     |
| Item 3.       |   | Legal Proceedings                                                                                                 | 31     |
| Item 4.       |   | Submission of Matters to a Vote of Security  Holders                                                              | 31     |
|          |   |                                                                                                              |   |
| PART II  |   |                                                                                                              |   |
| Item 5.       |   | Market for Registrant’s Common Stock,  Related Stockholder Matters and Issuer Purchases of Equity Securities | 32     |
| Item 6.       |   | Selected Financial Data                                                                                           | 33     |
| Item 7.       |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                       | 34     |
| Item 7A.      |   | Quantitative and Qualitative Disclosures  About Market Risk                                                       | 44     |
| Item 8.       |   | Consolidated Financial Statements and  Supplementary Data                                                         | 49     |
| Item 9A.      |   | Controls and Procedures                                                                                           | 81     |
| Item 9B.      |   | Other Information                                                                                                 | 82     |
|          |   |                                                                                                              |   |
| PART III |   |                                                                                                              |   |
| Item 10.      |   | Directors, Executive Officers, and  Corporate Governance of the Registrant                                        | 82     |
| Item 11.      |   | Executive Compensation                                                                                            | 82     |
| Item 12.      |   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters                   | 82     |
| Item 13.      |   | Certain Relationships and Related  Transactions, and Director Independence                                        | 82     |
| Item 14.      |   | Principal Accounting Fees and Services                                                                            | 82     |
|          |   |                                                                                                              |   |
| PART IV  |   |                                                                                                              |   |
| Item 15.      |   | Exhibits and Consolidated Financial  Statement Schedules                                                          | 82     |
|          |   | Signatures                                                                                                        | 86     |

 

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**ForwardLooking Statements**

 

*This AnnualReport on Form 10-K contains certain forward-looking statements (asdefined in the Securities Exchange Act of 1934 and the regulations hereunder).Forward-looking statements are not historical facts but instead represent onlythe beliefs, expectations or opinions of Willow Financial Bancorp, Inc.and its management regarding future events, many of which, by their nature, areinherently uncertain. Forward-looking statements may be identified by the useof such words as: “believe”, “expect”, “anticipate”, “intend”, “plan”, “estimate”,or words of similar meaning, or future or conditional terms such as “will”, “would”,“should”, “could”, “may”, “likely”, “probably”, or “possibly.” Forward-lookingstatements include, but are not limited to, financial projections and estimatesand their underlying assumptions; statements regarding plans, objectives andexpectations with respect to future operations, products and services; andstatements regarding future performance. Such statements are subject to certainrisks, uncertainties and assumption, many of which are difficult to predict andgenerally are beyond the control of Willow Financial Bancorp and itsmanagement, that could cause actual results to differ materially from thoseexpressed in, or implied or projected by, forward-looking statements. Thefollowing factors, among others, could cause actual results to differmaterially from the anticipated results or other expectations expressed in theforward-looking statements: (1) economic and competitive conditions whichcould affect the volume of loan originations, deposit flows and real estatevalues; (2) the levels of non-interest income and expense and the amountof loan losses; (3) competitive pressure among depository institutionsincreasing significantly; (4) changes in the interest rate environmentcausing reduced interest margins; (5) general economic conditions, eithernationally or in the markets in which Willow Financial Bancorp is or will bedoing business, being less favorable than expected;(6) political andsocial unrest, including acts of war or terrorism;(7) legislation orchanges in regulatory requirements adversely affecting the business in whichWillow Financial Bancorp will be engaged; and (8) completion of thepending merger of WillowFinancial Bancorp with and into Harleysville NationalCorporation. Willow Financial Bancorp undertakes no obligation to update theseforward-looking statements to reflect events or circumstances that occur afterthe date on which such statements were made.*

 

**PART I**

 

**Item 1.          Business**

 

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

 

WillowFinancial Bancorp, Inc. (the “Company”), is a Pennsylvania corporation andparent holding company for Willow Financial Bank (the “Bank”). The Bank, whichwas originally organized in 1909, is a Federally chartered savings bank andwholly owned subsidiary of the Company. The Bank’s business consists primarilyof making 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.

 

After theclose of business on August 31, 2005, the Company completed itsacquisition of Chester Valley Bancorp Inc. (“Chester Valley”), which was aregistered bank holding company headquartered in Downingtown, Pennsylvania,with over $654 million in assets at the time of acquisition. ChesterValley had two wholly owned subsidiaries, First Financial Bank (“FFB”), aPennsylvania chartered commercial bank with 13 full-service banking offices,and Philadelphia Corporation for Investment Services (“PCIS”), a registeredinvestment advisor and broker dealer. Chester Valley was merged with and intothe Company, with the Company as the surviving corporation (the “Chester ValleyMerger”), and FFB was merged with and into the Bank with the Bank as thesurviving bank (the “First Financial Bank Merger”). PCIS, doing business asWillow Investment Services (“WIS”) since March 2007, now operates as abusiness segment of the Company. The Chester Valley Merger resulted in theCompany’s issuance of an aggregate of 4,977,256 shares of Company commonstock and $51.0 million in cash, resulting in a total merger considerationpaid for Chester Valley common stock of $145.3 million. This includedcapitalized acquisition costs and the value of Chester Valley vested stockoptions, which were converted to options of the Company. The Company usedgeneral corporate funds to pay the aggregate cash consideration ofapproximately $51.0 million for the shares of Chester Valley Common Stockacquired in the Merger for cash, as well as the approximate $3.2 million inacquisition costs.

 

The ChesterValley Merger was accounted for using the purchase method of accounting, whichrequires that our financial statements include activity of Chester Valley onlysubsequent to the acquisition date of August 31, 2005. Accordingly, ourconsolidated financial statements and the information herein include thecombined results of Chester Valley and its former subsidiaries, FFB and PCIS,since September 1, 2005.

 

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Effective February 28,2006, the Bank completed the sale of all outstanding shares of capital stock ofPCIS to Uvest BD-A, Inc. (“Uvest”), a North Carolina Corporation andregistered broker-dealer 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 the Bank, and a FinancialServices Agreement between PCIS and the Bank, which provides that the Bank willbe entitled to 90% of the revenue generated by the securities brokerageactivities conducted at the PCIS office and will bear substantially alloperational and overhead expenses. Upon consummation of the sale of PCIS stockto Uvest, WIS is no longer a subsidiary of the Company. However, under theprovisions of Financial Accounting Standards Board Interpretation (“FASB”) No. 46R,“Consolidation of Variable Interest Entities”, the results of WIS continue tobe consolidated in the Company’s consolidated financial statements. Theaffiliation agreement with Uvest has the primary effect of relieving WIS ofdirect responsibility for securities clearing and certain back-office andoversight obligations.

 

On March 30,2007, the Company completed its acquisition of BeneServ, Inc. (“BeneServ”)for a purchase price of up to $5.5 million in cash. The purchase price includesa payment of $4.2 million at closing plus an additional amount up to $1.3million in payments through the three-year anniversary date of the acquisition,subject to the achievement of certain performance thresholds. As of June 30,2008, approximately $400 thousand of the additional payments were earned andpaid based on BeneServ achieving the established performance thresholds.BeneServ is an insurance agency serving the corporate employee benefit marketsegment. BeneServ and the Company share a target market in small businesseslocated in Chester, Montgomery, Bucks, and Philadelphia counties, Pennsylvania,thereby providing a number of cross selling opportunities for both companies.The Company recorded goodwill and other intangibles of $4.9 million as a resultof the acquisition.

 

On December 21,2007, the Company completed its acquisition of Carnegie Wealth Management (“Carnegie”)for a purchase price of up to $4.8 million in cash plus approximately $1.1million in the Company’s common stock. The purchase price included a payment of$2.3 million at closing plus an amount up to an additional $2.5 million inpayments through the three-year anniversary date of the acquisition, subject tothe achievement of certain performance thresholds. Carnegie is a wealthmanagement firm with approximately $160 million under management that providesprofessional investment consulting services to retirement plan administrators,foundations, corporations and high net worth investors. The Company recordedgoodwill and other intangibles of $3.5 million as a result of the acquisitionbased on the preliminary purchase price allocation.

 

On May 20,2008, the Company entered into an Agreement and Plan of Merger withHarleysville National Corporation, pursuant to which the Company will mergewith and into Harleysville National Corporation and the Bank will merge withand into Harleysville National Bank, the wholly owned subsidiary of HarleysvilleNational Corporation.  Upon consummationof the merger, shareholders of the Company will receive 0.73 shares ofHarleysville National Corporation common stock for each share of Company commonstock that they own plus cash in lieu of any fractional shares.  The Agreement and Plan of Merger recently wasapproved by shareholders of both the Company and Harleysville NationalCorporation.  Completion of the mergerwith Harleysville National Corporation is subject to the receipt of bankregulatory approvals and other standard conditions.  The merger is expected to be completed in thefourth calendar quarter of 2008.  Forfurther information regarding the proposed merger with Harleysville NationalCorporation, see the joint proxy statement/prospectus, dated July 31,2008, included in the Form S-4, as amended, filed by Harleysville NationalCorporation (SEC File No. 333-152007).

 

References tothe Company include its three business segments, Willow Financial Bank (“WFB”),WIS, and BeneServ, unless the context of the reference indicates otherwise. SeeNote 22 to the consolidated financial statements included herein. For periodsafter December 21, 2007, the WIS segment includes the operations ofCarnegie.

 

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

 

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

 

**AvailableInformation**

 

The Companyfiles annual, quarterly and special reports, proxy statements and other informationwith the Securities and Exchange Commission (“SEC”). Our SEC filings areavailable to the public at the SEC’s web site at http: //www.sec.gov. Membersof the public may also read and copy any document we file at the SEC’s PublicReference Room at 100 F Street, N.E., Washington, D.C. 20549. You canrequest copies of these documents by writing to the SEC and paying a fee forthe copying cost. Please call the SEC at 

 

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1-800-SEC-0330for more information about the operation of the public reference room. Inaddition, our stock is listed for trading on the Nasdaq Global Select Marketand trades under the symbol “WFBC”. You may find additional informationregarding Willow Financial Bancorp, Inc. at *www.nasdaq.com*.. In addition to the foregoing, we maintain a web site at *www.wfbonline.com.*We make available on our Internet web site copies of the Company’sAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and any amendments to such documents as soon asreasonably practicable after the Company files such material with, or furnishsuch documents to, the SEC.

 

**MarketArea and Competition**

 

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

 

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

 

**Employees**

 

The Companyhad 372 full-time employees and 74 part-time employees at June 30, 2008.None of these employees are covered by a collective bargaining agreement andthe Company believes it enjoys good relations with its personnel.

 

**LendingActivities**

 

**LoanPortfolio.****  **The following table sets forth the composition of the loan portfolio as of thedates indicated. This data does not include single family residential realestate loans classified as held for sale which amounted to $14.2 million, $8.1million, $2.6 million, $1.8 million, and $1.1 million at June 30,2008, 2007, 2006, 2005, and 2004, respectively.

 
| ** **                                                              | ** ** | **June 30, 2008**          | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** | **June 30, 2004** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                              | ** ** | ** **                           | ** ** | **Percent of**         | ** ** | ** **                  | ** ** | **Percent of**         | ** ** | ** **                  | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** | ** ** | ** ** | **Percent of** | ** ** |
| ** **                                                              | ** ** | **Amount**                           | ** ** | **Total**                   | ** ** | **Amount**                  | ** ** | **total**                   | ** ** | **Amount**                  | ** ** | **total** | ** ** | **Amount** | ** ** | **total** | ** ** | **Amount** | ** ** | **total** | ** ** |
| ** **                                                              | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate  loans:                                                     |       |                                 |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Single-family  residential                                              |       | $                                    | 240,659    |                        | 20.91      | %                           | $          | 273,247                     |       | 26.10                       | %          | $ | 298,509 |   | 27.60 | % | $ | 202,942 |   | 34.34 | % | $ | 181,049 |   | 34.15 | % |
| Commercial real  estate and multi-family residential                    |       | 338,037                              |       | 29.37                       |       | 316,099                     |       | 30.19                       |       | 325,987                     |       | 30.14 |   | 174,920 |   | 29.60 |   | 180,881 |   | 34.12 |   |
| Construction                                                            |       | 90,848                               |       | 7.89                        |       | 93,180                      |       | 8.90                        |       | 112,774                     |       | 10.43 |   | 86,658 |   | 14.66 |   | 57,014 |   | 10.75 |   |
| Home equity                                                             |       | 335,420                              |       | 29.16                       |       | 272,295                     |       | 26.01                       |       | 259,119                     |       | 23.96 |   | 100,805 |   | 17.06 |   | 91,848 |   | 17.32 |   |
| Total real estate  loans                                                |       | 1,004,964                            |       | 87.33                       |       | 954,821                     |       | 91.20                       |       | 996,389                     |       | 92.13 |   | 565,325 |   | 95.66 |   | 510,792 |   | 96.34 |   |
| Consumer loans                                                          |       | 3,598                                |       | 0.31                        |       | 3,917                       |       | 0.37                        |       | 4,304                       |       | 0.40 |   | 2,106 |   | 0.36 |   | 1,678 |   | 0.32 |   |
| Commercial  business loans                                              |       | 142,258                              |       | 12.36                       |       | 88,274                      |       | 8.43                        |       | 80,815                      |       | 7.47 |   | 23,492 |   | 3.98 |   | 17,686 |   | 3.34 |   |
| Total loans  receivable                                                 |       | 1,150,820                            |       | 100.00                      | %          | 1,047,012                   |       | 100.00                      | %          | 1,081,508                   |       | 100.00 | % | 590,923 |   | 100.00 | % | 530,156 |   | 100.00 | % |
| Allowance for  loan losses                                              |       | (14,793                              | )          |                        |       | (12,210                     | )          |                        |       | (16,737                     | )          |   |   | (6,113 | ) |   |   | (5,220 | ) |   |   |
| Deferred net loan  origination fees, costs and other discounts/premiums |       | 812                                  |       |                        |       | 491                         |       |                        |       | (1,170                      | )          |   |   | (623 | ) |   |   | (747 | ) |   |   |
| Loans receivable,  net                                                  |       | $                                    | 1,136,839  |                        |       |                        | $          | 1,035,293                   |       |                        |       | 1,063,601 |   |   |   | 584,187 |   |   |   | $ | 524,189 |   |   |   |
|                                                                         |            |                                      |            |                             |            |                             |            |                             |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**ContractualPrincipal Repayments and Interest Rates.****  ** The following table sets forth scheduledcontractual amortization of the loan portfolio at June 30, 2008. Demandloans, loans having no schedule of repayments and no stated maturity andoverdraft loans are reported as due in one year or less.

 

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| ** **                                                | ** ** | **At June 30, 2008, 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)**                                           | ** ** |
| Real estate  loans:                                       |       |                                                                           |       |                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Single-family  residential and home equity                |       | $                                                                              | 100,218    |                                                  | $          | 87,575 |   | $ | 63,386 |   | $ | 99,197 |   | $ | 217,207 |   | $ | 8,496 |   | $ | 576,079 |   |
| Commercial real  estate and multi-family residential |       | 107,774                                                                        |       | 64,550                                                |       | 80,047 |   | 57,521 |   | 26,076 |   | 2,069 |   | 338,037 |   |
| Construction                                              |       | 76,582                                                                         |       | 3,662                                                 |       | 3,154 |   | 4,207 |   | 3,243 |   | — |   | 90,848 |   |
| Total real estate  loans                                  |       | 284,574                                                                        |       | 155,787                                               |       | 146,587 |   | 160,925 |   | 246,526 |   | 10,565 |   | 1,004,964 |   |
| Consumer                                                  |       | 87                                                                             |       | 664                                                   |       | 406 |   | 971 |   | 1,470 |   | — |   | 3,598 |   |
| Commercial  business                                      |       | 66,758                                                                         |       | 18,843                                                |       | 26,983 |   | 26,304 |   | 2,435 |   | 935 |   | 142,258 |   |
| Total                                                     |       | $                                                                              | 351,419    |                                                  | $          | 175,294 |   | $ | 173,976 |   | $ | 188,200 |   | $ | 250,431 |   | $ | 11,500 |   | $ | 1,150,820 |   |

 

Of the $799.4million of loan principal repayments due after June 30, 2009, $513.8million have fixed rates of interest and $285.6 million have adjustable ratesof interest.

 

**LendingActivity and Products.****  **The Bank’s lending activities are subject to underwriting standards andorigination procedures, which have been approved by its Board of Directors.

 

**Single-FamilyResidential First Real Estate Loans.****  ** We process, underwrite and originatesingle-family residential real estate loans on both a retail and wholesalebasis. We have developed an extensive network of active residential real estatebrokers and mortgage bankers to support our wholesale production system. Thesebrokers identify, process and close loans on our behalf based upon rates andterms that we provide to them on a regular basis which correlate to ourassessment of our demand for various types of loans. The brokers forwardcompleted loan applications that are underwritten and approved by Bankpersonnel in accordance with standards previously approved by the Board ofDirectors. Retail residential lending activities are supplemented by loanoriginations through the Bank’s internal loan officers, whereby loanapplications are obtained through our branch network and referrals from localbuilders, real estate brokers and financial consultants. In order to facilitatesale in the secondary market, single-family residential mortgage loansgenerally are underwritten in accordance with Federal Home Loan MortgageCorporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”)guidelines. To a lesser extent, the Company originates single-familyresidential loans for its portfolio, primarily with adjustable interest rates.In general, these loans do not conform to their underwriting standards due tothe size of the loan. Upon completion of the Merger with Chester Valley, theCompany’s strategy has changed in that loan portfolio growth is concentrated incommercial business, construction, commercial real estate and multi-family andconsumer lending products. The Company does not originate sub-prime real estateloans.

 

The Bankgenerally requires a current appraisal prepared by an independent appraiser oran acceptable alternative property valuation on all new single-familyresidential real estate loans as well as private mortgage insurance on allfirst real estate loans with a loan to value in excess of 80%. Generally, titleinsurance is required on loans secured by real estate with the exception ofcertain single-family residential real estate loans originated under $250thousand. Hazard insurance is required on all real estate loans. Floodinsurance is also required for all loans secured by properties located in adesignated flood area.

 

During theyear ended June 30, 2008, the Company sold an aggregate of $195.1 millionin single-family residential real estate loans into the secondary market. Mostof the Company’s newly originated single-family residential real estate loans,together with servicing rights, are now originated for re-sale in the secondarymarket.

 

At June 30,2008, single-family residential real estate loans aggregated $240.7 million ascompared to $273.2 million at June 30, 2007. The $32.5 million or 11.9%decrease resulted largely from portfolio repayments as well as the fact thatmost new loans were sold in the secondary market during the year.

 

**HomeEquity Loans.****  ** Inrecent years, the Bank has increased its emphasis on the origination of homeequity loans and lines of credit, due to their shorter maturities and generallyhigher interest rates. The maximum term of the Bank’s home equity loans is30 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 30 years. The borrower may draw on this account up to themaximum credit amount and repay the line at any time. At June 30, 2008,home equity loans and lines of credit aggregated $335.4 million or 29.2%of the total loan portfolio. Of this amount, $111.6 million were lines ofcredit.

 

Home equityloans and lines of credit are secured by the borrower’s residence, on which theBank generally obtains a second lien position on the underlying real estate.The Bank’s home equity programs provide financing in amounts up to 95% of thevalue of the property securing the loan, when combined with the first realestate loan. In addition to originating home equity loans through our branchoffices, the Bank relies considerably on purchased loans from its network ofcorrespondents.

 

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**OtherConsumer Lending Activities.****  **The Bank offers various types of other consumer loans through its branchnetwork primarily consisting of loans secured by automobiles and, to a muchlesser extent, deposit account loans and unsecured personal loans. The Bankfacilitates the funding of student loans in conjunction with American EducationServices (“AES/PHEAA”). At June 30, 2008, $3.6 million, or 0.3% of ourtotal loan portfolio consisted of other consumer loans. This compares to$3.9 million of other consumer loans, or 0.4% of the total loan portfolio,at June 30, 2007.

 

**CommercialBusiness Loans.****  ** AtJune 30, 2008, commercial business loans aggregated $142.3 million,or 12.4% of total loans, compared to $88.3 million at June 30, 2007,or 8.4% of total loans. The $54.0 million or 61.2% increase resulted primarilyfrom the continued focus to increase this segment of the loan portfolio. Theseloans are generally originated to small and medium sized businesses in ourmarket area. These types of loans assist in the Bank’s asset/liabilitymanagement since they generally provide shorter maturities and/or adjustablerates of interest in addition to generally having higher rates of return thatcompensate for the additional credit risk associated with these loans.

 

Generally, theBank provides these loans on a secured basis, which are collateralized byaccounts receivable, inventory, equipment, or other general corporate assets ofthe borrower. Additionally, the principals of the borrower guarantee most commercialbusiness loans. In general, interest rates are adjustable, indexed to apublished rate of interest or fixed.

 

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

 

**CommercialReal Estate and Multi-Family Residential Real Estate Loans.****  ** At June 30, 2008,commercial real estate and multi-family residential loans amounted to $338.0million or 29.4% of the total loan portfolio. This compares to$316.1 million or 30.2% at June 30, 2007. Included in commercial realestate loans are approximately $116.8 million of loans to businesses secured byreal estate owned by the business as of June 30, 2008.

 

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

 

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

 

Commercialreal estate and multi-family real estate lending generally involves increasedrisks as compared to single-family residential lending including, but notlimited to, larger loans to individual borrowers and loan payments that aredependent upon the successful operation of the project or the borrower’sbusiness. The Bank attempts to mitigate these risks by limiting loans to provenbusinesses, properties with historical operating performance sufficient toservice the debt, utilizing conservative debt coverage ratios in 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 tooriginating loans, the Bank periodically purchases participation interests inlarger balance loans, typically multi-family and commercial real estatemortgage loans and construction loans, from other financial institutions in ourmarket area. We may purchase these loans to supplement our own originations orsell participations to manage borrower concentration risks. All purchasedparticipations comply with the Bank’s approved underwriting standards. Duringfiscal 2008, the Company purchased an aggregate of $76.9 million inparticipation interests.

 

**ConstructionLoans.****  **Construction loans, for residential and commercial projects, which generallyare secured by properties in southeastern Pennsylvania, southern New Jersey andDelaware are originated within our market area. The Bank generally limitsconstruction loans to builders and developers with whom the Bank has anestablished relationship, or who are otherwise known to officers of the Bank.Additionally, the Bank may acquire participation interests in certainconstruction loans originated by other local financial institutions that havesimilar underwriting standards as the Bank. These participation loans undergo afull underwriting in accordance with the Bank’s established policy. Constructionloans outstanding at June 30, 2008 were $90.8 million, or 7.9%of total 

 

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loans,compared to $93.2 million or 8.9% of total loans at June 30, 2007.The $2.4 million or 2.6% decrease is due primarily to the diminishing demandfor new construction financing, resulting from a slowdown in the housingmarket.

 

Constructionloans generally have variable rates of interest, which is a tool in managingthe interest rate risk exposure of the Bank. Generally, they have a maximumterm to maturity of three years and loan to value ratios of 80% or less.Residential construction loans to developers are made on either a pre-sold orspeculative (unsold) basis. Limits are placed on the number of units that canbe built on a speculative basis based upon the reputation, prior experience andfinancial position of the builder, the location of the property, and priorsales in the development and the surrounding area.

 

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

 

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

 

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

 

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

 

The followingtable shows the activity in our loan portfolio during the periods indicated:

 
| ** **                                           | ** ** | **Year ended June 30,** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                           | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)**   | ** ** |
| Loans held at the beginning of the period            |       | $                                      | 1,047,012  |   | $ | 1,081,508 |   | $ | 590,923 |   |
| Originated and purchased for portfolio(1):           |       |                                   |       |   |   |   |   |
| Real estate loans:                                   |       |                                   |       |   |   |   |   |
| Single-family residential(2)                         |       | 74,988                                 |       | 30,049 |   | 142,305 |   |
| Commercial real estate and multi-family  residential |       | 62,673                                 |       | 36,738 |   | 20,646 |   |
| Construction                                         |       | 26,420                                 |       | 76,017 |   | 73,573 |   |
| Home equity(3)                                       |       | 116,038                                |       | 95,845 |   | 96,995 |   |
| Consumer loans                                       |       | 1,852                                  |       | 1,218 |   | 1,088 |   |
| Commercial business loans                            |       | 68,673                                 |       | 67,187 |   | 24,578 |   |
| Total originations and purchases for  portfolio      |       | 350,644                                |       | 307,054 |   | 359,185 |   |
| Loans acquired from the Chester Valley  Merger       |       | —                                 |       | — |   | 467,700 |   |
| Amortization and curtailments                        |       | (246,262                               | )          | (336,370 | ) | (336,607 | ) |
| Net charge-offs                                      |       | (590                                   | )          | (5,180 | ) | 307 |   |
| Net increase (decrease) in loans                     |       | 103,808                                |       | (34,496 | ) | 490,585 |   |
| Total loans held at the end of the period            |       | $                                      | 1,150,820  |   | $ | 1,047,012 |   | $ | 1,081,508 |   |

 

----

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

 

(2)          Includes$22.8 million in purchased single-family residential real estate loans infiscal 2006.

 

(3)          Includes$33.3 million in purchased home equity lines of credit.

 

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**Loans toOne Borrower.****  **Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989(“FIRREA”) and pursuant to regulations for Federal Savings Banks, the aggregateloans that the Bank can make to any one borrower generally is equal to 15% ofthe Bank’s unimpaired capital and surplus. For the Bank, this amount would beapproximately $18.1 million at June 30, 2008. There are provisionsthat would allow us to lend an additional 10% of unimpaired capital and surplusif the loans are secured by readily marketable securities. At June 30,2008, our three largest credit relationships with an individual borrower andrelated entities amounted to $18.0 million, $12.1 million and$10.3 million; each of which are in conformity with the current loans toone borrower regulations described above.

 

**AssetQuality**

 

**General.****  ** As a part of the effortsto maintain asset quality, the Bank has developed and implemented an assetclassification system in conjunction with federal regulations. Loans,investments, and certain of the Bank’s other assets are subject to thisclassification system. Loans are periodically reviewed and the classificationsreviewed at least quarterly by the Loan Committee of the Board of Directors.

 

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

 

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

 

Real estatethat the Bank acquires as a result of foreclosure or deed-in-lieu offoreclosure is classified as real estate owned. Real estate owned is recordedat the lower of cost or fair value less estimated selling cost. Costsassociated with acquiring and improving a foreclosed property are usuallycapitalized to the extent that the carrying value does not exceed fair valueless estimated selling costs. Holding costs are charged to expense. Gains andlosses on the sale of real estate owned are reflected in operations, as incurred.

 

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

 
| ** **                                           | ** ** | **At  June 30, 2008**      | ** ** | **At  June 30, 2007** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **30 to  59 days**         | ** ** | **60 to  89 days**    | ** ** | **30 to  59 days** | ** ** | **60 to  89 days** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:                                   |       |                                 |       |                            |       |   |   |   |   |
| Single-family residential                            |       | $                                    | 3,062      |                            | $          | 782 |   | $ | 1,400 |   | $ | 147 |   |
| Commercial real estate and multi-family  residential |       | 297                                  |       | 162                             |       | 427 |   | 268 |   |
| Construction                                         |       | 49                                   |       | 14                              |       | 317 |   | 406 |   |
| Home equity                                          |       | 515                                  |       | 363                             |       | 541 |   | 349 |   |
| Consumer loans                                       |       | —                               |       | —                          |       | — |   | 6 |   |
| Commercial business loans                            |       | 552                                  |       | —                          |       | 72 |   | 5 |   |
| Total delinquent loans receivable                    |       | $                                    | 4,475      |                            | $          | 1,321 |   | $ | 2,757 |   | $ | 1,181 |   |

 

Loansdelinquent 30 to 89 days amounted to $5.8 million at June 30,2008 compared to $3.9 million at June 30, 2007. Management regularlymonitors all delinquent loan activity. Management believes that these loans areadequately collateralized or the allowance is adequate to cover any potentialcollateral shortfall.

 

**Non-PerformingAssets.****  **The following table sets forth information with respect to non-performingassets the Bank has identified, including non-accrual loans and other realestate owned. Total non-performing assets amounted to $10.9 million, or 0.69% 

 

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of totalassets, at June 30, 2008 compared to $3.9 million, or 0.25% of totalassets, at June 30, 2007. The $7.1 million increase in the Company’snon-performing assets during fiscal 2008 was due primarily from an internallyoriginated $6.7 million collateralized commercial construction and landdevelopment loan with a long-term client of the Bank.

 
| ** **                                           | ** ** | **At June 30,**            | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                           | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(Dollars in thousands)** | ** ** |
| Accruing loans 90 or more days past due              |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate loans                                    |       | $                                    | —     |   | $ | — |   | $ | — |   | $ | 109 |   | $ | — |   |
| Commercial business loans                            |       | —                               |       | — |   | — |   | — |   | — |   |
| Other                                                |       | —                               |       | — |   | — |   | — |   | 3 |   |
| Total accruing loans 90 or more days past  due       |       | —                               |       | — |   | — |   | 109 |   | 3 |   |
| Non-accrual loans                                    |       |                                 |       |   |   |   |   |   |   |   |   |
| Real estate loans:                                   |       |                                 |       |   |   |   |   |   |   |   |   |
| Single-family residential                            |       | 997                                  |       | 845 |   | 1,059 |   | 146 |   | 568 |   |
| Commercial real estate and multi-family  residential |       | 781                                  |       | 697 |   | 7,753 |   | 315 |   | 48 |   |
| Construction                                         |       | 7,415                                |       | 463 |   | — |   | — |   | — |   |
| Home equity                                          |       | 729                                  |       | 601 |   | 479 |   | 99 |   | 39 |   |
| Consumer loans                                       |       | 29                                   |       | 56 |   | 154 |   | — |   | 16 |   |
| Commercial business loans                            |       | 832                                  |       | 1,188 |   | 6,036 |   | 106 |   | 698 |   |
| Total non-accrual loans                              |       | 10,783                               |       | 3,850 |   | 15,481 |   | 666 |   | 1,369 |   |
| Performing troubled debt restructurings              |       | —                               |       | 1 |   | 256 |   | 1,912 |   | 1,404 |   |
| Total non-performing loans                           |       | 10,783                               |       | 3,851 |   | 15,737 |   | 2,687 |   | 2,776 |   |
| Other real estate owned, net                         |       | 166                                  |       | — |   | 51 |   | 439 |   | 403 |   |
| Total non-performing assets                          |       | $                                    | 10,949     |   | $ | 3,851 |   | $ | 15,788 |   | $ | 3,126 |   | $ | 3,179 |   |
| Non-performing loans to total loans                  |       | 0.94                                 | %          | 0.37 | % | 1.46 | % | 0.46 | % | 0.52 | % |
| Non-performing assets to total assets                |       | 0.69                                 | %          | 0.25 | % | 1.01 | % | 0.33 | % | 0.34 | % |

 

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

 

At June 30,2008, the Company had $18.1 million of assets classified as substandard,consisting of $15.9 million of construction, land, and commercial realestate and business loans, $1.5 million of single-family residential realestate loans, and $735 thousand of consumer loans, and $829 thousandclassified as doubtful, consisting of commercial real estate and business loansand consumer loans in the amounts of $806 thousand and $23 thousand,respectively. This compares to $8.2 million of assets classified assubstandard, consisting of $6.2 million of commercial real estate andbusiness loans, $1.3 million of single-family residential real estate loans,$660 thousand of consumer loans, and $1.4 million classified as doubtful,consisting of commercial real estate and business loans at June 30, 2007. Therewere no loans classified as loss at June 30, 2008 or 2007.

 

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

 

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The allowanceis increased by a provision for loan losses, which is charged against income.As shown in the table below, at June 30, 2008, our allowance for loanlosses amounted to $14.8 million or 137.2% and 1.29% of our non-performingloans and total loans receivable less deferred fees, respectively.

 
| ** **                                                                    | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands)**   | ** ** |
| Balance—beginning of period                                              |       | $                                      | 12,210     |   | $ | 16,737 |   | $ | 6,113 |   | $ | 5,220 |   | $ | 5,312 |   |
| Plus: provisions for loan losses                                              |       | 3,173                                  |       | 653 |   | 3,380 |   | 1,232 |   | 426 |   |
| Less: charge-offs for                                                         |       |                                   |       |   |   |   |   |   |   |   |   |
| Real estate loans                                                             |       | (82                                    | )          | (76 | ) | (24 | ) | (7 | ) | (58 | ) |
| Consumer loans                                                                |       | (517                                   | )          | (277 | ) | (237 | ) | (22 | ) | (11 | ) |
| Commercial real estate loans                                                  |       | —                                 |       | (1,848 | ) | — |   | — |   | — |   |
| Commercial business loans                                                     |       | (87                                    | )          | (3,185 | ) | (47 | ) | (316 | ) | (658 | ) |
| Total charge-offs                                                             |       | (686                                   | )          | (5,386 | ) | (308 | ) | (345 | ) | (727 | ) |
| Plus: recoveries for                                                          |       |                                   |       |   |   |   |   |   |   |   |   |
| Real estate loans                                                             |       | —                                 |       | 1 |   | 36 |   | 6 |   | 74 |   |
| Consumer loans                                                                |       | 90                                     |       | 45 |   | 44 |   | — |   | 1 |   |
| Commercial real estate loans                                                  |       | 6                                      |       | — |   | — |   | — |   | — |   |
| Commercial business loans                                                     |       | —                                 |       | 160 |   | 535 |   | — |   | 134 |   |
| Total recoveries                                                              |       | 96                                     |       | 206 |   | 615 |   | 6 |   | 209 |   |
| Allowance acquired from the Merger                                            |       | —                                 |       | — |   | 6,937 |   | — |   | — |   |
| Balance—end of period                                                    |       | $                                      | 14,793     |   | $ | 12,210 |   | $ | 16,737 |   | $ | 6,113 |   | $ | 5,220 |   |
| Allowance for loan loss to total end of  period non-performing loans          |       | 137.19                                 | %          | 317.06 | % | 106.35 | % | 227.50 | % | 188.04 | % |
| Charge-offs to average loans                                                  |       | 0.06                                   | %          | 0.51 | % | 0.03 | % | 0.06 | % | 0.16 | % |
| Allowance for loan loss to end of period  total loans less deferred fees |       | 1.29                                   | %          | 1.17 | % | 1.55 | % | 1.05 | % | 1.27 | % |

 

The provisionfor loan losses for the year ended June 30, 2008 was $3.2 million, anincrease of $2.5 million from $653 thousand in the prior year. Net charge-offsin fiscal 2008 were $590 thousand as compared to net charge-offs of $5.2million in fiscal year 2007. The decrease is due primarily to the charge-off oftwo loan relationships in the prior year. The increase in the provision forloan losses in fiscal 2008 compared to fiscal 2007 was due primarily to the$6.9 million increase in non-performing loans. The decrease in the provisionfor loan losses in fiscal 2006 compared to fiscal 2005 was due primarily to acorresponding decrease in non-performing loans and classified loans. Managementassesses the allowance for loan losses at least quarterly, and makes anynecessary provision for losses needed to maintain the its allowance for lossesat a level deemed adequate. Management believes that the allowance for loanlosses was adequate at June 30, 2008 to cover losses that are bothprobable and reasonably estimable based upon the facts and circumstances knownto us at that date.

 

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

 

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Statement werethe result of an agreement between the SEC and the federal banking agencies in March 1999to provide guidance on allowance for loan loss methodologies and supportingdocumentation. Management believes that the Bank’s documentation relating tothe allowance for loan loss is consistent with this guidance.

 

In addition tousing loss rates, secured commercial non-accrual loans are reviewed forimpairment as required under SFAS No. 114, “Accounting by Creditors forImpairment of a Loan.”  Those loans thathave specific loss allocations are identified and included in the reserveallocation. Risk-rated loans that are not reviewed for impairment aresegregated into homogeneous pools with loss allocation rates that reflect theseverity of risk. Loss rates are adjusted by applying other factors to thecalculations. These factors include adjustment for current economic trends,delinquency and risk trends, credit concentrations, credit administration,migration analysis, and other special allocations for unusual events or changesin products.

 

The allocationof the allowance for loan losses is shown in the table below. Through suchallocations, the Bank does not intend to imply that actual future charge-offswill necessarily follow the same pattern or that any portion of the allowanceis restricted.

 
| ** **                                           | ** ** | **June 30, 2008**          | ** ** | **June 30, 2007**                                   | ** ** | **June 30, 2006** | ** ** |
|------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **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)** | ** ** |
| Real estate loans:                                   |       |                                 |       |                                                          |       |                        |       |   |   |   |   |   |   |
| Single-family residential                            |       | $                                    | 513        |                                                          | 20.91      | %                           | $          | 438 |   | 26.10 | % | $ | 473 |   | 27.60 | % |
| Commercial real estate and multi-family  residential |       | 6,066                                |       | 29.37                                                         |       | 6,121                       |       | 30.19 |   | 7,412 |   | 30.14 |   |
| Construction                                         |       | 3,350                                |       | 7.89                                                          |       | 1,768                       |       | 8.90 |   | 1,979 |   | 10.43 |   |
| Home equity                                          |       | 2,268                                |       | 29.16                                                         |       | 1,435                       |       | 26.01 |   | 1,351 |   | 23.96 |   |
| Total real estate loans                              |       | 12,197                               |       | 87.33                                                         |       | 9,762                       |       | 91.20 |   | 11,215 |   | 92.13 |   |
| Consumer loans                                       |       | 95                                   |       | 0.31                                                          |       | 776                         |       | 0.37 |   | 663 |   | 0.40 |   |
| Commercial business loans                            |       | 2,501                                |       | 12.36                                                         |       | 1,672                       |       | 8.43 |   | 4,859 |   | 7.47 |   |
| Total                                                |       | $                                    | 14,793     |                                                          | 100.00     | %                           | $          | 12,210 |   | 100.00 | % | $ | 16,737 |   | 100.00 | % |

 

**Securities Activities**

 

**General.**   The Bank’s investment policy is designed, among other things, toprovide management with an additional tool in implementing its asset/liabilitystrategies. It emphasizes principal preservation, favorable returns,maintaining liquidity and flexibility, and minimizing credit risk. The policypermits investments in US government and agency securities, investment gradecorporate bonds and commercial paper, municipal bonds, various types ofmortgage-backed securities and collateralized mortgage obligations,certificates and federal funds sold to financial institutions approved by theCompany’s Board of Directors, and certain equity investments and mutual funds.

 

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

 

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

 

Additionally,investment securities are evaluated periodically to determine whether a declinein their fair value is other-than-temporary. Management utilizes criteria suchas the magnitude and duration of the decline, in addition to the reasonsunderlying the decline, to determine whether the loss in value isother-than-temporary. The term “other-than-temporary” is not intended toindicate that the decline is permanent, but indicates that 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 beother-than-temporary, the fair value of the security is reduced through acharge to earnings in the consolidated statement of operations. Based uponevaluations performed as of June 30, 2008, the Company recorded impairmentcharges of approximately $1.9 million for the year ended June 30, 2008related to the holding of certain debt securities, mutual funds, and commonstock on two Pennsylvania financial institutions and another financial servicesrelated equity security.

 

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The Company has both the ability and intent to hold fixed incomeinvestment securities until such time as the value recovers or the securitymatures and for the equity securities management believe that, other than theaforementioned impairment charge, the unrealized losses are temporary andoverall not significant to the value of equity securities and thereforebelieves that these individual unrealized losses as of June 30, 2008 arenot other-than-temporary impairments.

 

At June 30, 2008, investment securities, including trading,amounted to $258.3 million, or 16.3% of total assets. This includes an$4.4 million unrealized loss, net of income tax, on those investmentsecurities classified as AFS. The portfolio consists of US government andagency securities, many with callable features and agency and non-agencymortgage-backed pass-through securities, collateralized mortgage obligations,municipal bonds, and equity investments primarily in mutual funds.

 

The following table sets forth information on the carrying value andthe amortized cost of our investment securities classified as HTM and AFS atthe dates indicated.

 
| ** **                                    | ** ** | **At June 30,**            | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **Amortized  Cost**                  | ** ** | **Fair  value** | ** ** | **Amortized  Cost** | ** ** | **Fair  value** | ** ** | **Amortized  Cost** | ** ** | **Fair  value** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Investment securities held to maturity:       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities                    |       | 23,032                               |       | 22,863 |   | 28,092 |   | 27,227 |   | 33,206 |   | 31,662 |   |
| CMOs                                          |       | 52,749                               |       | 50,751 |   | 60,271 |   | 59,261 |   | 72,355 |   | 70,425 |   |
| Total investment securities held to  maturity |       | 75,781                               |       | 73,614 |   | 88,363 |   | 86,488 |   | 105,561 |   | 102,087 |   |

 
| ** **                                      | ** ** | **At June 30,**            | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **Amortized  Cost**                  | ** ** | **Carrying  value** | ** ** | **Amortized  Cost** | ** ** | **Carrying  value** | ** ** | **Amortized  Cost** | ** ** | **Carrying  value** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Investment securities available for sale:       |       |                                 |       |   |   |   |   |   |   |   |   |   |   |
| Corporate debt securities                       |       | $                                    | 20,586     |   | $ | 18,360 |   | $ | 19,978 |   | $ | 19,426 |   | $ | 14,419 |   | $ | 14,208 |   |
| Municipal bonds                                 |       | 27,129                               |       | 25,738 |   | 30,585 |   | 30,005 |   | 9,105 |   | 9,127 |   |
| Equity securities (1)                           |       | 10,227                               |       | 10,168 |   | 11,464 |   | 11,162 |   | 11,642 |   | 11,326 |   |
| US Gov’t agency securities                 |       | 24,330                               |       | 24,050 |   | 35,285 |   | 34,208 |   | 35,473 |   | 34,297 |   |
| Mortgage-backed securities                      |       | 92,861                               |       | 91,090 |   | 73,840 |   | 71,769 |   | 103,523 |   | 99,469 |   |
| CMOs                                            |       | 12,802                               |       | 11,856 |   | 22,080 |   | 21,769 |   | 29,059 |   | 28,498 |   |
| Total investment securities available for  sale |       | 187,935                              |       | 181,262 |   | 193,232 |   | 188,339 |   | 203,221 |   | 196,925 |   |
| Total investment securities                     |       | $                                    | 263,716    |   | $ | 254,876 |   | $ | 281,595 |   | $ | 274,827 |   | $ | 308,782 |   | $ | 299,012 |   |

 

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(1)      Includesmutual funds with a fair value of approximately $9.4 million and $10.1million at June 30, 2008 and 2007, respectively.

 

In addition to HTM and AFS investment securities, at June 30, 2008and 2007, the Company had $1.3 million and $1.2 million, respectively, oftrading account securities consisting of mutual funds related to the Company’sdeferred compensation plan for certain executive level employees and members ofthe Board of Directors. There is a corresponding liability in other liabilitieson the consolidated statements of financial condition at June 30, 2008 and2007.

 

**Mortgage-Backed Securities (“MBS”) and Collateralized MortgageObligations (“CMOs”).****  **At June 30, 2008, the investment securities portfolio contained MBSs witha carrying value of $23.0 million and $91.1 million in HTM and AFS,respectively, and CMOs of $52.7 million and $11.9 million in HTM andAFS, respectively. This compared to $28.1 million and $71.8 millionin HTM and AFS MBSs, respectively, and $60.3 million and $21.8 million inHTM and AFS CMOs, respectively, at 

 

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June 30, 2007. The decline during theyear resulted from principal repayments being utilized to fund deposit outflowsas well as laon growth. MBSs represent a participation interest in a pool ofsingle-family residential or multi-family residential real estate loans. Mortgagesare sold by various originators to intermediaries (generally agencies of the USGovernment and government sponsored enterprises) that pool and repackage themortgages and sell participation interests in the pools to investors. Theservicer of the mortgage loan collects the principal and interest payments andpasses those payments through to the intermediary who then remits the paymentto the investor. The US Government agencies and government sponsoredenterprises, primarily FNMA and FHLMC, guarantee the timely payment ofprincipal and interest on these securities. MBSs that are pooled by USGovernment or government-sponsored enterprises are known as agencymortgage-backed securities. Other private servicers may pool mortgages intosimilar 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, 2008, the Company’s mortgage-backedsecurities portfolio does not include any securities backed by sub-primemortgage loans.

 

MBSs are issued in stated principal amounts and are backed by mortgageloans within a specific interest rate range, but may have varying maturitydates. The underlying pool of mortgages may be comprised of either fixed-rateor adjustable-rate mortgage loans. Each MBS pool will also differ based uponthe actual level of prepayment experienced by the underlying mortgage loans.

 

At June 30, 2008, the weighted average life of our fixed-rate andadjustable-rate mortgage-backed securities was approximately 3.9 years and4.6 years, respectively, based upon management’s assumptions related to thefuture prepayments of the underlying mortgages. Prepayments that are greaterthan those projected will shorten the remaining term of the security, while adecrease in the amount of prepayments will lengthen the amount of time untilthe security matures. Prepayments depend on many factors, including the type ofmortgage, the coupon rate, the remaining period until the loan matures or therate is scheduled to reset, the geographic region, and the general level ofmarket interest rates. During periods of rising interest rates, if the couponrates of the underlying mortgages are less than prevailing market rates offeredon mortgages, refinancing will decrease and prepayments of the mortgagesunderlying the security will decline. Conversely, when market interest ratesare falling, and the coupon rate on the underlying mortgage exceeds theprevailing market interest rate for mortgages offered, refinancings tend toincrease which will increase the amount of prepayments of the underlyingmortgages.

 

CMOs are securities that are structured from a pool of MBSs or wholeloans. The structuring results in sectors known as tranches. Each tranchewithin a CMO will have different cash flow requirements and interest rates.Although still subject to prepayments, this structuring into tranches providesa more predictable cash flow to the bondholder.

 

**US Government Agency Securities and Municipal Bonds.****  ** At June 30, 2008, thecarrying value of US government agency securities within the investmentsecurities portfolio was $24.1 million, which includes approximately$280 thousand in unrealized losses, compared to $34.2 million, whichincluded approximately $1.1 million in unrealized losses, at June 30,2007. 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 AFS at June 30, 2008 are comprisedprimarily of bonds issued by local school districts as well as three non-ratedPennsylvania Municipal Authority bonds that are classified as substandard. At June 30,2008, the aggregate book value of these substandard bonds was$3.8 million. Two of the three bonds, with an aggregate book value of$3.5 million at June 30, 2008, 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 $247 thousand at June 30, 2008, 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 2008, $47 thousand in principal repayments were received on thebond issue. The Bank’s remaining par value is $425 thousand.

 

**Other Investments.****  **Other than MBSs, US government agency securities and municipal bonds, theCompany has investments in various equity securities, which includes mutualfunds. At June 30, 2008, the Company was invested in equity securitieswith a fair value of $10.2 million, of which mutual funds have a fairvalue of $9.4 million. The equity securities include stock of several publiclytraded companies, primarily local financial institutions. The Company recordedan impairment charge of $948 thousand relating to 

 

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two mutual funds backed primarily byinvestments in adjustable-rate mortgage-backed securities.

 

**Sources ofFunds**

 

**General.****  **Deposits are the primary source of funds for the Bank’s lending and investmentactivities. In addition to deposits, funds are provided from the amortizationand prepayments within the loan and mortgage-backed securities portfolios,maturities of investments, and borrowings. Scheduled loan amortization is arelatively stable source of funds. However, competition, the general level ofinterest rates and market conditions significantly influences deposit inflowsand outflows. Borrowings may be used on a short-term basis to compensate forreductions in other funding sources. On a longer-term basis, borrowings may beused for general business purposes.

 

**Deposits.****  ** Asshown in the table below, the Bank’s core deposit accounts at June 30,2008 (which the Bank consider to be all deposits other than certificateaccounts) represent 75.1% of total deposits as compared to 69.3% at June 30,2007.

 
| ** **            | ** ** | **At June 30,**            |
|-----------------------|------------|--------------------------------------|
| ** **            | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **            | ** ** | **Amount**                           | ** ** | **Percent of  total** | ** ** | **Amount** | ** ** | **Percent of  total** | ** ** |
| ** **            | ** ** | **(Dollars in thousands)** | ** ** |
| Savings accounts      |       | $                                    | 80,982 |   | 8.1 | % | $ | 87,565 |   | 8.0 | % |
| Money market accounts |       | 408,990                              |   | 40.8 |   | 403,487 |   | 36.9 |   |
| Certificates          |       | 249,532                              |   | 24.9 |   | 334,672 |   | 30.7 |   |
| Checking accounts:    |       |                                 |   |   |   |   |   |   |   |
| Interest-bearing      |       | 132,936                              |   | 13.2 |   | 125,905 |   | 11.5 |   |
| Non-interest-bearing  |       | 130,438                              |   | 13.0 |   | 141,101 |   | 12.9 |   |
| Total deposits        |       | $                                    | 1,002,878 |   | 100.0 | % | $ | 1,092,730 |   | 100.0 | % |

 

During the year ended June 30, 2008, total deposits decreased by$89.9 million, or 8.2% compared to the year ended June 30, 2007. Thedecrease occurred primarily from a decrease in certificates of deposit as theCompany chose not to offer high rates for customers that only maintained acertificate account at the Bank. Core deposits, as previously defined,decreased by $4.7 million.

 
| ** **                          | ** ** | **Year ended June 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**   | ** ** |
| Beginning balance                   |       | $                                      | 1,092,730  |   | $ | 1,016,500 |   | $ | 602,678 |   |
| Net (decrease) increase in deposits |       | (117,436                               | )          | 49,510 |   | (36,332 | ) |
| Deposits assumed in acquisition     |       | —                                 |       | — |   | 437,065 |   |
| Interest credited                   |       | 27,584                                 |       | 26,720 |   | 13,089 |   |
| Ending balance                      |       | $                                      | 1,002,878  |   | $ | 1,092,730 |   | $ | 1,016,500 |   |

 

The following table sets forth by various interest rate ranges, theamount of our certificates at the dates indicated.

 
| ** **          | ** ** | **At June 30,**            | ** ** |
|---------------------|------------|--------------------------------------|------------|
| ** **          | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **          | ** ** | **(Dollars in thousands)** | ** ** |
| Interest rates:     |       |                                 |       |   |   |
| from 0.00% to 2.99% |       | $                                    | 67,723     |   | $ | 18,547 |   |
| from 3.00% to 3.99% |       | 45,543                               |       | 16,796 |   |
| from 4.00% to 4.99% |       | 121,480                              |       | 196,705 |   |
| from 5.00% to 5.99% |       | 14,139                               |       | 101,799 |   |
| 6.00% and over      |       | 647                                  |       | 825 |   |
| Total               |       | $                                    | 249,532    |   | $ | 334,672 |   |

 

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| ** **               | ** ** | **Amounts maturing in**    | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| **Interest rates:** | ** ** | **Six months  or less**    | ** ** | **Over six  months  through one  year** | ** ** | **Over one  year through  two years** | ** ** | **Over two  years through  three years** | ** ** | **Over three  years** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)** |
| 0.00% to 2.99%           |       | $                                    | 30,871     |   | $ | 26,666 |   | $ | 7,650 |   | $ | 1,401 |   | $ | 1,135 |   |
| 3.00% to 3.99%           |       | 10,311                               |       | 25,536 |   | 7,898 |   | 866 |   | 931 |   |
| 4.00% to 4.99%           |       | 53,353                               |       | 29,804 |   | 30,063 |   | 3,728 |   | 4,532 |   |
| 5.00% to 5.99%           |       | 8,454                                |       | 1,888 |   | 2,945 |   | 141 |   | 712 |   |
| 6.00% and over           |       | 38                                   |       | 5 |   | 327 |   | 149 |   | 128 |   |
| Total                    |       | $                                    | 103,027    |   | $ | 83,899 |   | $ | 48,883 |   | $ | 6,285 |   | $ | 7,438 |   |

 

At June 30, 2008 the total amount of outstanding certificates $100thousand and greater was $57.5 million. The following table providesinformation regarding the maturity of these certificates.

 

| **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)** | ** ** |
| $                                    | 12,453     |   | $ | 14,814 |   | $ | 17,692 |   | $ | 12,527 |   | $ | 57,486 |   |
|                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Borrowings.****  **The Bank utilizes borrowings to supplement its funding needs. At June 30,2008, the Company had $413.7 million in outstanding borrowings, which werecomprised of $311.4 million of FHLB borrowings, $25.8 million of trustpreferred securities, $75.0 million of repurchase agreements, and $1.5 millionin secured borrowings related to certain commercial business loanrelationships. The investment in FHLB stock, as well as a portion of ourresidential real estate loan portfolio and investment securities portfolio, secureadvances from the FHLB. The FHLB of Pittsburgh provides an array of borrowingprograms which include: fixed or variable rate programs; various fixed termsranging from overnight to 20 years; and other programs that have callableor putable features attached to them. The repurchase agreements are secured byvarious securities within the Company’s investment securities portfolio.

 

The following table sets forth certain information regarding ourborrowings for the periods indicated.

 
| ** **                                 | ** ** | **At or for the year ended** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                 | ** ** | **June 30, 2008**                           | ** ** | **June 30, 2007** | ** ** |
| ** **                                 | ** ** | **(Dollars in thousands)**                  | ** ** |
| FHLB advances:                             |       |                                                  |       |   |   |
| Average balance outstanding for the period |       | $                                                     | 258,910    |   | $ | 225,722 |   |
| Maximum outstanding at any month end       |       | 311,428                                               |       | 258,035 |   |
| Balance outstanding at end of the period   |       | 311,428                                               |       | 189,764 |   |
| Average interest rate for the period       |       | 4.15                                                  | %          | 3.93 | % |
| Interest rate at the end of the period     |       | 3.85                                                  | %          | 4.19 | % |
| Repurchase agreements:                     |       |                                                  |       |   |   |
| Average balance outstanding for the period |       | $                                                     | 62,719     |   | $ | 22,767 |   |
| Maximum outstanding at any month end       |       | 75,000                                                |       | 30,000 |   |
| Balance outstanding at end of the period   |       | 75,000                                                |       | 20,000 |   |
| Average interest rate for the period       |       | 4.00                                                  | %          | 4.99 | % |
| Interest rate at the end of the period     |       | 4.06                                                  | %          | 4.52 | % |

 

At June 30, 2008, the maturity dates of the Bank’s FHLB advancesranged from July 9, 2008 to October 1, 2018. Certain advances alsorequire monthly payments of principal. At June 30, 2008,$242.5 million of FHLB advances were callable at the option of the FHLBwithin certain parameters, of which $192.5 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.

 

**Trust Preferred Securities.****  ** Effective with the acquisition of ChesterValley, the Company assumed the liability for $10.5 million of JuniorSubordinated Debentures to the Chester Valley Statutory Trust, a PennsylvaniaBusiness Trust, in which the Company owns all of the common equity as a result ofthe acquisition 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. The Company redeemed these TrustPreferred Securities on March 26, 2007 in accordance with the TrustAgreement.

 

On March 31, 2006, the Company issued $25.8 million of JuniorSubordinated Debentures to the Willow Grove Statutory Trust I, a ConnecticutStatutory Trust, in which the Company owns all of the common equity. The Trustthen issued $25.0 million of Trust Preferred Securities, which pay interestquarterly at three-month Libor plus 1.31% to investors, which are secured bythe Junior Subordinated Debentures and the guarantee of the Company. The JuniorSubordinated Debentures are treated as debt of the Company, but qualify as TierI capital of the Bank to the extent of the amount of the proceeds, which areinvested in the Bank. The Trust 

 

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Preferred Securities are callable by theCompany on or after September 30, 2011. The Trust Preferred Securitiesmust be redeemed by the Company upon their maturity in the year 2036.

 

**Accounting for Derivative Instruments andHedging**

 

The Company may from time to time utilize derivative instruments suchas interest rate swaps, interest rate collars, interest rate floors, interestrate swaptions or combinations thereof to assist in its asset/liabilitymanagement. In accordance with SFAS No. 133, “Accounting for DerivativeInstruments,” the Company must document its hedge relationships, includingidentification of the hedging instruments and the hedged items, as well as itsrisk management objectives and strategies for undertaking the hedge in order toqualify for hedge accounting treatment. The Company also assesses, both atinception and at least quarterly thereafter, whether the derivative instrumentsthat are used in hedging transactions are highly effective in offsetting thechanges in either the fair value or cash flows of the hedged item. For fairvalue hedges, both the effective and ineffective portions of the changes in thefair value of the derivative, along with the gain or loss on the hedged itemthat is attributable to the hedged risk, are recorded in the statement ofoperations within interest income or interest expense. For cash flow hedges,the effective portion of the change in the fair value of the derivative isrecorded in accumulated other comprehensive income. When the hedged itemimpacts the consolidated 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 consolidated statement of operations.

 

At June 30, 2008 and 2007, the Company had four and five interestrate swap arrangements, respectively, tied to specific loans originated by theBank. The swaps effectively convert the rates from a fixed rate to a floatingrate based on Libor throughout the lives of the underlying loans, as of June 30,2008; whereas, the swaps effectively convert the rates from a floating rate toa fixed rate based on Libor throughout the lives of the underlying loans as of June 30,2007. At June 30, 2008, the total outstanding notional amount on theseswaps was $7.6 million. The weighted average floating and fixed rates on thesetransactions were 2.95% and 4.73%, respectively at June 30, 2008. TheCompany does not maintain sufficient documentation for these transactions toreceive hedge accounting treatment and thus all changes in the fair value ofthe derivatives is recorded in the consolidated statement of operations. Assuch, based on the decrease in the market value of the interest rate swapsduring fiscal 2008, the Company recognized a loss of $251 thousand in otherincome in the consolidated statement of operations with respect to these fourswap agreements. The Company has recorded a net payable of $55 thousand at June 30,2008 as compared to a net receivable of $196 thousand at June 30, 2007.

 

As part of the Chester Valley 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 FHLB borrowings of the former Chester Valley. Onthe date of the Merger, the interest rate swap and the hedged borrowings weremarked to fair value in purchase accounting. In September 2005, the hedgedborrowings were repaid and $10 million notional amount of the interest rateswap was unwound with the counter-party. After performing the appropriatedocumentation of the derivative instrument, the Company designated theremaining $10 million notional amount interest rate swap as a fair value hedgeof certain existing borrowings of the Bank. The swap had the effect of convertinga fixed rate borrowing to an adjustable rate borrowing. During the quarterended December 31, 2005, the derivative instrument ceased to be a highlyeffective hedge; therefore, the Company discontinued hedge accounting resultingin a pre-tax charge to the statement of operations of $47 thousand. Theinterest rate swap was unwound in February 2006 without resulting in anyadditional impact to the consolidated statement of operations. The basisadjustment that was previously recorded on the hedged borrowing that isrecorded in the consolidated statement of financial condition is amortized asan increase in interest expense over the remaining life of the borrowing usingthe interest method.

 

Additionally, in August 2003, Chester Valley purchased a $30.0 millionnotional amount 3.50% six month Libor interest rate cap whilesimultaneously selling a $30.0 million notional amount 6.00% six-month Liborinterest rate cap (“Interest Rate Corridor”), which was to expire 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 theBank, 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 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 RateCorridor and recognized a gain of $804 thousand in the statement of operationsupon repayment of the $30 million FHLB advance.

 

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**REGULATION**

 

Set forth below is a brief description of certain laws and regulations,which are applicable to the Company and Bank, including our other two businesssegments, BeneServ and WIS. The description, of these laws and regulations, aswell as descriptions of laws and regulations contained elsewhere herein, doesnot purport to be complete and is qualified in its entirety by reference to theapplicable laws and regulations.

 

**General**

 

Willow Financial Bank, as a federally chartered savings institution, issubject to federal regulation and oversight by the OTS extending to all aspectsof its operations. The Bank also is subject to regulation and examination bythe FDIC, which insures the deposits of the Bank to the maximum extentpermitted by law, and requirements established by the Federal Reserve Board. Federallychartered savings institutions are required to file periodic reports with theOTS and are subject to periodic examinations by the OTS and the FDIC. Federallaws and regulations determine the investment and lending authority of savingsinstitutions, and such institutions are prohibited from engaging in anyactivities not permitted by such laws and regulations. Such regulation andsupervision primarily is intended for the protection of depositors and not forthe purpose of protecting stockholders.

 

The OTS regularly examines the Bank and prepares reports forconsideration by its Board of Directors on any deficiencies that it may find inthe Bank’s operations. The FDIC also has the authority to examine the Bank inits role as the administrator of the DIF. The Bank’s relationship with itsdepositors and borrowers also is regulated to a great extent by both federaland, to a lesser extent, state laws, especially in such matters as theownership of savings accounts and the form and content of the Bank’s mortgagerequirements. The OTS’ enforcement authority over all savings institutions andtheir holding companies includes, among other things, the ability to assesscivil money penalties, to issue cease and desist or removal orders and toinitiate injunctive actions. In general, these enforcement actions may beinitiated for violations of laws and regulations and unsafe or unsoundpractices. Other actions or inactions may provide the basis for enforcementaction, including misleading or untimely reports filed with the OTS. Any changein such laws or regulations, whether by the FDIC, OTS or Congress, could have amaterial adverse impact on us and the Bank and our operations.

 

**Willow Financial Bancorp, Inc.**

 

Willow Financial Bancorp is a registered savings and loan holdingcompany under Section 10 of the Home Owners’ Loan Act, as amended andsubject to OTS examination and supervision as well as certain reportingrequirements. In addition, the Bank is subject to certain restrictions indealing with the Company and with other persons affiliated with the Bank.

 

Generally, the Home Owners’ Loan Act prohibits a savings and loanholding company, such as us, directly or indirectly, from (1) acquiringcontrol (as defined) of a savings institution (or holding company thereof)without prior OTS approval, (2) acquiring more than 5% of the votingshares of a savings institution (or holding company thereof) which is not asubsidiary, subject to certain exceptions, without prior OTS approval, or (3) acquiringthrough a merger, consolidation or purchase of assets of another savingsinstitution (or holding company thereof) or acquiring all or substantially allof the assets of another savings institution (or holding company thereof)without prior OTS approval or (4) acquiring control of an uninsuredinstitution. A savings and loan holding company may not acquire as a separatesubsidiary a savings institution which has its principal offices outside of thestate where the principal offices of its subsidiary institution is located,except (a) in the case of certain emergency acquisitions approved by theFDIC, (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 OTS, acquire controlof any savings institution which is not a subsidiary of such holding company.

 

**Willow Financial Bank**

 

**Insurance of Accounts.****  **The deposits of the Bank are insured to the maximum extent permitted by theDIF, which is administered by the FDIC, and are backed by the full faith andcredit of the U.S. Government. As insurer, the FDIC is authorized to conductexaminations of, and to require reporting by, insured institutions. It also mayprohibit any insured institution from engaging in any activity the FDICdetermines by regulation or order to pose a serious threat to the FDIC. TheFDIC also has the authority to initiate enforcement actions against savingsinstitutions, after giving the OTS an opportunity to take such action.

 

Under current FDIC 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 the regulations establishing the promptcorrective action system discussed below. Effective January 1, 2007, theprevious nine risk classifications have been consolidated into four riskcategories, which reflect varying levels of supervisory concern, from 

 

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those, which are considered to be healthy tothose, which are considered to be of substantial supervisory concern. The risk categorieswere created with rates during the last six months of fiscal 2007 ranging fromfive basis points for well-capitalized, healthy institutions, such as the Bank,to 43 basis points for undercapitalized institutions with substantialsupervisory concerns.

 

In addition, all institutions with deposits insured by the FDIC arerequired to pay assessments to fund interest payments on bonds issued by theFinancing Corporation, a mixed-ownership government corporation established torecapitalize the predecessor to the Savings Association Insurance Fund. Theassessment rate for the third calendar quarter of 2008 was 0.01538% of insureddeposits and is adjusted quarterly. These assessments will continue until theFinancing Corporation bonds mature in 2019. The FDIC approved a one-timeassessment credit to banks and savings associations in existence on December 31,1996. The credit is applied on a quarterly basis up to the amount of therespective quarter’s assessment.  Theremaining credit was $16 thousand at June 30, 2008 and will be fullyutilized by September 30, 2008.

 

The FDIC may terminate the deposit insurance of any insured depositoryinstitution, including the Bank, if it determines after a hearing that theinstitution has engaged or is engaging in unsafe or unsound practices, is in anunsafe or unsound condition to continue operations, or has violated anyapplicable law, regulation, order or any condition imposed by an agreement withthe FDIC. It also may suspend deposit insurance temporarily during the hearingprocess for the permanent termination of insurance, if the institution has notangible capital. If insurance of accounts is terminated, the accounts at theinstitution at the time of the termination, less subsequent withdrawals, shallcontinue to be insured for a period of six months to two years, as determinedby the FDIC. Management is aware of no existing circumstances, which wouldresult in termination of the Bank’s deposit insurance.

 

**Deposit Insurance Reform.**    On February 8,2006, President George W. Bush signed into law legislation that merged the BankInsurance Fund and the Savings Association Insurance Fund to form the DIF,eliminated any disparities in bank and thrift risk-based premium assessments,reduced the administrative burden of maintaining and operating two separatefunds and established certain new insurance coverage limits and a mechanism forpossible periodic increases. The legislation also gave the FDIC greaterdiscretion to identify the relative risks all institutions present to the DIFand set risk-based premiums.

 

Major provisions 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;

 

·                  providingthe FDIC with the ability to set the designated reserve ratio within a range ofbetween 1.15% and 1.50%, rather than maintaining 1.25% at all times regardlessof prevailing economic conditions;

 

·                  providinga one-time assessment credit of $4.7 billion to banks and savings associationsin existence on December 31, 1996, which may be used to offset futurepremiums with certain limitations; and

 

·                  requiring thepayment of dividends of 100% of the amount that the insurance fund exceeds 1.5%of the estimated 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.****  **The OTS capital requirements consist of a “tangible capital requirement,” a “leveragecapital requirement” and a “risk-based capital requirement.” The OTS isauthorized to impose capital requirements in excess of those standards onindividual institutions on a case-by-case basis.

 

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

 

Under the leveragecapital requirement adopted by the OTS, savings banks must maintain “corecapital” in an amount equal to at least 3.0% of adjusted total assets. Corecapital is defined as common stockholders’ equity (including retainedearnings), non-cumulative perpetual preferred stock, and minority interests inthe equity accounts of consolidated subsidiaries, plus purchased mortgageservicing rights valued at the lower of 90% of fair market value, 90% oforiginal cost or the current amortized book value as determined under generallyaccepted accounting principles, and “qualifying supervisory goodwill,” lessnon-qualifying intangible assets.

 

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

 

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

 

In its letterapproving the Chester Valley Merger Agreement, the OTS, as one of itsconditions for approval, indicated that, for the periods ending December 31,2005, 2006 and 2007, the Bank was required to have tier one core capital ratiosat least equal to 6.50%, 6.75%, and 7.25%, respectively, and total risk-basedcapital ratios at least equal to 11.97%, 12.02% and 12.40%, respectively. TheBank also was required to submit to the OTS, quarterly status reports detailingits compliance with the conditions on regulatory capital outlined in itsapproval letter. The OTS’ conditions for approval of the First Financial BankMerger also indicated that, for the periods ending December 31, 2005, 2006and 2007, the Company must have had consolidated tangible capital ratios atleast equal to 5.14%, 5.59% and 6.12%, respectively. The Company also wasrequired to submit to the OTS quarterly status reports. The Company and Bankmet these regulatory capital requirements at the respective dates.

 

OTSregulations establish special capitalization requirements for savings banksthat own service corporations and other subsidiaries, including subsidiarysavings banks. According to these regulations, certain subsidiaries areconsolidated for capital purposes and others are excluded from assets andcapital. In determining compliance with the capital requirements, allsubsidiaries engaged solely in activities permissible for national banks,engaged solely in mortgage-banking activities, or engaged in certain otheractivities solely as agent for its customers are “includable” subsidiaries thatare consolidated for capital purposes in proportion to the Bank’s level ofownership, including the assets of includable subsidiaries in which the Bankhas a minority interest that is not consolidated for generally acceptedaccounting principles purposes. For excludable subsidiaries, the debt andequity investments in such subsidiaries are deducted from assets and capital.At June 30, 2008, the Bank had no investments subject to a deduction fromtangible capital.

 

Undercurrently applicable OTS policy, savings institutions must value securities AFSat amortized cost for regulatory capital purposes. This means that in computingregulatory capital, savings institutions should add back any unrealized lossesand deduct any unrealized gains, net of income taxes, on debt securitiesreported as a separate component of capital calculated according to U.S.generally accepted accounting principles (“GAAP”).

 

At June 30,2008, the Bank exceeded all of its regulatory capital requirements withtangible, core and risk-based capital ratios of 7.17%, 7.17%, and 12.56%,respectively.

 

The OTS andthe FDIC generally are authorized to take enforcement action against a savingsbank that fails to meet its capital requirements, which action may includerestrictions on operations and banking activities, the imposition of a capitaldirective, a cease-and-desist order, civil money penalties or harsher measures suchas the appointment of a receiver or conservator or a forced merger into anotherinstitution. In addition, under current regulatory policy, a savings bank thatfails to meet its capital requirements is prohibited from paying any dividends.

 

**PromptCorrective Action.****  **Under the FDIC 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 theFederal Deposit Insurance Corporation Improvement Act an institution is deemedto be (a) “well capitalized” if it has total risk-based capital of 10.0%or more, has a Tier 1 risk-based capital ratio of 6.0% or more, has a Tier 1leverage capital ratio of 5.0% or more and is not subject to any order or finalcapital directive to meet and maintain a specific capital level for any capital

 

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measure, (b) “adequately capitalized” ifit has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-basedcapital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% ormore (3.0% under certain circumstances) and does not meet the definition of “wellcapitalized,” (c) “undercapitalized” if it has a total risk-based capitalratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is lessthan 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% undercertain circumstances), (d) “significantly undercapitalized” if it has atotal risk-based capital ratio that is less than 6.0%, a Tier 1 risk-basedcapital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that isless than 3.0%, and (e) “critically undercapitalized” if it has a ratio oftangible equity to total assets that is equal to or less than 2.0%. Underspecified circumstances, a federal banking agency may reclassify a wellcapitalized institution as adequately capitalized and may require an adequatelycapitalized institution or an undercapitalized institution to comply withsupervisory actions as if it were in the next lower category (except that theFDIC may not reclassify a significantly undercapitalized institution ascritically undercapitalized).

 

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

 

At June 30,2008, the Bank was in the “well capitalized” category for purposes of theabove regulations.

 

**Safety andSoundness Guidelines.****  **The OTS and the other federal bank regulatory agencies have establishedguidelines for safety and soundness, addressing operational and managerialstandards, as well as compensation matters for insured financial institutions.Institutions failing to meet these standards may be required to submitcompliance plans to their appropriate federal regulators. The OTS and the otheragencies have also established guidelines regarding asset quality and earningsstandards for insured institutions. The Bank believes that it is in compliancewith these guidelines and standards.

 

**CapitalDistributions.****  **OTS regulations govern capital distributions by savings institutions, whichinclude cash dividends, stock repurchases and other transactions charged to thecapital account of a savings institution to make capital distributions. Asavings institution must file an application for OTS approval of the capitaldistribution if any of the following occur or would occur as a result of thecapital distribution (1) the total capital distributions for the applicablecalendar year exceed the sum of the institution’s net income for that year todate plus the institution’s retained net income for the preceding two years, (2) theinstitution would not be at least adequately capitalized following thedistribution, (3) the distribution would violate any applicable statute,regulation, agreement or OTS-imposed condition, or (4) the institution isnot eligible for expedited treatment of its filings. If the filing of anapplication is not required, savings institutions that are a subsidiary of aholding company (as well as certain other institutions) must still file anotice with the OTS at least 30 days before the board of directorsdeclares a dividend or approves a capital distribution.

 

**Branchingby Federal Savings Institutions.****  **OTS policy permits interstate branching to the full extent permitted by statute(which is essentially unlimited). Generally, federal law prohibits federalsavings institutions from establishing, retaining or operating a branch outsidethe state in which the federal institution has its home office unless theinstitution meets the IRS’ domestic building and loan test (generally, 60% of athrift’s assets must be housing-related) (“IRS Test”). The IRS Test requirementdoes not apply if: (a) the branch(es) result(s) from an emergencyacquisition of a troubled savings institution (however, if the troubled savingsinstitution is acquired by a bank holding company, does not have its homeoffice in the state of the bank holding company bank subsidiary and does notqualify under the IRS Test, its branching is limited to the branching laws forstate-chartered banks in the state where the savings institution is located); (b) thelaw of the state where the branch would be located would permit the branch tobe established if the federal savings institution were chartered by the statein which its home office is located; or (c) the branch was operatedlawfully as a branch under state law prior to the savings institution’sreorganization to a federal charter.

 

Furthermore,the OTS will evaluate a branching applicant’s record of compliance with theCommunity Reinvestment Act of 1977. An unsatisfactory Community ReinvestmentAct record may be the basis for denial of a branching application.

 

**CommunityReinvestment Act (“CRA”) and the Fair Lending Laws.****  ** Savings institutions have a responsibilityunder the CRA and related regulations of the OTS to help meet the credit needsof their communities, including low- and moderate-income neighborhoods. Inaddition, the Equal Credit Opportunity Act and the Fair Housing Act prohibitlenders from discriminating in their lending practices on the basis ofcharacteristics specified in those statutes. An institution’s failure to complywith the provisions of the CRA 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 OTS, as well as other federalregulatory agencies and the Department of Justice.

 

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

 

Currently, theportion of the qualified thrift lender test that is based on Section 10(m) ofthe Home Owners’ Loan Act rather than the Internal Revenue Code requires that65% of an institution’s “portfolio assets” (as defined) consist of certainhousing and consumer-related assets on a monthly average basis in nine out ofevery 12 months. Assets that qualify without limit for inclusion as partof the 65% requirement are loans made to purchase, refinance, construct,improve or repair domestic residential housing and manufactured housing; homeequity loans; mortgage-backed securities (where the mortgages are secured bydomestic residential housing or manufactured housing); stock issued by the FHLBof Pittsburgh; and direct or indirect obligations of the FDIC. Small businessloans, credit card loans and student loans are also included without limitationas qualified investments. In addition, the following assets, among others, maybe included in meeting the test subject to an overall limit of 20% of thesavings institution’s portfolio assets: 50% of residential mortgage loansoriginated and sold within 90 days of origination; 100% of loans forpersonal, family and household purposes (other than credit card loans andeducational loans); and stock issued by FNMA or FHLMC. Portfolio assets consistof total assets minus the sum of (a) goodwill and other intangible assets,(b) property used by the savings institution to conduct its business, and (c) liquidassets up to 20% of the institution’s total assets. At June 30, 2008,approximately 70.2% of the portfolio assets of the Bank were qualified thriftinvestments.

 

**FederalHome Loan Bank System.****  **The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regionalFHLBs that administer the home financing credit function of savingsinstitutions. Each FHLB serves as a reserve or central bank for its memberswithin its assigned region. It is funded primarily from proceeds derived fromthe sale of consolidated obligations of the FHLB System. It makes loans tomembers (i.e., advances) in accordance with policies and procedures establishedby its board of directors. At June 30, 2008, the Bank had$311.4 million of FHLB advances.

 

As a member,the Bank is required to purchase and maintain stock in the FHLB of Pittsburghin an amount equal to at least 1% of its aggregate unpaid residential realestate loans, home purchase contracts or similar obligations at the beginningof each year or 5% of the members’ aggregate amount of outstanding advances and0.7% of the members’ unused borrowing capacity. At June 30, 2008, the Bankhad $15.8 million in stock of the FHLB of Pittsburgh, which was incompliance with this requirement.

 

The FHLBs arerequired to provide funds for the resolution of troubled savings institutionsand to contribute to affordable housing programs through direct loans orinterest subsidies on advances targeted for community investment and low- andmoderate-income housing projects. These contributions have adversely affectedthe level of FHLB dividends paid and could continue to do so in the future andcould also result in the FHLBs imposing higher interest rates on advances tomembers. These contributions also could have an adverse effect on the value ofFHLB stock in the future.

 

**FederalReserve System.****  **Federal Reserve Board regulations require all depository institutions tomaintain non-interest earning reserves against their transaction accounts(primarily NOW and Super NOW checking accounts) and non-personal time deposits.At June 30, 2008, the Bank was in compliance with these reserverequirements. The balances maintained to meet the reserve requirements imposedby the Federal Reserve Board may be used to satisfy liquidity requirements thatmay be imposed by the OTS.

 

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

 

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

 

Generally, Section 23Aand OTS regulations issued in connection therewith limit the extent to which asavings institution or its subsidiaries may engage in certain “coveredtransactions” with affiliates to an amount equal to 10% of the institution’scapital and surplus, in the case of covered transactions with any oneaffiliate, and to an amount equal to 20% of such capital and surplus, in the 

 

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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 timefor comparable transactions with nonaffiliated companies. A “coveredtransaction” is defined to include a loan or extension of credit to anaffiliate; a purchase of investment securities issued by an affiliate; apurchase of assets from an affiliate, with certain exceptions; the acceptanceof securities issued by an affiliate as collateral for a loan or extension ofcredit to any party; or the issuance of a guarantee, acceptance or letter ofcredit on behalf of an affiliate. Section 23B transactions also apply tothe provision of services and the sale of assets by a savings association to anaffiliate.

 

In addition,under OTS regulations, a savings institution may not make a loan or extensionof credit to an affiliate unless the affiliate is engaged only in activitiespermissible for bank holding companies; a savings institution may not purchaseor invest in securities of an affiliate other than shares of a subsidiary; asavings institution and its subsidiaries may not purchase a low-quality assetfrom an affiliate; and covered transactions and certain other transactionsbetween a savings institution or its subsidiaries and an affiliate must be onterms and conditions that are consistent with safe and sound banking practices.With certain exceptions, each loan or extension of credit by a savingsinstitution to an affiliate must be secured by collateral with a market valueranging from 100% to 130% (depending on the type of collateral) of the amountof the loan or extension of credit.

 

The OTSregulation generally excludes all non-bank and non-savings institutionsubsidiaries of savings institutions from treatment as affiliates, except tothe extent that the OTS or the Federal Reserve Board decides to treat suchsubsidiaries as affiliates. The regulation also requires savings institutionsto make and retain records that reflect affiliate transactions in reasonabledetail, and provides that certain classes of savings institutions may berequired to give the OTS prior notice of affiliate transactions.

 

**Federal Securities Law**

 

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

 

**Sarbanes-Oxley Act of 2002**

 

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

 

Longer prisonterms will also be applied to corporate executives who violate federalsecurities laws, the period during which certain types of suits can be broughtagainst a company or its officers has been extended, and bonuses issued to topexecutives prior to restatement of a company’s consolidated financialstatements are subject to disgorgement if such restatement was due to corporatemisconduct. Executives are also prohibited from insider trading duringretirement plan “blackout” periods, and loans to company executives arerestricted. In addition, a provision directs that civil penalties levied by theSEC as a result of any judicial or administrative action under the Act bedeposited to a fund for the benefit of harmed investors. The Federal Accountsfor Investor Restitution (“FAIR”) provision also requires the SEC to developmethods of improving collection rates. The legislation accelerated the timeframe for disclosures by public companies, as they must immediately discloseany material changes in their financial condition or operations. Directors andexecutive officers must also provide information for most changes in ownershipin a company’s securities within two business days of the change.

 

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

 

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

 

**Regulation of WIS**

 

**General**

 

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

 

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

 

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

 

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

 

WIS also issubject to “Risk Assessment Rules” imposed by the SEC which require, amongother things, that certain broker-dealers maintain and preserve certaininformation, describe risk management policies and procedures and report on thefinancial condition of certain affiliates whose financial and securitiesactivities are reasonably likely to have a material impact on the financial andoperational condition of the broker-dealers. Certain “Material AssociatedPersons” (as defined in the Risk Assessment Rules) of the broker-dealers andthe activities conducted by such Material Associated Persons may also besubject to regulation by the SEC.

 

WIS isregistered as an investment adviser with the SEC. As an investment adviserregistered with the SEC, it is subject to the requirements of the InvestmentAdvisers Act of 1940 and the SEC’s regulations thereunder, as well as certainstate securities laws and regulations. Such requirements relate to, among otherthings, limitations on the ability of an investment adviser to chargeperformance-based or non-refundable fees to clients, record-keeping andreporting requirements, disclosure requirements, limitations on principaltransactions between an adviser or its affiliates and advisory clients, as wellas general anti-fraud prohibitions. The state securities law requirementsapplicable to registered investment advisers are in certain cases morecomprehensive than those imposed under the federal securities laws.

 

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In the eventof non-compliance with an applicable regulation, governmental regulators andFINRA 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 or investmentadviser, the suspension or disqualification of the broker-dealer’s officers oremployees or other adverse consequences. With the sale of PCIS to Uvest, Uvestis now responsible for any such penalties or orders imposed on WIS subsequentto effective date of the sale, which was February 28, 2006.

 

**TAXATION**

 

**Federal Taxation**

 

**General.****  ** The Company is subject tofederal income taxation in the same general manner as other corporations withsome exceptions listed below. The following discussion of federal taxation isonly intended to summarize certain pertinent federal income tax matters and isnot a comprehensive description of the applicable tax rules. Tax years 2005through 2007 are open under the statute of limitations and subject to review bythe Internal Revenue Service.

 

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

 

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

 

**Bad DebtReserves.****  **The Small Business Job Protection Act of 1996 (the “1996 Act”) eliminated theuse of the reserve method of accounting for bad debt reserves by savingsinstitutions, effective for taxable years beginning after 1995. Prior to the1996 Act, the Bank was permitted to establish a reserve for bad debts and tomake additions to the reserve. These additions could, within specified formulalimits, be deducted in arriving at taxable income. As a result of the 1996 Act,savings associations must use the specific charge-off method in computing theirbad debt deduction beginning with their 1996 federal tax return. In addition,federal legislation requires the recapture (over a six year period) of theexcess of tax bad debt reserves at December 31, 1995 over thoseestablished as of December 31, 1987. The Bank has no excess reservessubject to recapture as of June 30, 2008.

 

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

 

At June 30,2008, the Bank’s total federal pre-1988 reserve was approximately$8.9 million. The reserve reflects the cumulative effects of federal taxdeductions for which no federal income tax provisions have been made.

 

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

 

**NetOperating Loss Carryovers.****  **Net operating losses may be carried back to the three preceding taxable yearsand forward to the succeeding 15 taxable years. This provision applies tolosses incurred in taxable years beginning before August 6, 1997. For netoperating losses in years beginning after August 5, 1997, net operatinglosses can be carried back to the two preceding taxable years and forward tothe succeeding 20 taxable years with some exceptions. At June 30, 2008,the Company has operating loss carry-forwards of $1.8 million for federalincome tax purposes.

 

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

 

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**State and Local Taxation**

 

**PennsylvaniaTaxation.****  **The Company is subject to the Pennsylvania Corporate Net Income Tax and CapitalStock and Franchise Tax. The Corporate Net Income Tax rate for fiscal 2008 is9.99% and is imposed on the Company’s unconsolidated taxable income for federalpurposes with certain adjustments. In general, the Capital Stock Tax is aproperty tax imposed at the rate of approximately 0.389% of a corporation’scapital stock value, which is determined in accordance with a fixed formulabased upon average net income and net worth.

 

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

 

**Subsidiaries**

 

As of June 30,2008, the Company’s sole direct subsidiary was the Bank. At such date, the Bankhad five direct subsidiaries, including Willow Grove Investment Corporation, aDelaware corporation which holds and manages certain securities investments,Willow Grove Insurance Agency, LLC, a Pennsylvania limited liability company formedto conduct permitted fixed-rate annuity sales and BeneServ, Inc, a corporatebenefit insurance firm. As of June 30, 2008, the Bank’s aggregateinvestment in these three subsidiaries was $295.2 million. As a result ofthe Chester Valley Merger on August 31, 2005, D&S Service Corporation(“D&S Service”) and First Financial Investments (“FFI”), which previouslywere subsidiaries of Chester Valley, are now operating as active subsidiariesof the Bank. D&S Service has participated in the development for sale ofresidential properties, in particular condominium conversions, and developmentof commercial properties located in or within close proximity of Chester Valley’smarket area and FFI conducts retail investment service activities. D&SService also operates two wholly owned subsidiaries, Wildman Projects andD&F Projects, Inc. As of June 30, 2008, the Bank had$1.7 million invested in D&S Service and its subsidiaries.

 

Effective February 28, 2006, the Bank completed the sale of alloutstanding shares of capital stock of PCIS to Uvest BD-A, Inc., a NorthCarolina Corporation and registered broker-dealer (“Uvest”) for considerationof $100 but providing that such shares may be repurchased for $100 at any timeafter the closing date of the stock sale. Concurrently with the execution ofthe sale of PCIS, the parties entered into a related Sub-Clearing and BrokerageServices Agreement, which provides that an affiliate of Uvest will providesecurities clearing and certain supervisory and compliance services for the Bank,and a Financial Services Agreement between PCIS and the Bank which providesthat the Bank will be entitled to 90% of the revenue generated by thesecurities brokerage activities conducted at the PCIS office and will bearsubstantially all operational and overhead expenses. Since March 2007,PCIS has been doing business as WIS. Upon consummation of the sale of PCISstock to Uvest, WIS is no longer a subsidiary of the Company. However, underthe provisions of Financial Accounting Standards Board Interpretation No. 46R,“Consolidation of Variable Interest Entities”, the results of WIS continue tobe consolidated in the Company’s financial statements, which includes theresults of Carnegie effective on its acquisition date of December 21,2007. The affiliation agreement with Uvest has the primary effect of relievingWIS of direct responsibility for securities clearing and certain back-officeand oversight obligations.

 

### **Item 1A.         RiskFactors**

 

**Risk Factors Relating to the Merger**

**between Harleysville National Corporation andWillow Financial Bancorp**

 

***Thevalue of the shares of Harleysville National common stock that Willow Financialshareholders receive upon the consummation of the merger may be less than thevalue of shares of Harleysville National or Willow Financial common stock as ofthe date the merger agreement was entered into or the date of the specialmeetings.***

 

The exchange ratio in the mergeragreement is fixed and will not be adjusted in the event of any change in thestock prices of Harleysville National Corporation (“Harleysville National”) orWillow Financial prior to the merger. There also may be a period of timebetween the date when shareholders of each of Harleysville National and WillowFinancial vote on the merger agreement and the date when the merger iscompleted. The relative prices of Harleysville National and Willow Financialcommon stock may vary between the date of this Annual Report and the date ofcompletion of the merger. The market price of Harleysville National and WillowFinancial common stock may change as a result of a variety of factors,including general market and economic conditions, 

 

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changesin its business, operations and prospects, and regulatory considerations. Manyof these factors are beyond the control of Harleysville National or WillowFinancial, and are not necessarily related to a change in the financialperformance or condition of Harleysville National or Willow Financial. AsHarleysville National and Willow Financial market share prices fluctuate, basedon numerous factors, the value of the shares of Harleysville National commonstock that a Willow Financial shareholder will receive will correspondinglyfluctuate. In addition, it is impossible to predict accurately the market priceof Harleysville National common stock after completion of the merger.Accordingly, the current prices of Harleysville National and Willow Financialcommon stock may not be indicative of their prices immediately prior tocompletion of the merger and the price of Harleysville National common stockafter the merger is completed.

 

***WillowFinancial directors and executive officers may have interests in the mergerthat differ from the shareholders.***

 

Someof Willow Financial’s directors and executive officers have interests in thetransaction other than their interests as shareholders. For example, DonnaCoughey, a director and the President and Chief Executive Officer of WillowFinancial has previously entered into an employment agreement with WillowFinancial and Willow Financial Bank that would provide her withchange-in-control payments upon termination of her employment in connectionwith a change in control of Willow Financial and Willow Financial Bank.

 

HarleysvilleNational has agreed that it will endeavor to continue the employment of allcurrent Willow Financial employees in positions that will contribute to thesuccessful performance of the combined organization, but it is not obligated tocontinue the employment of all current Willow Financial employees. HarleysvilleNational will notify Willow Financial employees if it expects to eliminatetheir current positions after the merger becomes effective. These reductionswill not necessarily be entirely achieved through employee layoffs, but may berealized through normal attrition and reassignment of employees from existingpositions to other positions. If before the merger or within one year after theeffective time of the merger, Harleysville National elects to displace anemployee or eliminate an employee’s position, it will pay two weeks severancefor each year of the employee’s combined service with Willow Financial andWillow Financial Bank, with a minimum of four weeks and a maximum of 26 weeksof severance, provided the employee does not have a change in control agreementor employment agreement and is not terminated for cause. During the severanceperiod Harleysville National will continue to pay its share of medical benefitsuntil the earlier of the end of the severance period or the date on which theemployee enrolls in another health plan. Severance pay for employees withchange in control agreements or employment agreements will be governed by theterms of the relevant agreement.

 

WillowFinancial Bank employees will be immediately eligible for participation in allHarleysville National benefit plans generally offered to Harleysville Nationalemployees on the terms of such benefit plans.

 

Allunvested stock options under Willow Financial’s stock option plans, includingoptions owned by executive officers and directors, will fully vest on theeffective date of the merger. In addition, all unvested shares granted underWillow Financial’s Recognition and Retention Plans and Trust Agreements,including those shares granted to executive officers and directors, will fullyvest on the effective date of the merger.

 

DonnaCoughey has entered into a new employment agreement with a subsidiary ofHarleysville National for a one-year term. This employment agreement willbecome effective on the effective date of the merger. Harleysville National hasagreed to hire Donna Coughey as an Executive Vice President of HarleysvilleNational and Harleysville National Bank. Her annual salary under the employmentagreement will be $350,000. She will also receive other benefits.

 

DonnaCoughey’s existing employment agreement with Willow Financial and WillowFinancial Bank will be terminated on the effective date of the merger. Ms. Cougheywill receive a lump sum payment of $1.5 million under a termination agreementupon the effective date of the merger in exchange for the termination of heremployment agreement with Willow Financial and Willow Financial Bank andproviding a release in favor of Willow Financial and Harleysville National.

 

Theemployment agreements for Messrs. Ammon J. Baus, Richard Bertolet, andMatthew Kelly, and the change in control agreement for Neelesh Kalani, providefor certain change in control benefits that may be triggered by the merger andthe subsequent termination of the executive’s employment by HarleysvilleNational other than for cause (as defined in the agreements), disability,retirement or death, or by the executive for good reason (as defined in theagreements). If the change in control provisions in these agreements aretriggered, Messrs. Ammon J. Baus, Richard Bertolet, Matthew Kelly andNeelesh Kalani will be entitled to receive approximately $380 thousand, $390thousand, $364 thousand and $136 thousand, respectively. Harleysville Nationalwill assume the employment agreements as a result of the merger.

 

Theemployment agreements for Messrs. Roy Johnston, Colin N. Maropis, ThomasSaunders, Kevin Roche, Michael Kerl, and Robert McGinley provide for certainchange in control benefits that may be triggered by the merger and thesubsequent termination of the executive’s employment by Harleysville Nationalother than for cause (as defined in the agreements), disability, retirement ordeath, or by the executive for good reason (as defined in the agreements). Ifthe change in control provisions is triggered 

 

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in all of these agreements, the paymentscould equal in the aggregate approximately $1.3 million. Harleysville Nationalwill assume these agreements, along with Russ Carlson’s employment agreement,as a result of the merger.

 

Certainother executive officers and employees of Willow Financial have change incontrol agreements that may be triggered by the merger and the subsequenttermination of employment by Harleysville National other than for cause (asdefined in the agreements), death, disability or retirement, or by the employeefor good reason (as defined in the agreements). If the change in controlprovisions in all of these agreements is triggered, the payments could equal inthe aggregate approximately $1.9 million.

 

Ms. DonnaCoughey and Messrs. Ammon J. Baus, Christopher Blakely, Matthew D. Kelly,Thomas Saunders and Allen Wagner each participate in Willow Financial’ssupplemental executive retirement plan. Their combined vested and unvestedinterests in the plan equal approximately $296 thousand, $155 thousand, $23thousand, $31 thousand, $44 thousand and $137 thousand. Upon the effective dateof the merger, each individual’s interest in the plan will become fully vested.

 

Ms. DonnaCoughey and Messrs. William Byrne, Colin Maropis, Matthew Kelly and G.Richard Bertolet are each a party to an executive survivor income agreement.These agreements provide that if the executive’s employment is terminatedwithin twelve months following a change in control (as defined in theagreements) other than for cause (as defined in the agreements), or isterminated by the executive for good reason (as defined in the agreements)within such twelve month period, the executive’s named beneficiary will beentitled to receive a death benefit if the terminated executive dies beforereaching age 85. The death benefit that Ms. Donna Coughey’s and Messrs. WilliamByrne’s, Colin Maropis’, Matthew Kelly’s and G. Richard Bertolet’sbeneficiaries would be entitled to receive in such a situation is $500 thousand,$150 thousand, $250 thousand, $250thousand and $250 thousand, respectively.

 

Certainof Willow Financial’s executive officers, employees and directors participatein Willow Financial’s deferred compensation plans. If these plans areterminated in connection with the merger, the participants will be entitled toreceive a lump sum distribution of their account balance. As of May 19,2008, the total balance of all accounts under the deferred compensation planswas approximately $2.1 million.

 

Mr. Russ Carlson will receive a deferred incentive paymentpursuant to the Stock Purchase Agreement by and between Russ Carlson, Beneserv, Inc.and Willow Financial Bank as a result of the merger in the amount ofapproximately $750 thousand.

 

***After the merger iscompleted, Willow Financial shareholders will become Harleysville Nationalshareholders and will have different rights that may be less advantageous thantheir current rights.***

 

Uponcompletion of the merger, Willow Financial shareholders will becomeHarleysville National shareholders. Differences in Willow Financial’s articlesof incorporation and bylaws and Harleysville National’s articles ofincorporation and bylaws will result in changes to the rights of WillowFinancial shareholders who become Harleysville National shareholders.

 

***If themerger is not completed, Willow Financial will have incurred substantialexpenses without realizing the expected benefits.***

 

     WillowFinancial will incur substantial expenses in connection with the merger. Thecompletion of the merger depends on the satisfaction of specified conditionsand the receipt of regulatory approvals. Willow Financial and HarleysvilleNational cannot guarantee that these conditions will be met. If the merger isnot completed, these expenses could have a material adverse impact on thefinancial condition of Willow Financial because it would not have realized theexpected benefits.

 

***Failureto complete the merger in certain circumstances could require Willow Financialto pay a termination fee.***

 

Ifthe merger should fail to occur in certain circumstances, Willow Financial maybe obligated to pay Harleysville National $7.0 million as a termination fee.

 

**Risk Factors Related to**

**the Operations of Willow Financial Bancorp**

**on a Stand-Alone Basis**

 

***If the merger with Harleysville National isnot completed, Willow Financial Bancorp will continue to face certain riskfactors related to its on-going operations.***

 

In the eventthat the proposed merger with Harleysville National Corporation is notcompleted, Willow Financial Bancorp will continue its operations as anindependent entity and, as such, would continue to face certain risks in itson-going operations, as described below. Even if the merger is completed as expected in the fourth calendarquarter of 2008, the Company will face these risks on an independent basisuntil the time of the merger.

 

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***The Company’s operations are subject to interestrate risk and variations in interest rates may negatively affect financialperformance.***

 

Our earningsand cash 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 inthe general level of interest rates may have an adverse effect on our business,financial condition and results of operations. Interest rates are highlysensitive to may 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:

 

·                  Our ability to originate loans andobtain deposits;

·                  The fair value of our financialassets and liabilities; and

·                  The average duration of oursecurities portfolio.

 

If the interest rates paid on deposits and other borrowings increase ata faster rate than the interest rates received on loans and other investments,our net interest income, and therefore earnings, could be adversely affected.Earnings could also be adversely affected if the interest rates received on loansand other investments fall more quickly than the interest rates paid ondeposits and other borrowings. The Company measure interest rate risk undervarious rate scenarios using specific criteria and assumptions. A summary ofthis process, along with the results of our net portfolio value simulations andgap analyses is presented within “Quantitative and Qualitative DisclosuresAbout Market Risk” in Item 7A of this Annual Report on Form 10-K.

 

***The Company is subject to lending risk andcould suffer losses in our loan portfolio despite its underwriting practices.***

 

There areinherent risks associated with the Company’s lending activities. There arerisks inherent in making any loan, including those related to dealing withindividual borrowers, nonpayment, uncertainties as to the future value ofcollateral and changes in economic and industry conditions. The Companyattempts to closely manage its credit risk through loan underwriting andapplication approval procedures, monitoring of large loan relationship andperiodic independent reviews of outstanding loans by our lending department andthird party loan review specialists. The Company cannot assure that suchapproval and monitoring procedures will reduce these credit risks.

 

***The Company’s loan portfolio includescommercial and multi-family real estate, commercial business and constructionloans, which generally have a higher degree of risk of loss than single-familyresidential loans.***

 

As of June 30,2008, approximately 29.4% of the Company’s total loan portfolio consisted ofcommercial real estate and multi-family real estate loans and constructionloans. In addition, 12.4% of the Company’s loan portfolio at June 30, 2008consisted of commercial business loans. 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 real estate loans orconsumer loans. Furthermore, since these types of loans frequently haverelatively large balances, the deterioration of one or more of these loanscould cause a significant increase in non-performing loans and non-performingassets. An increase in non-performing loans would result in a reduction ininterest income recognized on loans. An increase in non-performing loans alsocould require us to increase the provision for losses on loans and increaseloan charge-offs, both of which would reduce our net income. All of these couldhave a material adverse effect on the Company’s financial condition and resultsof operations.

 

***Adverse economic and business conditions inour primary market area could cause an increase in loan delinquencies andnon-performing asset, which could adversely affect the Company’s financialcondition and results of operations.***

 

Thesubstantial majority of our real estate loans are secured by properties locatedin Bucks, Montgomery and Chester Counties, Pennsylvania, and Philadelphia andits suburbs in southeastern Pennsylvania, central and southern New Jersey andDelaware. The Company’s results of operations and financial condition may beadversely affected by changes in prevailing economic conditions, particularlyin the Philadelphia metropolitan area, including decreases in real estatevalues, adverse local employment conditions, and other significant localevents. Any deterioration in the local economy could result in borrowers notbeing able to repay their loans, the value of the collateral securing theCompany’s loans to borrowers declining and the quality of the loan portfoliodeteriorating. This could result in an increase in delinquencies andnon-performing assets or require the Company to record loan charge-offs and/orincrease the Company’s provisions for loan losses, which would reduce theCompany’s earnings.

 

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***The Company’s allowance for loan losses maybe insufficient to cover actual losses.***

 

The Company maintainsan allowance for loan losses at a level believed adequate by us to absorbcredit losses inherent in the loan portfolio. The allowance for loan losses isa reserve established through a provision for loan losses charged to expensethat represents our estimate of probable incurred losses within the loanportfolio at each statement of financial condition date and is based on thereview of available and relevant information. The level of the allowance forloan losses reflects, among other things, our consideration of the Company’shistorical experience, levels of and trends in delinquencies, the amount ofclassified assts, 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 loanlosses inherently involves a high degree of subjectivity and requires us tomake significant estimates of current credit risks and future trends. Ourallowance for loan losses may be insufficient to cover actual lossesexperienced on loans. Changes in economic conditions affecting borrowers, newinformation regarding existing loans, identification of additional problemloans and other factors, both within and outside of our control, may require anincrease in the allowance for loan losses. In addition, bank regulatoryagencies periodically review our allowance for loan losses and may require anincrease in the provision for loan losses or the recognition of further loancharge offs, based on judgments different from ours. Also, if charge offs infuture periods exceed the allowance for loan losses, the Company will needadditional provisions to increase our allowance for loan losses. Any increasesin the allowance for loan losses will result in a decrease in net income andpossibly capital, and may have a material adverse effect on our financialcondition and results of operations. For the fiscal year ended June 30,2008, the Company’s provision for loan losses amounted to $3.2 million.

 

***The Company operates in a highly competitiveindustry and market area with other financial institutions offering productsand services similar to those the Company offers.***

 

The Companycompetes with savings associations, national banks, regional banks, and othercommunity banks in making loans, attracting deposits and recruiting andretaining talented employees, many of which have greater financial andtechnical resources than us. The Company also competes with securities andbrokerage companies, mortgage companies, insurance companies, financecompanies, money market mutual funds, credit unions and other non-bankfinancial service providers. Many of these competitors are not subject to thesame regulatory restrictions to which the Company is subject, yet are 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 operations. The competition in our market for attracting deposits alsohas resulted in more competitive pricing.

 

***The Company depends on the skills andperformance of management.***

 

The Companydepends heavily on its management team to provide leadership and to implementits strategic plan. The Company’s senior management team provides valuablefinancial expertise and administrative guidance. The loss of any member of oursenior management 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 Company is subject to extensivegovernment regulation and supervision, which could adversely affect itsoperations.***

 

The Company is subject toextensive federal and state regulations and supervisions. 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, including changesin interpretation or implementation of statutes, regulations or policies, couldaffect the Company in substantial and unpredictable ways. Such changes couldsubject the Company to additional costs, limit the types of financial servicesand products the Company may offer and/or increase the ability of non-banks tooffer competing financial services and products, among other things. Failure tocomply with law, regulations or policies could result in sanctions byregulatory agencies, civil money penalties and/or reputation damage, whichcould have a material adverse affect on the Company’s business, financialcondition and results of operations.

 

**Item 1B.**         **UnresolvedStaff Comments**

 

Notapplicable.

 

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### **Item2.            Properties**

 

As of June 30, 2008, the Company and the Bank operated from thefollowing locations:

 

**PROPERTIES**

 
| ** **                                                                   | ** ** | ** **                | ** ** | ** **                      | ** ** | **At June 30, 2008**  | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **                                                                   | ** ** | **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              |       | $                                    | 1,410      |   | $ | 57,560 |   |
| *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               |       | 326                                  |       | 101,507 |   |
| 1555 W. Street Road   Warminster, PA 18974-3103                              |       | Leased                    |       | December 2010              |       | 46                                   |       | 32,030 |   |
| 1141 Ivyland Road   Warminster, PA 18974-2048                                |       | Leased                    |       | June 2009                  |       | 17                                   |       | 22,506 |   |
| 9 Easton Road   Willow Grove, PA 19090-0905 (1)                              |       | Owned                     |       | n/a                             |       | 760                                  |       | 84,069 |   |
| 701 Twining Road   Dresher, PA 19025-1894                                    |       | Leased                    |       | January 2026               |       | 84                                   |       | 50,142 |   |
| 761 Huntingdon Pike   Huntingdon Valley, PA 19006-8399                       |       | Leased                    |       | January 2026               |       | 122                                  |       | 47,607 |   |
| 2 North York Road   Hatboro, PA 19040-3201                                   |       | Leased                    |       | July 2008                  |       | 34                                   |       | 57,508 |   |
| 1331 Easton Road   Roslyn, PA 19001-2426                                     |       | Leased                    |       | December 2008              |       | 51                                   |       | 12,508 |   |
| 11730 Bustleton Avenue   Philadelphia, PA 19116-2516                         |       | Leased                    |       | February 2014              |       | 42                                   |       | 33,094 |   |
| 122 N. Main Street   North Wales, PA 19454-3115                              |       | Leased                    |       | February 2010              |       | 69                                   |       | 10,259 |   |
| 8200 Castor Avenue   Philadelphia, PA 19152-2719                             |       | Leased                    |       | December 2009              |       | 117                                  |       | 18,955 |   |
| 735 Davisville Road   Southampton, PA 18966-3276                             |       | Leased                    |       | May 2011                   |       | 124                                  |       | 12,897 |   |
| 9869 Bustleton Avenue   Belair Shopping Center   Philadelphia, PA 19115-2611 |       | Leased                    |       | July 2012                  |       | 164                                  |       | 10,964 |   |
| 102 Airport Road   Airport Village Shopping Center   Coatesville, PA 19320   |       | Owned                     |       | n/a                             |       | 265                                  |       | 29,880 |   |
| 119 Pennsylvania Avenue   Avondale, PA 19311                                 |       | Owned                     |       | n/a                             |       | 487                                  |       | 9,283 |   |
| 82 Quarry Road   Brandywine Square Shopping Center   Downingtown, PA 19335   |       | Leased                    |       | August 2011                |       | 126                                  |       | 40,324 |   |
| 112 – 114 East Lincoln Highway   Coatesville, PA 19320                  |       | Leased                    |       | January 2026               |       | 90                                   |       | 34,150 |   |
| 414 Lancaster Avenue   Devon, PA 19333                                       |       | Leased                    |       | January 2026               |       | 43                                   |       | 22,266 |   |
| 100 East Lancaster Avenue   Downingtown, PA 19335                            |       | Leased                    |       | January 2026               |       | 58                                   |       | 43,533 |   |
| 300 Simpson Drive   Chester Springs, PA 19425                                |       | Leased                    |       | January 2018               |       | 134                                  |       | 12,479 |   |
|                                                                              |            |                           |            |                                 |            |                                      |            |  |  |  |  |

 

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| ** **                                                                             | ** ** | ** **                | ** ** | ** **                      | ** ** | **At June 30, 2008**  | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **Owned or  Leased** | ** ** | **Lease  expiration date** | ** ** | **Net book  value**             | ** ** | **Deposits** | ** ** |
| ** **                                                                             | ** ** | ** **                | ** ** | ** **                      | ** ** | **(Dollars in thousands)** | ** ** |
| 601 North Pottstown Pike   Exton, PA 19341                                             |       | Leased                    |       | January 2026               |       | 256                                  |       | 59,776 |   |
| 200 West Lancaster Avenue   Frazer, PA 19355 (2)                                       |       | Leased                    |       | January 2026               |       | 119                                  |       | 38,555 |   |
| 838 East Baltimore Pike   Marlborough Square Shopping Center   Kennet Square, PA 19348 |       | Owned                     |       | n/a                             |       | 573                                  |       | 22,629 |   |
| 3909 Lincoln Highway   Caln Village Shopping Center   Downingtown, PA 19335            |       | Leased                    |       | July 2008                  |       | 80                                   |       | 47,616 |   |
| 16 East Market Street   West Chester, PA 19382                                         |       | Leased                    |       | July 2008                  |       | 35                                   |       | 13,136 |   |
| 1197 Wilmington Pike   Westtown Village Shopping Center   West Chester, PA 19382       |       | Leased                    |       | November 2009              |       | 143                                  |       | 64,837 |   |
| 220 E. Street Rd  Feasterville, PA 19053                                               |       | Leased                    |       | January 2022               |       | 526                                  |       | 11,835 |   |
| 321 N. Third Street   Oxford, PA 19363-1429                                            |       | Leased                    |       | December 2016              |       | 1,444                                |       | 973 |   |
| 1012 E. Philadelphia Ave   Gilbertsville, PA 19525-9511                                |       | Leased                    |       | November 2008              |       | n/a                                  |       | n/a |   |
| *WIS office:*                                                                          |       |                      |       |                            |       |                                 |       |   |   |
| One Liberty Place, Suite 3050  Philadelphia, PA 19103                             |       | Leased                    |       | May 2009                   |       | n/a                                  |       | n/a |   |
| *Beneserv office:*                                                                     |       |                      |       |                            |       |                                 |       |   |   |
| 435 Baltimore Pike  Springfield, PA 19064-3810                                         |       | Leased                    |       | May 2009                   |       | 20                                   |       | n/a |   |
| *Carnegie office:*                                                                     |       |                      |       |                            |       |                                 |       |   |   |
| 667 Exton Commons  Exton, PA 19341-2446                                                |       | Leased                    |       | December 2010              |       | 40                                   |       | n/a |   |
| Total                                                                                  |       |                      |       |                            |       | $                                    | 7,805      |   | $ | 1,002,878 |   |
|                                                                                        |            |                           |            |                                 |            |                                      |            |  |  |  |  |

 

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(1)             Includes thelease of an easement at this location.

 

(2)             The branchfacility at this location is owned. There is also a drive-up facility at this location that is leased.

 

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### **Item 3.**            LegalProceedings

 

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

 

FFB is a partyto three civil actions relating to some of the revenue bonds, which are thesubject of the SEC investigation described above. On August 30, 2005, awrit of summons was filed by the Boyertown Area School District (“Boyertown”)in the Court of Common Pleas, Montgomery County, Pennsylvania commencing acivil action against, *inter alia,*FFB. *Boyertown Area School District v. First FinancialBank et. al.* , No. 05­21799. A complaint was filed onNovember 9, 2005, asserting the following claims against FFB: Breach ofTrust Indenture and Fiduciary Duties (Count 1), Breach of Fiduciary Duties(Count 2), Civil Conspiracy (Count 3), and Concerted Action (Count 4). On September 19,2005, Red Lion Area School District (“Red Lion”) filed a complaint in theCourt of Common Pleas, York County, Pennsylvania, against *inter alia* , FFB. *Red Lion Area School Districtv. Bradbury et. al.* , No. 2005-SU­1656­Y01; No. 2005­SU­2544­Y01.This case has been transferred to the Court of Common Pleas of MontgomeryCounty, Pennsylvania, and an amended complaint was filed on October 18,2006. The amended complaint asserts the following claims against FFB:Declaratory Judgment (Count 15), Breach of Trust Indenture (Count 16), CivilConspiracy (Count 17), Civil Conspiracy—Alternative Legal Basis (Count 18),Breach of Common Law Duties as Trustee (Count 19), Tortious Action in Concert/Aidingand Abetting Fraud (Count 20), Breach of Trust Indenture (Count 21), Breach ofFiduciary Duties (Count 22), Vicarious Liability and Respondeat Superior(Count 23), Unjust Enrichment (Count 24), and Unjust Enrichment (Count 25). On March 16,2006, Perkiomen Valley School District (“Perkiomen”) filed a complaint in theCourt of Common Pleas, Montgomery County, Pennsylvania, against, *inter alia* , FFB *Perkiomen Valley SchoolDistrict v. First Financial Bank et.al.* , No. 06­06533. Thecomplaint asserts the following claims against FFB: Breach of Trust Indenture(Count 1), Breach of Fiduciary Duties (Count 2), Vicarious Liability andRespondeat 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 declaratoryjudgment action in federal court against the Bank, Red Lion, Boyertown, andPerkiomen seeking a declaration that Cincinnati is not obligated to provideinsurance coverage to the Bank in connection with the SEC subpoena and thelitigation brought by Red Lion, Boyertown, and Perkiomen: *CincinnatiInsurance Company v. First Financial Bank et al*., 07-02389 (E.D.Pa.), (the “School District Litigation”). Willow Financial Bank filed an answerand counterclaim on September 20, 2007 seeking damages for Cincinnati’sbreach of contract for failure to defend and for bad faith. Cincinnati answeredthe Counterclaim and denied all of the Bank’s allegations. Willow FinancialBank has served discovery and received documents from Cincinnati and itscounsel.  Cincinnati has not served anydiscovery. Willow Financial Bank filed a Motion for Judgment on the Pleadingsas to Cincinnati’s duty to defend the Bank in the School District Litigation.Cincinnati filed its own Motion for Judgment on the Pleadings. Willow FinancialBank filed an opposition to Cincinnati’s Motion, and Boyertown also filed anopposition to Cincinnati’s Motion. The trial judge heard argument on the Bank’sMotion and Cincinnati’s Motion on May 30, 2008.

 

In the normalcourse of business, the Company is involved in various legal proceedings.Management of the Company, based on discussions with legal counsel, believesthat such proceedings will not have a material adverse effect on the financialcondition or operations of the Company. There can be no assurance that any ofthe outstanding legal proceedings to which the Company is a party will not bedecided adversely to the Company’s interests and have a material adverse effecton the financial condition and operations of the Company.

 

### **Item 4.**            Submission of Matters to a Vote of SecurityHolders

 

Not applicable.

 

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**PART II**

 

### **Item 5.**            Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a)   Ourcommon stock is traded on the NASDAQ Global Select Market (“NASDAQ”) under thesymbol WFBC. At September 5, 2008, there were 2,473 registeredshareholders of record, not including the number of persons or entities whosestock is held in nominee or “street” name through various brokerage firms andbanks. On January 23, 2007, the Company’s Board of Directors authorized a5% stock dividend, which was paid on February 23, 2007, to shareholders ofrecord after the close of business on February 9, 2007. The followingtable shows the quarterly high and low trading prices of our stock and theamount of cash dividends declared per share for our past two fiscal years. Themarket prices and dividends for periods prior to February 23, 2007 havebeen adjusted to give retroactive effect to the 5% stock dividend.

 
| ** **              | ** ** | **Stock Price** | ** ** | **Cash dividends** | ** ** |
|-------------------------|------------|----------------------|------------|-------------------------|------------|
| ** **              | ** ** | **High**             | ** ** | **Low**                 | ** ** | **per share** | ** ** |
| Quarter ended:          |       |                 |       |                    |       |   |   |
| June 30, 2008      |       | $                    | 9.75       |                    | $          | 7.29 |   | $ | 0.115 |   |
| March 31, 2008     |       | 8.69                 |       | 6.30                    |       | 0.115 |   |
| December 31, 2007  |       | 12.49                |       | 8.39                    |       | 0.115 |   |
| September 30, 2007 |       | 12.83                |       | 10.86                   |       | 0.115 |   |
| 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 |   |

 

**Performance Graph. **The following graph demonstrates comparisonof the cumulative total returns for the common stock of Willow FinancialBancorp, the NASDAQ Composite Index and the SNL Securities Thrift Index for theperiods indicated.  The graph belowrepresents $100 invested in our common stock at its closing price on June 30,2003.  The cumulative total returnsinclude the payment of dividends by Willow Financial Bancorp.

 

 
| ** **                          | ** ** | **Period Ending** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| **Index**                           | ** ** | **6/30/03**            | ** ** | **06/30/04** | ** ** | **06/30/05** | ** ** | **06/30/06** | ** ** | **06/30/07** | ** ** | **06/30/08** | ** ** |
| Willow Financial Bancorp, Inc. |       | $                      | 100.00     |   | $ | 96.21 |   | $ | 90.68 |   | $ | 101.44 |   | $ | 90.07 |   | $ | 59.19 |   |
| NASDAQ Composite                    |       | 100.00                 |       | 126.19 |   | 126.75 |   | 133.85 |   | 160.42 |   | 141.30 |   |
| SNL Thrift Index                    |       | 100.00                 |       | 116.68 |   | 131.55 |   | 147.38 |   | 145.80 |   | 75.43 |   |
|                                     |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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*              Source:SNL Financial LC

 

The information for allequity based and individual compensation arrangements is incorporated byreference from Item 12 hereof.

 

(b)           Notapplicable

 

(c)           Purchasesof Equity Securities

 

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The following tablerepresents the repurchasing activity of the share repurchase program during thefourth 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, 2008 –  April 30, 2008 |       | —                                  |       | $                                            | n/a        |                                                                                                                     | —     |                                                                                                                    | 579,063     |   |
| Month #2 May 1, 2008 – May 31,  2008     |       | —                                  |       | n/a                                          |       | —                                                                                                                   |       | 579,063                                                                                                                 |        |
| Month #3 June 30, 2008 – June 30,  2008  |       | —                                  |       | n/a                                          |       | —                                                                                                                   |       | 579,063                                                                                                                 |        |
| **Total**                                               | ** ** | **—**                              | ** ** | **$**                                        | **n/a**    |                                                                                                                     | —     | ** **                                                                                                              | **579,063** | ** ** |

 

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*Notes to this table:*

* *

(a)    On January 24,2007, the Company issued a press release announcing that the Board of Directorsauthorized a share repurchase program (the “Program”). Pursuant to theHarleysville National Merger Agreement, the Company has agreed to notrepurchase any additional shares of common stock without the prior writtenconsent of Harleysville National.

 

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

 

(c)    The Programhas an expiration date of January 23, 2009.

 

**Item 6.****              SelectedFinancial Data**

 
| ** **                               | ** ** | **At June 30,**            | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|
| ** **                               | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| Total assets                             |       | $                                    | 1,584,645  |   | $ | 1,551,296 |   | $ | 1,570,734 |   | $ | 958,891 |   | $ | 921,228 |   |
| Cash and cash equivalents                |       | 36,182                               |       | 60,277 |   | 30,955 |   | 20,609 |   | 39,445 |   |
| Investment securities available for sale |       | 181,262                              |       | 188,339 |   | 196,925 |   | 148,517 |   | 234,207 |   |
| Investment securities held to maturity   |       | 75,781                               |       | 88,363 |   | 105,561 |   | 164,451 |   | 98,513 |   |
| Loans held for sale                      |       | 14,199                               |       | 8,075 |   | 2,635 |   | 1,795 |   | 1,136 |   |
| Loans receivable, net                    |       | 1,136,839                            |       | 1,035,293 |   | 1,063,601 |   | 584,187 |   | 524,189 |   |
| Deposits                                 |       | 1,002,878                            |       | 1,092,730 |   | 1,016,500 |   | 602,678 |   | 603,115 |   |
| Borrowings                               |       | 413,740                              |       | 235,538 |   | 338,753 |   | 237,400 |   | 206,168 |   |
| Total stockholders’ equity          |       | 150,097                              |       | 199,433 |   | 198,624 |   | 106,679 |   | 103,412 |   |
|                                          |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                                | ** ** | **For the year ended June 30,**                        | ** ** |
|-----------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest income                                           |       | $                                                                               | 84,681     |   | $ | 86,050 |   | $ | 81,530 |   | $ | 49,679 |   | $ | 40,628 |   |
| Interest expense                                          |       | 43,003                                                                          |       | 41,062 |   | 32,205 |   | 18,749 |   | 15,074 |   |
| Net interest income                                       |       | 41,678                                                                          |       | 44,988 |   | 49,325 |   | 30,930 |   | 25,554 |   |
| Provision for loan losses                                 |       | 3,173                                                                           |       | 653 |   | 3,380 |   | 1,232 |   | 426 |   |
| Net interest income after provision for  loan losses |       | 38,505                                                                          |       | 44,335 |   | 45,945 |   | 29,698 |   | 25,128 |   |
| Non-interest income                                       |       | 13,773                                                                          |       | 12,267 |   | 8,114 |   | 3,477 |   | 3,983 |   |
| Non-interest expense                                      |       | 97,881                                                                          |       | 46,449 |   | 44,382 |   | 23,397 |   | 20,390 |   |
| (Loss) income before income taxes                         |       | (45,603                                                                         | )          | 10,153 |   | 9,677 |   | 9,778 |   | 8,721 |   |
| Income tax (benefit) expense                              |       | (2,128                                                                          | )          | 2,886 |   | 3,010 |   | 3,052 |   | 2,610 |   |
| Net (loss) income                                         |       | (43,475                                                                         | )          | 7,267 |   | 6,667 |   | 6,726 |   | 6,111 |   |
| (Loss) Earnings per share—basic (1)                  |       | $                                                                               | (2.88      | ) | $ | 0.48 |   | $ | 0.47 |   | $ | 0.70 |   | $ | 0.63 |   |
| (Loss) Earnings per share—diluted (1)                |       | (2.88                                                                           | )          | 0.47 |   | 0.46 |   | 0.67 |   | 0.59 |   |
| Cash dividends declared per share (1)                     |       | 0.46                                                                            |       | 0.46 |   | 0.46 |   | 0.44 |   | 0.36 |   |
| Dividend payout ratio                                     |       | N/A                                                                             |       | 97.87 | % | 100.00 | % | 65.67 | % | 61.02 | % |

 

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| ** **                                                                    | ** ** | **At or for the year ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Return on average assets                                                      |       | (2.77                                                                    | )%         | 0.47 | % | 0.45 | % | 0.70 | % | 0.73 | % |
| Return on average equity                                                      |       | (24.25                                                                   | )          | 3.58 |   | 3.64 |   | 6.33 |   | 5.56 |   |
| Average interest-earning assets to  average interest-bearing liabilities |       | 114.3                                                                    |       | 115.9 |   | 116.7 |   | 121.6 |   | 124.2 |   |
| Interest rate spread (2)                                                      |       | 2.56                                                                     |       | 2.85 |   | 3.31 |   | 2.88 |   | 2.94 |   |
| Interest rate margin (3)                                                      |       | 2.99                                                                     |       | 3.32 |   | 3.71 |   | 3.30 |   | 3.17 |   |
| Non-performing assets to total assets  (4)                               |       | 0.69                                                                     |       | 0.25 |   | 1.01 |   | 0.33 |   | 0.34 |   |
| Allowance for loan losses to:                                                 |       |                                                                     |       |   |   |   |   |   |   |   |   |
| Non-performing loans                                                          |       | 137.2                                                                    |       | 317.1 |   | 106.4 |   | 227.5 |   | 188.0 |   |
| Total loans less deferred fees                                                |       | 1.29                                                                     |       | 1.17 |   | 1.55 |   | 1.05 |   | 0.99 |   |
| Average stockholders’ equity to  average assets                     |       | 11.41                                                                    |       | 13.26 |   | 12.31 |   | 10.88 |   | 13.10 |   |
| Tangible stockholders’ equity to end of  period assets                   |       | 7.17                                                                     |       | 5.75 |   | 5.80 |   | 11.07 |   | 11.43 |   |
| Total regulatory capital to  risk-weighted assets (5)                    |       | 12.56                                                                    |       | 13.31 |   | 12.60 |   | 17.70 |   | 17.72 |   |

 

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

 

(2)        Theweighted average yield on interest-earning assets less the weighted averagecost of interest-bearing liabilities.

 

(3)        Thisrepresents net interest income as a percentage of average interest-earningassets.

 

(4)        Non-performingassets equal non-accrual loans, troubled debt restructurings plus accruingloans 90 or more days past due and real estate owned.

 

(5)        Thisratio relates to the Bank only.

 

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

 

The followingdiscussion is intended to assist in understanding our financial condition, andthe results of operations for Willow Financial Bancorp, Inc. and itssubsidiaries, for the fiscal years ended June 30, 2008, 2007 and 2006. Theinformation in this section should be read in conjunction with the Company’sconsolidated financial statements and the accompanying notes included elsewhereherein.

 

**General**

 

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

 

**CriticalAccounting Policies**

 

The followingdiscussion and analysis of the Company’s financial condition and results ofoperations is based upon consolidated financial statements, which have beenprepared in accordance with U.S. GAAP. The preparation of these consolidatedfinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets and liabilities, revenues and expensesand related disclosures of contingent assets and liabilities at the date of theconsolidated financial statements. Actual results may differ from theseestimates under different assumptions or conditions.

 

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

 

1.     *Evaluation of the allowance for loan losses.  * Thedetermination of the allowance for loan losses involves significant judgmentsand assumptions by management which may have a material impact on the carryingvalue of net loans and, 

 

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potentially,on the amount of net income we recognize from period to period. For adescription of the methods the Company uses to determine the adequacy of theallowance for loan losses, see “Results of Operations—Provision for LoanLosses.”

 

2.     *Realization of deferred income tax items* .  Included in other assets is a “net deferred tax asset”, which is an estimate ofnet deferred tax assets and deferred tax liabilities. These estimates involvesignificant judgments and assumptions by management, which may have a materialeffect on the carrying value of this asset for financial reporting purposes.For a more detailed description of these items and estimates, see Note 15to the consolidated financial statements at and for the fiscal year ended June 30,2008.

 

*3.**     Goodwill and core depositintangibles.  * Goodwill represents the excess cost over fairvalue of assets acquired over liabilities as a result of the Merger and earlierbranch acquisitions. Core deposit intangibles are a measure of the value of thechecking, savings and money market deposits acquired in the Merger accountedfor under the purchase method. The core deposit intangible is being amortizedto expense over a twelve-year life using a method that approximates a levelyield method. The Company follows the provisions of SFAS No. 142, “Goodwilland Other Intangible Assets,” and performs impairment tests of the intangibleassets as well as the review of the estimated life at least annually andimpairment losses are recognized if the carrying value of the intangible exceedsits fair value. As discussed in Note 9 of the Notes to the ConsolidatedFinancial Statements, the Company recorded an impairment charge to goodwill forthe quarter ended December 31, 2007 in the amount of $40.0 million.

 

*4.**     Investment Securities.* Securities are evaluated periodicallywhether a decline in their fair value is other-than-temporary. Managementutilizes criteria such as the magnitude and duration of the decline, inaddition to the reasons underlying the decline, to determine whether the loss invalue is other-than-temporary. The term “other-than-temporary” is not intendedto indicate that the decline is permanent, but indicates that the prospects fora near-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 through a charge toearnings in the statement of operations. Based upon evaluations performed as ofJune 30, 2008, the Company recorded impairment charges of approximately$1.9 million for the fiscal year ended June 30, 2008.

 

The Notes toConsolidated Financial Statements identify other significant accountingpolicies used in the development and presentation of the consolidated financialstatements. This discussion and analysis, the significant accounting policiesand other financial statement disclosures identify and address key variablesand other qualitative and quantitative factors that are necessary for anunderstanding and evaluation of the Company and its results of operations.

 

**Changes in Financial Condition**

 

***General.******  ***Total assets increased by $33.3 million, or 2.1% to $1.58 billion at June 30,2008 from $1.55 billion at June 30, 2007. The net loan portfolio increased$101.5 million or 9.8% while total deposits decreased by $89.9 million or8.2%.

 

***Cash and Cash Equivalents.******  *** Cash and cashequivalents, which consist of cash in banks and interest-bearing deposits,amounted to $36.2 million and $60.3 million at June 30, 2008 and2007, respectively. The decrease in cash and cash equivalents of$24.1 million or 40.0% was due primarily to the increase in loanoriginations and decrease in deposits, which were partially offset by proceedsfrom additional FHLB advances and repayments of investment securities.Additionally, there was a substantial cash build-up at June 30, 2007,which was reinvested during fiscal 2008 which contributed to the decrease incash and cash equivalents.

 

***Investment Securities Available for Sale.******  *** At June 30, 2008,investment securities that were classified as AFS totaled $181.3 million,compared to $188.3 million in AFS securities at June 30, 2007. Thedecrease in AFS securities was due to principal repayments being utilized topartially fund the growth in loans during that period. The unrealized loss, netof income taxes, on AFS securities amounted to approximately $4.4 millionat June 30, 2008 compared to $3.2 million at June 30, 2007. Theincrease in the unrealized loss was the result of the deterioration in thecurrent interest rate environment.

 

***Investment Securities Held to Maturity.******  *** At June 30, 2008,investment securities classified as HTM totaled $75.8 million, compared to$88.4 million in HTM securities at June 30, 2007. HTM securities werecomprised primarily of CMOs and mortgage-backed securities. The decrease in HTMsecurities was the result of calls, maturities and principal repayments withinthe portfolio. HTM investment securities are carried at amortized cost. Inorder to more effectively manage its interest rate risk, the Company planslimiting additions to its HTM portfolio.

 

***Loans Held for Sale.******  ***Real estate loans originated or purchased with the intention of being sold intothe secondary market are classified as held for sale and are carried at thelower of aggregate cost or fair value with any unrealized loss reflected in theconsolidated statements of operations. At June 30, 2008,$14.2 million of fixed-rate, single-family residential real estate loanswere 

 

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classified asheld for sale compared to $8.1 million in loans classified as held forsale at June 30, 2007. The increase of $6.1 million resulted primarilyfrom the timing of the origination of the loans and the ultimate delivery tothe purchaser of the loans. In order to mitigate the risk of loss on the saleof these loans, the Company generally commits these loans for sale, on a bestefforts basis, to a third party at the time that the borrower locks the loanwith the Company.

 

***Loans Receivable.******  ***The loan portfolio, which does not include loans held for sale, increased$101.5 million or 9.8% to $1.14 billion at June 30, 2008 from$1.04 billion at June 30, 2007. The increase was primarily the resultof growth experienced in the commercial real estate and commercial businessportfolios as well as the acquisition of $34.9 million in home equity loansduring the three months ended September 30, 2007.  Single-family residential loans decreased$32.6 million at June 30, 2008 compared to June 30, 2007 as a part ofmanagement’s strategy to reduce reliance on long-term single-family residentialreal estate loans in its portfolio and to sell newly originated residentialmortgage loans into the secondary market. Commercial business loans increasedby $54.0 million from June 30, 2007 to June 30, 2008. At June 30,2008, home equity loans and lines of credit increased $63.1 million compared toJune 30, 2007.

 

In the priorfiscal year, with the inverted (long-term rates are lower than short-termrates) and/or flat yield curve experienced, a number of loans within thecommercial real estate portfolio were refinanced through other lenders, whooffered extended terms without recourse. Additionally, the construction loanportfolio included larger residential projects, which sold at a more rapid pacethan anticipated and the demand for new construction was not as robust as aresult of a slowing in the housing market.

 

The allowancefor loan losses increased to $14.8 million at June 30, 2008 compared to$12.2 million at June 30, 2007. The current fiscal year provision forloan losses increased from fiscal 2007 by approximately $2.6 million duelargely to a $6.9 million increase in non-performing loans. This increase innon-performing assets resulted primarily from an internally originated $6.7million collateralized commercial construction and land development loan with along-term client of the Bank. Also, the real estate owned portfolio includedone residential property located within the Company’s market area with anaggregate carrying value of $166 thousand as compared to no real estate ownedas of June 30, 2007. During the current fiscal year, the Company recordednet charge-offs of $590 thousand.

 

***Goodwill and Other Intangible Assets.******  *** At June 30, 2008,intangible assets aggregated $71.5 million as compared to $109.9 millionat June 30, 2007. Intangible assets include a core deposit intangible of$10.9 million, which resulted from the acquisition of Chester Valley. The coredeposit intangible is being amortized over a 12-year life. Intangible assetsalso include goodwill, which primarily represents the excess cost over fairvalue of assets acquired over liabilities as a result of the Chester Valleyacquisition. The goodwill that resulted from the Chester Valley acquisition wasapproximately $93.7 million. As a result of the BeneServ acquisition, goodwillof $1.4 million and customer intangibles of $3.1 million were recorded at June 30,2008. In addition, goodwill of $959 thousand and customer intangibles of $2.3million were recorded at June 30, 2008, as a result of the Carnegieacquisition. The customer intangible balances are being amortized over 10-yearlives. The remaining balance of the goodwill relates to a branch acquisition in1994 of approximately $836 thousand at June 30, 2008. Goodwill is measuredfor impairment at least annually. As discussed in Note 9 of the Notes to theConsolidated Financial Statements, the Company recorded an impairment charge togoodwill for the quarter ended December 31, 2007 in the amount of $40.0million.

 

***Other Assets.***     Other assets increased by approximately$4.0 million from June 30, 2007 to June 30, 2008 due primarily to thesale of $3.0 million in investment securities which occurred on June 30,2008, but settled in early July 2008.

 

***Deposits.******  ***During the year ended June 30, 2008, total deposits decreased by $89.9million or 8.2%. The decrease resulted primarily from the maturity of highercosting certificates, which did not renew with the Bank. Core deposits, whichwe define as savings, checking, NOW and money market accounts, decreased by $4.7 millionas a result of withdrawals from customers money market demand accounts.Checking accounts totaled $263.4 million or 26.2% of total deposits at June 30,2008 compared to $267.0 million, or 24.4% of total deposits at June 30,2007.

 

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

 

***Securities Sold Under Agreements toRepurchase.***    The Company’s repurchase liability increased by $55.0 million from June 30,2007 to June 30, 2008 due to five new agreements as a result ofopportunities to obtain lower cost funding rates than through FHLB borrowingsand maturing certificates.

 

***Federal Home Loan Bank Advances.******  *** Advances from the FHLBof Pittsburgh are an additional source of funds used to supplement the fundingof loan demand as well as for liquidity and other asset/liability purposes. At June 30,2008, the total amount of these borrowings was $311.4 million, an increaseof $121.7 million or 64.1% from the $189.8 million outstanding at June 30,2007. The Bank determined that it was beneficial to utilize these borrowings tofund its loan growth rather than pay high rates for 

 

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certificates.

 

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

 

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

 

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

 

Net gains or lossesresulting from the termination of derivative instruments are recorded on thestatement of operations as a component of non-interest income.

 

At June 30,2008 and 2007, the Company had four and five interest rate swap arrangements,respectively, tied to specific loans originated by the Bank. The swapseffectively convert the rates from a fixed rate to a floating rate based onLibor throughout the lives of the underlying loans, as of June 30, 2008;whereas, the swaps effectively convert the rates from a floating rate to afixed rate based on Libor throughout the lives of the underlying loans as of June 30,2007. At June 30, 2008, the total outstanding notional amount on theseswaps was $7.6 million. The weighted average floating and fixed rates on thesetransactions were 2.95% and 4.73%, respectively at June 30, 2008. TheCompany does not maintain sufficient documentation for these transactions toreceive hedge accounting treatment and thus all changes in the fair value ofthe derivatives is recorded in the consolidated statement of operations. Assuch, based on the decrease in the market value of the interest rate swapsduring fiscal 2008, the Company recognized a loss of $251 thousand in otherincome in the consolidated statement of operations with respect to these fourswap agreements. The Company has recorded a net payable of $55 thousand at June 30,2008 as compared to a net receivable of $196 thousand at June 30, 2007.

 

As part of theChester Valley Merger, the Company assumed the responsibility for a $20 millionnotional interest rate swap whereby the Company paid a variable rate andreceived a fixed rate. The interest rate swap had been used to hedge certainFHLB borrowings of the former Chester Valley. On the date of the Chester ValleyMerger, the interest rate swap and the hedged borrowings were marked to fairvalue as a result of purchase accounting. In September 2005, the hedgedborrowings were repaid and the $10 million notional amount of the interest rateswap was unwound with the counter-party. After performing the appropriatedocumentation of the derivative instrument, the Company designated theremaining $10 million notional amount interest rate swap as a fair value hedgeof certain existing borrowings of the Bank. The swap had the effect ofconverting a fixed rate borrowing to an adjustable rate borrowing. During thequarter ended December 31, 2005, the derivative instrument ceased to be ahighly effective hedge; therefore, the Company discontinued hedge accountingresulting in a pre-tax charge to income of $47 thousand. The interest rate swapwas unwound in February 2006 without any additional impact to operations.The basis adjustment that was previously recorded on the hedged borrowing thatis recorded in the statement of financial condition is amortized as an increasein interest expense over the remaining life of the borrowing using the interestmethod.

 

Additionally,in August 2003, Chester Valley purchased a $30.0 million notional amount3.50% six month Libor interest rate cap while simultaneously selling a$30.0 million notional amount 6.00% six-month Libor interest rate cap (“InterestRate Corridor”), which was to expire in August 2008. Chester Valley paid anet premium, which entitled it to receive the difference between six-month

 

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Libor from 3.50% up to 6.00% applied to the $30.0 million notionalamount. Upon consummation of the Chester Valley Merger, the Company assumed theInterest Rate Corridor and designated it to hedge certain borrowings of theBank, 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 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, theCompany unwound the Interest Rate Corridor and recognized a gain of $804thousand upon repayment of the $30 million FHLB advance.

 

***Other Liabilities.******  *** At June 30, 2008,other liabilities decreased $5.0 million to $12.0 million from $17.0 million atJune 30, 2007.  This decrease wasdue primarily to a liability established at June 30, 2007 for aninvestment security purchase with a trade date in June 2007 for whichsettlement occurred in early July 2007.

 

***Stockholders’ Equity.******  *** At June 30, 2008,total stockholders’ equity amounted to $150.1 million or 9.5% of totalassets compared to $199.4 million, or 12.9% of assets at June 30,2007. This decrease was primarily the result of the goodwill impairment chargeof $40.0 million. In addition, accumulated other comprehensive income decreasedas a result of $1.2 million in unrealized investment security losses, net oftax. Treasury stock decreased primarily due to the release of $1.1 million inshares for the purchase of Carnegie Wealth Management offset by $299 thousandin stock repurchases. The Company paid aggregate cash dividends of $7.0million.

 

**AverageBalances, Net Interest Income, Yields Earned and Rates Paid**

 

The following table presents the average daily balances for variouscategories of assets and liabilities, and income and expense related to thoseassets and liabilities for the years ended June 30, 2008, 2007 and 2006.The table also shows the average yields and costs on interest-earning assetsand interest-bearing liabilities for each of those years. Loans receivableinclude non-accrual loans. To adjust nontaxable loans and securities to ataxable equivalent, a 34.0% effective rate has been used for the fiscal yearsending June 30, 2008, 2007, and 2006, respectively. The adjustment oftax-exempt loans and securities to a tax equivalent yield in the table belowmay be considered to include non-GAAP financial information. Managementbelieves that it is a standard practice in the banking industry to present netinterest margin, net interest rate spread and net interest income on a fullytax equivalent basis. Therefore, management believes, these measures provideuseful information to investors by allowing them to make peer comparisons. AGAAP reconciliation also is included below.

 
| ** **                                                                             | ** ** | **At June 30,**            | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **Average  Balance**                 | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Yield/  Cost** | ** ** |
| ** **                                                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Interest-earning assets:                                                               |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Single family residential                                                              |       | $                                    | 274,617    |   | $ | 14,382 |   | 5.24 | % | $ | 292,221 |   | $ | 17,119 |   | 5.86 | % | $ | 276,270 |   | $ | 17,173 |   | 6.22 | % |
| Construction and land                                                                  |       | 81,822                               |       | 5,245 |   | 6.41 |   | 75,161 |   | 6,349 |   | 8.45 |   | 90,487 |   | 7,025 |   | 7.76 |   |
| Commercial real estate                                                                 |       | 292,936                              |       | 20,002 |   | 6.83 |   | 284,116 |   | 19,741 |   | 6.95 |   | 287,367 |   | 19,385 |   | 6.75 |   |
| Commercial business                                                                    |       | 160,842                              |       | 10,698 |   | 6.65 |   | 129,161 |   | 9,597 |   | 7.43 |   | 111,434 |   | 8,150 |   | 7.31 |   |
| Consumer                                                                               |       | 321,707                              |       | 19,319 |   | 6.01 |   | 269,807 |   | 16,839 |   | 6.24 |   | 233,264 |   | 14,022 |   | 6.01 |   |
| Total Loans                                                                            |       | $                                    | 1,131,924  |   | $ | 69,646 |   | 6.15 | % | $ | 1,050,466 |   | $ | 69,645 |   | 6.63 | % | $ | 998,822 |   | $ | 65,755 |   | 6.58 | % |
| Securities and other investments                                                       |       | 296,358                              |       | 16,095 |   | 5.43 |   | 319,047 |   | 16,930 |   | 5.31 |   | 346,594 |   | 16,328 |   | 4.71 |   |
| Total interest-earning assets                                                          |       | 1,428,282                            |       | $ | 85,741 |   | 6.00 | % | 1,369,513 |   | $ | 86,575 |   | 6.32 | % | 1,345,416 |   | $ | 82,038 |   | 6.10 | % |
| Non-interest-earning assets                                                            |       | 142,634                              |       |   |   |   |   | 161,827 |   |   |   |   |   | 142,022 |   |   |   |   |   |
| Total assets                                                                           |       | $                                    | 1,570,916  |   |   |   |   |   | $ | 1,531,340 |   |   |   |   |   | $ | 1,487,438 |   |   |   |   |   |
|                                                                                   |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Liabilities and Stockholders’ Equity:                                             |       |                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits                                                              |       | $                                    | 901,842    |   | $ | 28,220 |   | 3.13 | % | $ | 900,640 |   | $ | 28,698 |   | 3.19 | % | $ | 820,124 |   | $ | 18,476 |   | 2.25 | % |
| FHLB borrowings                                                                        |       | 258,910                              |       | 10,725 |   | 4.14 |   | 225,722 |   | 8,868 |   | 3.93 |   | 312,420 |   | 12,626 |   | 4.04 |   |
| Repurchase agreements                                                                  |       | 62,719                               |       | 2,510 |   | 4.00 |   | 22,767 |   | 1,135 |   | 4.99 |   | 4,959 |   | 228 |   | 4.60 |   |
| Trust preferred securities                                                             |       | 24,901                               |       | 1,548 |   | 6.22 |   | 32,999 |   | 2,361 |   | 7.15 |   | 15,548 |   | 875 |   | 5.63 |   |
| Total interest-bearing liabilities                                                     |       | 1,248,372                            |       | 43,003 |   | 3.44 | % | 1,182,128 |   | 41,062 |   | 3.47 | % | 1,153,051 |   | 32,205 |   | 2.79 | % |
| Non-interest-bearing deposits                                                          |       | 129,320                              |       |   |   |   |   | 131,611 |   |   |   |   |   | 125,500 |   |   |   |   |   |
| Non-interest-bearing liabilities                                                       |       | 13,977                               |       |   |   |   |   | 14,355 |   |   |   |   |   | 25,831 |   |   |   |   |   |
| Stockholders’ equity                                                              |       | 179,247                              |       |   |   |   |   | 203,246 |   |   |   |   |   | 183,056 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                        |       | $                                    | 1,570,916  |   |   |   |   |   | $ | 1,531,340 |   |   |   |   |   | $ | 1,487,438 |   |   |   |   |   |
| Net interest-earning assets                                                            |       | $                                    | 179,910    |   |   |   |   |   | $ | 187,385 |   |   |   |   |   | $ | 192,365 |   |   |   |   |   |
| Net interest income                                                                    |       |                                 |       | $ | 42,738 |   |   |   |   |   | $ | 45,513 |   |   |   |   |   | $ | 49,833 |   |   |   |
| Net interest rate spread                                                               |       |                                 |       |   |   | 2.56 | % |   |   |   |   | 2.85 | % |   |   |   |   | 3.31 | % |
| Net interest margin                                                                    |       |                                 |       |   |   | 2.99 | % |   |   |   |   | 3.32 | % |   |   |   |   | 3.71 | % |
| Ratio of average interest-earning assets to average  interest-bearing liabilities |       |                                 |       |   |   | 114 | % |   |   |   |   | 116 | % |   |   |   |   | 117 | % |

 

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Although management believes that the above non-GAAP financial measuresenhance investors’ understanding of the Company’s business and performance,these non-GAAP financial measures should not be considered an alternative toGAAP. The reconciliation of these non-GAAP financial measures to GAAP ispresented below.

 
| ** **            | ** ** | **Year Ended June 30,** | ** ** |
|-----------------------|------------|----------------------------------------|------------|
| ** **            | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **            | ** ** | **Interest  Income**                   | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** | **Interest  Income** | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** | **Interest  Income** | ** ** | **Tax  Adjustment** | ** ** | **Adjusted  Income** | ** ** |
| ** **            | ** ** | **(Dollars in Thousands)**   | ** ** |
| Loans                 |       | $                                      | 69,293     |   | $ | 353 |   | $ | 69,646 |   | $ | 69,315 |   | $ | 330 |   | $ | 69,645 |   | $ | 65,472 |   | $ | 283 |   | $ | 65,755 |   |
| Investment securities |       | 15,388                                 |       | 707 |   | 16,095 |   | 16,735 |   | 195 |   | 16,930 |   | 16,058 |   | 270 |   | 16,328 |   |
| Total                 |       | $                                      | 84,681     |   | $ | 1,060 |   | $ | 85,741 |   | $ | 86,050 |   | $ | 525 |   | $ | 86,575 |   | $ | 81,530 |   | $ | 553 |   | $ | 82,083 |   |

 

**Rate/VolumeAnalysis**

 

The following table shows the effect of changing rates and volumes onnet interest income on a tax equivalent basis for the years ended June 30,2008 and 2007, compared to the prior fiscal year. Information provided showsthe effect on net interest income of (1) rates (changes in rate timesprior volume), (2) volume (changes in volume times prior rate) and (3) rate/volume(changes in rate times change in volume).

 
| ** **                                                   | ** ** | **Increase (decrease) in net interest  income for the year ended June 30,  2008 compared to the year ended  June 30, 2007 due to** | ** ** | **Increase (decrease) in net interest  income for the year ended June 30,  2007 compared to the year ended  June 30, 2006 due to** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | ** **                                                                                                                                                                                                                        | ** ** | ** **                                                                                                                                                                                                                        | ** ** | **Rate/** | ** ** | **Increase/** | ** ** | ** ** | ** ** | ** ** | ** ** | **Rate/** | ** ** | **Increase/** | ** ** |
| ** **                                                   | ** ** | **Rate**                                                                                                                                                                                                                          | ** ** | **Volume**                                                                                                                                                                                                                        | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)**                                                                                                                                                                                              | ** ** |
| Interest-earning assets:                                     |       |                                                                                                                                                                                                                              |       |                                                                                                                                                                                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                             |       | $                                                                                                                                                                                                                                 | (4,544     | )                                                                                                                                                                                                                                 | $          | 5,375 |   | $ | (298 | ) | $ | 533 |   | $ | 506 |   | $ | 3,399 |   | $ | (15 | ) | $ | 3,890 |   |
| Investment securities                                        |       | 221                                                                                                                                                                                                                               |       | (351                                                                                                                                                                                                                              | )          | (184 | ) | (314 | ) | 2,185 |   | (1,831 | ) | (204 | ) | 150 |   |
| Interest-bearing deposits                                    |       | (247                                                                                                                                                                                                                              | )          | (303                                                                                                                                                                                                                              | )          | 99 |   | (451 | ) | 134 |   | 221 |   | 97 |   | 452 |   |
| Total net change in income on interest-earning assets        |       | (4,570                                                                                                                                                                                                                            | )          | 4,721                                                                                                                                                                                                                             |       | (383 | ) | (232 | ) | 2,825 |   | 1,789 |   | (122 | ) | 4,492 |   |
| Interest-bearing liabilities:                                |       |                                                                                                                                                                                                                              |       |                                                                                                                                                                                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                     |       | (540                                                                                                                                                                                                                              | )          | 38                                                                                                                                                                                                                                |       | 24 |   | (478 | ) | 7,709 |   | 1,812 |   | 701 |   | 10,222 |   |
| FHLB advances                                                |       | 474                                                                                                                                                                                                                               |       | 1,304                                                                                                                                                                                                                             |       | 79 |   | 1,856 |   | (343 | ) | (3,503 | ) | 88 |   | (3,758 | ) |
| Repurchase agreements                                        |       | (225                                                                                                                                                                                                                              | )          | 1,994                                                                                                                                                                                                                             |       | (394 | ) | 1,375 |   | 19 |   | 820 |   | 68 |   | 907 |   |
| Trust preferred securities                                   |       | (377                                                                                                                                                                                                                              | )          | (516                                                                                                                                                                                                                              | )          | 81 |   | (811 | ) | 236 |   | 982 |   | 268 |   | 1,486 |   |
| Total net change in expense on interest-bearing  liabilities |       | (668                                                                                                                                                                                                                              | )          | 2,820                                                                                                                                                                                                                             |       | (210 | ) | 1,942 |   | 7,621 |   | 111 |   | 1,125 |   | 8,857 |   |
| Change in net interest income (expense)                      |       | $                                                                                                                                                                                                                                 | (3,902     | )                                                                                                                                                                                                                                 | $          | 1,901 |   | $ | (173 | ) | $ | (2,173 | ) | $ | (4,796 | ) | $ | 1,678 |   | $ | (1,247 | ) | $ | (4,365 | ) |

 

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**Results of Operations**

 

***General.******  *** Net loss for the yearended June 30, 2008 was $43.5 million, a decrease of $50.7 million or698.3% from net income for the year ended June 30, 2007. Net income forthe year ended June 30, 2007 was $7.3 million, an increase of $600thousand, or 9.0%, from the year ended June 30, 2006.

 

The Company completed an interim impairment test of goodwill for thequarter ended December 31, 2007. As a result of this impairment test, theCompany recorded an impairment charge of $40.0 million related to its bankingunit.

 

***Interest Income.******  *** Interest incomeincludes the interest earned on loans and investment securities, as well asyield 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, 2008 was $84.7 million compared to$86.1 million and $81.5 million for fiscal 2007 and 2006,respectively.

 

The decrease in interest income in fiscal 2008 compared to fiscal 2007was $1.4 million due primarily to a decrease in the average yield ofoutstanding loans of 48 basis points from 6.63% for the year ended June 30,2007 to 6.15% for the year ended June 30, 2008. The decrease in theaverage yield of the loan portfolio was primarily from the decrease in theshort-term interest rates. Specifically, the Federal Reserve target rate decreasedfrom 5.25% at June 30, 2007 to 2.00% at June 30, 2008. The Bank has asignificant portfolio of variable rate loans, including commercial, residentialreal estate, and consumer home equity loans whose rates reset with changes inFederal Reserve target rates. In addition, the yield on construction and landloans declined due to an internally originated $6.7 million commercialconstruction and land development loan with a long-term client of the Bankentering non-accrual. Also, the increase in loan balances was due primarily tonew loans originated after market loan rates had decreased and during a periodof intense competition for high-quality commercial, real estate, business andconsumer loans. The Company does not invest in sub-prime loans or related assets,and accordingly, did not incur any significant impact to its loan yields fromdisruptions in the credit markets for sub-prime assets. Interest income fromsecurities, as of June 30, 2008, decreased $1.3 million or 8.0%, from June 30,2007; however, the Company has been able to enhance investment securitiesyields due primarily to its ability to reinvest significant cash inflows fromlower-yielding investments into higher-yielding investments.

 

The increase in interest income in fiscal 2007 compared to fiscal 2006was $4.5 million or 5.5% due primarily to an increase in the averagebalance of outstanding loans of $51.6 million. Additionally, the average yield on loans increased approximately fivebasis points in fiscal 2007 compared to fiscal 2006. The increase in theaverage yield of the loan portfolio was largely the result of a change in themix of the loan portfolio reflecting the Company’s reduced reliance onlong-term single-family residential mortgage loans and increase in home equityloans and lines of credit, along with the interest rate sensitive assetsacquired from Chester Valley at a time in which the Federal Reserve wasaggressively raising short-term interest rates. Also contributing to theincrease was an approximate 71 basis point increase in the average yield in theinvestment securities portfolio.

 

***Interest Expense.******  *** Interest expenseconsists of the interest paid to depositors on their interest-bearing depositaccounts as well as interest paid on borrowings. For the fiscal year ended June 30,2008, total interest expense was $43.0 million compared to $41.1 millionand $32.2 million, for the fiscal years ended June 30, 2007 and 2006,respectively.

 

For the fiscal year ended June 30, 2008, interest expenseincreased by $1.9 million, or 4.7% compared to the fiscal year ended June 30,2007. This increase was due primarily to a $2.4 million, or 19.6%, increase ininterest expense on borrowings and repurchase agreements, which was partiallyoffset by a $478 thousand, or 1.7% decrease in interest expense on deposits.This decrease in interest expense on deposits was due primarily to the decreasein average cost of deposits of six basis points in fiscal 2008 as compared tofiscal 2007. This decrease was partially offset by an increase of $65.0 millionor 23.1% in the aggregate average balance of borrowings for the year ended June 30,2008 compared to the year ended June 30, 2007. During the six-month periodended December 31, 2007, the Company experienced a lag in rate decreaseson its variable rate deposits. This lag in deposit rate decreases was due tothe competitive market, which kept deposit rates higher during the immediateperiods following Federal Reserve rate reductions. This lag appears to havesubsided in the quarter ended June 30, 2008, as the deposit rates havegradually declined. With the objective of maintaining competitive core depositpricing, the Company’s variable deposit rate decreases occurred at a slowerpace than the decreases experienced in the loan portfolio as floating rateloans contractually require adjustments in rates consistent with the FederalFunds rate adjustments. In the remaining six-month period of fiscal year 2008,the Company has successfully lowered its core deposit interest rates whilemaintaining relatively stable balances. Throughout the year, the Companyexecuted a strategy in which it did not compete aggressively for single-servicecertificates, thereby avoiding unprofitable rates on new certificates.Additionally, contributing to the increased cost of deposits was a migration ofbalances from lower cost demand deposit and savings accounts to money marketaccounts as well as the inflow of the WIS customer deposits to money marketaccounts.

 

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For the fiscal year ended June 30, 2007, interest expenseincreased by $8.9 million, or 27.5% compared to the fiscal year ended June 30,2006. This increase was due primarily to a $10.2 million, or 55.3%, increase ininterest expense on deposits, which was partially offset by a $1.4 million, or9.9% decrease in interest expense on borrowings and repurchase agreements. Thisincrease in interest expense on deposits was due primarily to the increase inaverage deposits of $87.0 million, or 9.2%. In addition, the average cost ofdeposits increased by 94 basis points in fiscal 2007 as compared to fiscal2006. This increase was partially offset by a reduction of $51.4 million or15.5% in average borrowings for the year ended June 30, 2007 compared tothe year ended June 30, 2006.

 

***Net Interest Income.******  *** Net interest income isdetermined from the average interest rate spread (i.e. the difference betweenthe average yields on interest-earning assets and the average rates paid oninterest-costing liabilities) as well as the relative amounts of averageinterest-earning assets compared to interest-bearing liabilities. The averageinterest rate spread computed on a fully tax equivalent basis for the yearsended June 30, 2008, 2007 and 2006 was 2.56%, 2.85% and 3.31%,respectively. The net interest margin (i.e. net interest income expressed as apercentage of average interest-earning assets) was 2.99%, 3.32% and 3.71% forthe same three respective fiscal years.

 

Net interest income decreased by $3.3 million or 7.4% to$41.7 million for the year ended June 30, 2008 as compared to $45.0 millionfor the year ended June 30, 2007. This decrease was due primarily to adecrease in the average yield on interest earning assets of 32 basis points,which was partially offset by a decrease in the average cost ofinterest-bearing liabilities to 3.44% for the year ended June 30, 2008from 3.47% for the year ended June 30, 2007.  Additionally, pressures existed in the marketplace that maintained deposit rates at a high level. As such, the Companydecided to increase its commercial loan portfolio, where interest is received ona floating basis. With the declining interest rate market, the Company’scommercial loan yields declined from the prior year.

 

Net interest income decreased by $4.3 million or 8.8% to$45.0 million for the year ended June 30, 2007 as compared to $49.3 millionfor the year ended June 30, 2006. This decrease was due primarily to anincrease in the average cost of interest-bearing liabilities to 3.47% for theyear ended June 30, 2007 from 2.79% for the year ended June 30, 2006while the yield on average earning assets increased by only 22 basis points.

 

***Provision for Loan Losses.******  *** In order to maintainthe allowance for loan losses at a level that management deems adequate toabsorb known and unknown losses which are both probable and can be reasonablyestimated, a provision for loan losses is recorded through charges to earnings.The determination of the adequacy of the allowance is based upon the Company’sregular review of credit quality and is based upon, but not limited to, thefollowing factors: an evaluation of our loan portfolio, loss experience,current economic conditions, volume, growth, composition of the loan portfolioand other relevant factors. The balance of the allowance for loan losses is anestimate and actual losses may vary from these estimates. Management assessesthe allowance for loan losses at least quarterly and makes any necessaryadjustments to maintain the allowance for losses at a level deemed adequate.For the years ended June 30, 2008, 2007 and 2006, the provisions for loanlosses were $3.2 million, $653 thousand and $3.4 million, respectively. Theincreased amount of the provision in fiscal 2008 compared to fiscal 2007 is theresult of the reduction of residential real estate loans as a percentage oftotal loans, which the Company now sells primarily all of its residential realestate production, and the corresponding increase in commercial loans, whichcarry a higher level of risk, as a percentage of total loans. In addition,non-performing loans increased due to an internally originated $6.7 millioncollateralized construction and land development loan with a long-term clientof the Bank. The decreased amount of the provision in fiscal 2007 compared tofiscal 2006 was due primarily to the decrease in non-performing assets of $11.9million, which was partially offset by net charge-offs of $5.2 million.

 

At June 30, 2008, the balance in the allowance for loan losses was$14.8 million compared to $12.2 million at June 30, 2007, withthe increase resulting from $6.9 million in non-performing loans and $590thousand in net charge-offs during fiscal 2008. The percentage of the allowancefor losses to loans, net of deferred fees, increased to 1.29% at June 30,2008 compared to 1.17% at June 30, 2007.

 

Management believes the allowance for loan loss was adequate at June 30,2008 and represents all known and inherent losses in the portfolio that areboth probable and reasonably estimable. No assurance can be given as to theamount or timing of additional provisions for loan losses in the future as aresult of potential increases in the amount of the Company’s non-performingloans in the remainder of the Company’s loan portfolio. Regulatory agencies, inthe course of their regular examinations, review the allowance for losses andcarrying value of non-performing assets. No assurance can be given that theseagencies might not require changes to the allowance for losses in the future.

 

***Non-Interest Income.******  *** Non-interest income iscomprised of investment services income, account service fees and charges, loanservicing fees, realized gains and losses on assets available or held for sale,increases in the cash surrender value of bank owned life insurance (“BOLI”) andwith the acquisitions of BeneServ, insurance premiums, and Carnegie,professional investment consulting 

 

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services.Total non-interest income for the years ended June 30, 2008, 2007, and2006 was $13.8 million, $12.3 million and $8.1 million, respectively.

 

The increase in non-interest income of $1.5 million, or 12.3%, duringfiscal 2008 compared to fiscal 2007 was due primarily to increases of $1.9million in gains on the sale of loans, a $1.7 million increase in income frominsurance operations, and $876 thousand in investment services income. Thesewere partially offset by a reduction in gains on securities AFS due primarilyto other-than-temporary impairment write-downs aggregating $1.9 million, andthe absence of $804 thousand from a prior year gain on the unwinding of the InterestRate Corridor.

 

The increase in non-interest income of $4.2 million, or 51.2%, duringfiscal 2007 compared to fiscal 2006 was due primarily to a $1.1 milliondifference in the amount of change recognized on the sale of investmentsecurities available-for-sale, a gain of $804 thousand recorded during thequarter ended December 31, 2006 on the unwinding of the Interest RateCorridor, increased investment services income of $687 thousand, $637 thousandfor income from the insurance operations of BeneServ, increased service chargesand fees of $443 thousand, and $363 thousand in gains on the sale of realestate. These items were partially offset by a reduction in the fair value ofinterest rate swaps recognized in other income. The increase in service chargesand fees was due primarily to growth in the deposit base. The increase ininvestment services income was the result of growth in the trust operations andthe sales of retail investment products through the branch network.

 

***Non-Interest Expense.******  *** The primary componentsof non-interest expense are compensation and employee benefits, occupancy andequipment expenses, data processing costs, deposit account services,professional fees and a variety of other expenses. For the years ended June 30,2008, 2007, and 2006, non-interest expense totaled $97.9 million, $46.4million and $44.4 million, respectively. Non-interest expense increased$51.4 million, or 110.7%, from the year ended June 30, 2007 to thecomparable period ended June 30, 2008. The most significant cause for thisincrease was the previously discussed goodwill impairment charge of $40.0million recorded in the three-month period ended December 31, 2007.  In addition, professional fees increased by$5.0 million due primarily to consulting and legal costs incurred ininvestigating and resolving the Company’s previously disclosed out of balancecondition in its financial statements for prior periods as well as increasedcosts for the Company’s independent registered public accounting firm, alongwith costs associated with due diligence related to the acquisition of theCompany by Harleysville National Corporation (“HNC”), announced on May 21,2008.

 

Salaries and employee benefit expenses totaled $28.8 million,$24.1 million and $19.4 million, respectively, for the fiscal yearsended June 30, 2008, 2007, and 2006. For the fiscal year ended June 30,2008, the increase in compensation costs was due primarily to the acquisitionof Carnegie, which occurred on December 21, 2007, a full year of expensesfrom BeneServ, which was acquired on March 30, 2007, and increasedcommissions paid to loan officers due to the expansion of the mortgageoperations. For the fiscal year ended June 30, 2007, compensation costsincreased by $4.7 million partially as a result of operating our expandedbranch office network for a full 12 months after the acquisition of ChesterValley on August 31, 2005 as well as new hirings in the lending and wealthmanagement areas during the year ended June 30, 2007 along with normalsalary increases. At June 30, 2007, the Company had 374 full-timeemployees compared to 312 at June 30, 2006. In addition, $519 thousand ofcompensation costs were recorded during fiscal 2007 due to severance paymentsand costs associated with the retirement of three Board members as well ascertain employee reductions. For the year ended June 30, 2006,compensation and benefit costs increased approximately $6.4 million or48.8% due primarily to an increased number of employees as a result of theMerger.

 

Occupancy and equipment expenses were $9.2 million,$8.1 million and $6.0 million for the fiscal years ended June 30,2008, 2007, and 2006, respectively. During fiscal year 2008, occupancy costsincreased due primarily to rental and other occupancy costs associated with theopening of the Feasterville and Oxford branches and the aforementioned Carnegieacquisition and a full year of BeneServ. During fiscal year 2007, occupancycosts increased partially as a result of operating our expanded branch officenetwork for 12 full months after the acquisition of Chester Valley and also dueto additional rental costs incurred at the corporate headquarters building andrental expense associated with certain Bank buildings sold in a sale/leasebacktransaction. During fiscal year 2006, these costs increased $3.4 million due tothe addition of 13 branch locations from the Chester Valley Merger as well asthe Company’s relocation to a new corporate headquarters and operationsbuilding in February 2006. In fiscal 2006, the approximate occupancy costof $237 thousand for the headquarters building was offset by a sale-leasebackof certain of the Bank’s branches for which the cash proceeds were invested inloans or repaid borrowings. The Company’s rent expense increased from $2.0million in fiscal 2006 to $2.9 million in fiscal 2007.

 

Advertising expenses for fiscal 2008, 2007 and 2006 were $2.1 million,$2.0 million and $1.5 million, respectively. The balance for fiscal 2008 wasrelatively stable as compared to fiscal 2007 due to the opening of a new branchin August 2007 and increased marketing efforts in the current competitiveenvironment. The increase in fiscal year 2007 was a result of the Bank’sre-branding efforts during the year associated with the change in the Bank’sname. The increase during fiscal 2006 was due primarily to direct mailcampaigns to the combined company’s customer base as the Company commissioned astudy of its customer base and found there were significant opportunities tocross-sell its existing products.

 

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For the fiscal years ended June 30, 2008, 2007, and 2006,amortization of intangible assets was $2.3 million, $2.1 million and $1.9million respectively. The significant increase in fiscal 2006 was the result ofthe amortization of the core deposit intangible recorded as a result of theMerger. The asset is being amortized over a twelve-year period.

 

Data processing expenses were $2.0 million, $1.5 million, and $1.2million, respectively, for fiscal 2008, 2007 and 2006. The increase in eachyear results from rate increases of third party providers as well as increasedaccount volumes.

 

Professional fees were $7.4 million, $2.4 million and $2.3million for fiscal 2008, fiscal 2007 and fiscal 2006, respectively. Infiscal 2008, professional fees increased due primarily to consulting and legalcosts incurred in investigating and resolving the Company’s previouslydisclosed out of balance condition in its financial statements for priorperiods, as well as increased costs for the Company’s independent registeredpublic accounting firm, along with costs associated with due diligence relatedto the acquisition of the Company by Harleysville National Corporation (“HNC”),announced on May 21, 2008. In fiscal 2007, professional fees wererelatively stable as compared to fiscal 2006.

 

For the fiscal years ended June 30, 2008, 2007, and 2006, otherexpenses, which include miscellaneous operating items, were $6.1 million,$6.1 million and $11.9 million, respectively. The significant decrease infiscal 2007 was due to an approximate $7.7 million write-off of un-reconcileddifferences in fiscal 2006 that were the result of the Company not completingreconciliations in a timely and consistent manner nor investigating andresolving reconciling items identified in the reconciliation process. Thiswrite-off was partially offset by $670 thousand in reductions to salaries andemployee benefit expense and $487 thousand in increased non-interest income asa result of the reconciliation review.

 

***Goodwill Impairment.*    **The Company follows the provisions ofSFAS No. 142, “Goodwill and Other Intangibles,” and performs an annualimpairment test of goodwill. However, when circumstances indicate that an eventhas occurred during an interim period, the Company will perform an impairmenttest at that time. The Company determined that such an event occurred duringthe quarter ended December 31, 2007, resulting in a charge of $40.0million. During this period, conditions in the housing market continued todeteriorate resulting in a tightening of available credit in the marketplace.Additionally, several companies that specialized in sub-prime lending declaredbankruptcy. These market conditions and related concerns surrounding creditcause valuations for thrifts and other financial institutions to decreasesignificantly during this quarter.

 

***Income Tax Benefit / Expense.****** *** For the fiscal years ended June 30,2008, 2007, and 2006, income tax (benefit) expense amounted to$(2.1) million, $2.9 million and $3.0 million, respectively. The effectivetax rates for fiscal 2008, 2007 and 2006 were 4.7%, 28.4% and 31.1%,respectively. The decrease in the income tax expense for the year ended June 30,2008 was primarily due to the Company’s loss before income taxes of $5.6million, excluding the goodwill impairment charge. In addition, there was anincrease in the balance of tax-exempt securities and related income as well as creditsreceived on low income housing partnerships representing a larger portion ofpre-tax book earnings, exclusive of the goodwill impairment charge, which isnot deductible for tax purposes. The decrease in the income tax expense and theeffective tax rate for the year ended June 30, 2007 was primarily relatedto an increase in the relative balance of income from tax-exempt securities asa proportion of income before income taxes.

 

**Liquidity and Commitments**

 

The Company’s primary sources of funds are from deposits, principalamortization of loans, loan and securities prepayments and repayments, interestincome from loans, mortgage-backed securities and other investments, and otherfunds provided from operations. While scheduled payments from the amortizationof loans and mortgage-backed securities and maturing investment securities arerelatively predictable sources of funds, deposit flows and loan prepayments canbe greatly influenced by general interest rates, economic conditions andcompetition. We also maintain excess funds in short-term, interest-bearingassets that provide additional liquidity. We have also utilized outsideborrowings, primarily from the FHLB of Pittsburgh as an additional fundingsource.

 

We use our liquidity resources to fund existing and future loancommitments, to fund maturing certificates and demand deposit withdrawals, toinvest in other interest-earning assets, and to meet operating expenses. At June 30,2008, outstanding approved loan commitments were $36.4 million and certificatesmaturing within the next twelve months amounted $186.9 million.

 

During the current fiscal year, the Company utilized principalrepayments on investment securities and loans to reduce its use of borrowingsfrom the FHLB. Outstanding borrowings from the FHLB have increased to $311.4million at June 30, 2008 as compared to $189.8 million at June 30,2007. Under terms of the borrowing agreement with the FHLB, the Bank pledgescertain assets such as residential real estate loans and mortgage-backed securitiesas well as stock in the FHLB as collateral for these advances. At June 30,2008, the Bank had $209 million in additional borrowing capacity availablefrom the FHLB.

 

Prior to the Chester Valley Merger, the Company had not in the pastused any significant off-balance sheet financing arrangement 

 

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for liquidityor other purposes. Our financial assets with off-balance sheet risk are limitedto obligations to fund loans to borrowers pursuant to existing loancommitments. Additionally, the Company has not had any transactions,arrangements or other relationships with any unconsolidated, limited purposeentities that could affect its liquidity or capital resources, nor do wecurrently intend to engage in trading commodity contracts.

 

The Company fully anticipates that it will continue to have sufficientfunds and alternative funding sources to meet its current commitments.

 

The Company’s contractual obligations as of June 30, 2008 are asfollows:

 
| ** **                    | ** ** | **Payments Due by Period:** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                  | ** ** | **Less Than\  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)**       | ** ** |
| FHLB advances            |       | $                                          | 311,428    |   | $ | 24,696 |   | $ | 61,851 |   | $ | 103,906 |   | $ | 120,975 |   |
| Operating leases              |       | 26,373                                     |       | 2,740 |   | 4,547 |   | 3,683 |   | 15,403 |   |
| Total contractual obligations |       | $                                          | 337,801    |   | $ | 27,436 |   | $ | 66,398 |   | $ | 107,589 |   | $ | 136,378 |   |

 
| ** **                               | ** ** | **Total** | ** **    | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More Than  5 Years** | ** ** |
|------------------------------------------|------------|-----------|---------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Lines of credit                |       | $         |  134,267 |                            | $          |  88,585       |       | $                  |  174  |                             | $          |  710 |   | $ |  44,798 |   |
| Standby letters of credit |       | 10,928    |          | 10,928                          |       | —             |       | —             |       | —                           |       |
| Other commitments to make loans          |       | 36,356    |          | 36,356                          |       | —             |       | —             |       | —                           |       |
| Construction loans                       |       | 90,848    |          | 76,582                          |       | 3,662              |       | 3,154              |       | 7,450                            |       |
| Total contractual obligations            |       | $         | 272,399       |                            | $          | 212,451            |       | $                  | 3,836      |                             | $          | 3,864 |   | $ | 52,248 |   |

 

**Impact ofInflation and Changing Prices**

 

The consolidated financial statements, accompanying notes, and relatedfinancial data presented herein have been prepared in accordance with U.S. GAAP,which require the measurement of financial position and operating results interms of historical dollars without considering the changes in purchasing powerof money over time due to inflation. The impact of inflation is reflected inthe increased cost of our operations. Most of our assets and liabilities aremonetary in nature; therefore, the impact of interest rates has a greaterimpact on our performance than the effects of general levels of inflation.Interest rates do not necessarily move in the same direction or to the sameextent as the prices of goods and services.

 

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

 

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

 

The market value of assets and liabilities, as well as future earnings,can be affected by interest rate risk. Market values of certain financialassets have an inverse relationship to rates (i.e. when interest rates rise,the market value of many of the Company’s assets decline and when rates fall,the market value of many of the Company’s assets rise). The primary assets ofthe Company are loans to borrowers who often have the ability to prepay theirloan. Therefore, in a falling rate environment, the increase in the marketvalue of the Company’s assets is limited by this option for the borrower toprepay the loan.

 

The ability to maximize net interest income is largely dependent uponthe achievement of a positive interest spread that can be maintained duringfluctuations in prevailing interest rates. Interest rate sensitivity gap (“gap”)is a measure of the difference between interest-earning assets andinterest-bearing liabilities that either mature or re-price within a specifiedtime period. A gap is considered positive when the amount of interest-earningassets exceeds the amount of interest-bearing liabilities, and is considerednegative when interest-bearing liabilities exceed interest-earning assets.Generally, during a period of rising interest rates, a negative gap wouldadversely affect net interest income, while a positive gap would result in anincrease in net interest income. During a period of falling interest rates, anegative gap would generally result in an increase in net interest income, anda positive gap would result in a decrease in net interest income. This isusually the case; however, interest rates on differing financial instrumentswill not always change at the same time or to the same extent.

 

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The following gap table shows the amount as of June 30, 2008 ofthe Bank’s assets and liabilities projected to mature or re-price withinvarious time periods. This table includes certain assumptions management hasmade that affect the rate at which loans will prepay as well as the duration ofcore deposits. Changes in interest rates may affect these assumptions, whichwould impact our gap position.

 
| ** **                                                                                                                    | ** ** | **0 to 3**                 | ** ** | **3 to 12** | ** ** | **1 to 3** | ** ** | **3 to 5** | ** ** | **over 5** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|----------------------|------------|----------------------|------------|-----------------|------------|------------|------------|
| ** **                                                                                                                    | ** ** | **months**                           | ** ** | **months**            | ** ** | **years**            | ** ** | **years**            | ** ** | **years**       | ** ** | **Total**  | ** ** |
| ** **                                                                                                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Investment securities and interest-bearing  deposits                                                                          |       | $                                    | 52,773     |                  | $          | 36,282               |       | $                    | 53,730     |            | $          | 40,624     |       | $ | 98,474 |   | $ | 281,883 |   |
| Loans receivable                                                                                                              |       | 377,403                              |       | 200,580               |       | 322,998              |       | 141,306              |       | 122,732         |       | 1,165,019  |       |
| Total interest-earning assets                                                                                                 |       | 430,176                              |       | 236,862               |       | 376,728              |       | 181,930              |       | 221,206         |       | 1,446,902  |       |
| Deposits                                                                                                                      |       | 515,209                              |       | 151,580               |       | 87,109               |       | 31,638               |       | 86,904          |       | 872,440    |       |
| Borrowings                                                                                                                    |       | 13,039                               |       | 80,104                |       | 191,947              |       | 44,000               |       | 61,770          |       | 390,860    |       |
| Total interest-bearing liabilities                                                                                            |       | 528,248                              |       | 231,684               |       | 279,056              |       | 75,638               |       | 148,674         |       | 1,263,300  |       |
| Excess (deficiency) of  interest-earning assets over interest-bearing liabilities                                        |       | $                                    | (98,072    | )                     | $          | 5,178                |       | $                    | 97,672     |            | $          | 106,292    |       | $ | 72,532 |   | $ | 183,602 |   |
| Cumulative excess (deficiency) of interest-earning  assets over interest-bearing liabilities                             |       | $                                    | (98,072    | )                     | $          | (92,894              | )          | $                    | 4,778      |            | $          | 111,070    |       | $ | 183,602 |   | $ | 183,602 |   |
| Cumulative excess (deficiency) of  interest-earning assets to Interest-bearing liabilities as a Percent  of total assets |       | (6.2                                 | )%         | (5.9                  | )%         | 0.3                  | %          | 7.0                  | %          | 11.6            | %          | 11.6       | %          |
| Ratio of interest-earning assets to  interest-bearing liabilities                                                             |       | 81.4                                 | %          | 102.2                 | %          | 135.0                | %          | 240.5                | %          | 148.8           | %          | 114.5      | %          |
| Cumulative ratio of interest-Earning assets  to assets to Interest-bearing liabilities                                   |       | 81.4                                 | %          | 87.8                  | %          | 100.5                | %          | 110.0                | %          | 114.5           | %          |       |       |

 

At June 30, 2008, the ratio of the cumulative interest-earningassets maturing or re-pricing in one-year or less to interest-bearingliabilities maturing or re-pricing in one-year or less was 87.8%, which resultsin a cumulative one-year gap to total assets ratio of negative 5.9%, indicatingthat the Bank’s net interest income could decline depending upon the degree towhich interest rates change and the change in the relationship between interestrates used to re-price assets and interest rates used in the re-pricing ofliabilities.

 

The Company has adopted asset/liability management policies designed toquantify the interest rate risk caused by mismatches in the maturities andre-pricing of our interest-earning assets and interest-bearing liabilities.These interest rate risk and asset/liability management actions are taken underthe guidance of the Finance Committee. The Finance Committee’s purpose is tocommunicate, coordinate and control asset/liability management consistent withour business plan and Board approved policies. The objective of the FinanceCommittee is to manage asset and funding sources to produce results that areconsistent with liquidity, capital adequacy, growth, and risk and profitabilitygoals. The Finance Committee meets at least quarterly and monitors the volumeand mix of assets and funding sources taking into account the relative costsand spreads, the interest rate sensitivity gap and liquidity needs. The FinanceCommittee also reviews economic conditions and interest rate projections,current and projected liquidity needs and capital positions, anticipatedchanges in the mix of assets and liabilities, and interest rate exposure limitsversus current projections pursuant to gap analysis and interest income simulations.At each meeting, the Finance Committee recommends changes in strategy asappropriate. Interest rate risk issues are also discussed by the Board ofDirectors on a regular basis. Management meets periodically to monitor progressin achieving asset/liability targets approved by the Board, particularly thetype and rate on asset generation and sources of funding.

 

In order to manage the Company’s assets and liabilities and improve ourinterest rate risk position, emphasis has been placed on the origination ofassets with shorter maturities or adjustable rates such as commercial andmulti-family real estate loans, construction loans, home equity loans and to alesser extent commercial business loans. At the same time, other actionsinclude attempts to increase our core deposits and the use of FHLB advances asadditional sources of funds. Additionally, longer term fixed rate single-familyresidential mortgage loans are originated and held for sale.

 

The Finance Committee regularly reviews interest rate risk by, amongother things, examining the impact of alternative interest rate environments onnet interest income and net portfolio value (“NPV”), and the change in NPV. NPVis the difference between the 

 

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market valueof assets and the market value of liabilities and off-balance sheet items undervarious interest rate scenarios. Sensitivity is the difference (measured inbasis points) between the NPV to assets ratio at market rate and the NPV toassets ratio determined under each rate scenario. The Finance Committeemonitors both the NPV and sensitivity according to guidelines established bythe OTS in Thrift Bulletin 13A “Management of Interest Rate Risk, InvestmentSecurities and Derivative Activities,” and board approved limitations.

 

Presented below, as of June 30, 2008 and 2007, is an analysis ofthe interest rate risk position as measured by NPV and sensitivity based uponvarious rate scenarios. These values were obtained from an internal modelproduced by the Bank as required by OTS regulation as total assets now exceed$1.0 billion. Due to the level of interest rates, no values are calculated forhypothetical rate scenarios of down 300 basis points at June 30, 2008 and2007. It only provides an estimate of economic value at a point in time and theeconomic value of the same portfolio under the above referenced interest ratescenarios.

 

**Estimated change in NPV and Sensitivity  At June 30, 2008**

 
| ** **                            | ** ** | **Net Portfolio Value** | ** ** |
|---------------------------------------|------------|-----------------------------------|------------|
| ** **                            | ** ** | **Amount of  Change**        | ** ** | **Percent of  change** | ** ** | **To  Assets** | ** ** |
| ** **                            | ** ** | **(in thousands)**           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Hypothetical change in interest rates |       |                              |       |   |   |   |   |
| up 300 basis points                   |       | $                                 | (21,737    | ) | (12.4 | )% | 10.52 | % |
| up 200 basis points                   |       | (11,720                           | )          | (6.4 | ) | 10.99 |   |
| up 100 basis points                   |       | (3,337                            | )          | (1.9 | ) | 11.28 |   |
| no change—base case              |       | —                            |       | — |   | 11.27 |   |
| down 100 basis points                 |       | (5,518                            | )          | (3.1 | ) | 10.73 |   |
| down 200 basis points                 |       | (24,989                           | )          | (14.2 | ) | 9.38 |   |
|                                       |            |                                   |            |  |  |  |  |  |

 

**Estimated change 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    | ) | (35.1 | )% | 7.26 | % |
| up 200 basis points                   |       | (35,035                           | )          | (22.9 | ) | 8.62 |   |
| up 100 basis points                   |       | (16,798                           | )          | (11.0 | ) | 9.96 |   |
| no change—base case              |       | —                            |       | — |   | 11.19 |   |
| down 100 basis points                 |       | 13,757                            |       | 9.0 |   | 12.20 |   |
| down 200 basis points                 |       | 21,829                            |       | 14.3 |   | 12.79 |   |
|                                       |            |                                   |            |  |  |  |  |  |

 

NPV is more sensitive and may be more negatively impacted by risinginterest rates than by declining rates. This occurs primarily because as ratesrise, the market value of long-term fixed rate assets, like fixed rate realestate loans, declines due to both the rate increase and slowing prepayments.When rates decline, these assets do not experience similar appreciation invalue. This is due to the decrease in the duration of the asset resulting fromthe increase in prepayments.

 

***Recently Issued Accounting Pronouncements***

 

*FASB StaffPosition FSP No. EITF 03-6-1, Determining Whether Instruments Granted inShare-based Payment Transactions are Participating Securities*

 

In June 2008, the Financial AccountingStandards Board issued FASB Staff Position FSP No. EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-based Payment Transactions areParticipating Securities.” FSP No. EITF 03-6-1 states that unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of EPS pursuant to the two-class method.FSP No. EITF 03-6-1 is effective for financial statements issued forfiscal years beginning after December 15, 2008. All prior-period EPS datapresented shall be adjusted retrospectively (including interim financialstatements, summaries of earnings, and selected financial data) to conform tothe provisions of this FSP. Early application is not permitted. The Company isevaluating the impact of FSP No. EITF 03-6-1.

 

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*FASB Statement No. 162, The Hierarchy of Generally AcceptedAccounting Principles*

 

In May 2008, the Financial AccountingStandards Board issued Statement No. 162, “The Hierarchy of GenerallyAccepted Accounting Principles.” Statement No. 162 improves financialreporting by identifying a consistent framework, or hierarchy, for selectingaccounting principles to be used in preparing financial statements that arepresented in conformity with U.S. generally accepted accounting principles fornongovernmental entities. Statement No. 162 is effective sixty daysfollowing the SEC’s approval of the Public Company Accounting Oversight Boardauditing amendments to AU Section 411, “The Meaning of Present Fairly inConformity with Generally Accepted Accounting Principles.” The Company isevaluating the impact of Statement No. 162.

 

*FASB StaffPosition FSP No. FAS 142-3, Determination of the Useful Life of IntangibleAssets*

* *

In April 2008, theFinancial Accounting Standards Board issued FASB Staff Position FSP No. FAS142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. FAS142-3 is effective for financial statements issued for fiscal years beginningafter December 15, 2008, and interim periods within those fiscal years.The Company is evaluating the impact of FSP No. FAS 142-3.

 

*FASBStatement No. 161, Disclosures about Derivative Instruments and HedgingActivities*

 

In March 2008, the Financial AccountingStandards Board issued Statement No. 161, “Disclosures about DerivativeInstruments and Hedging Activities.” Statement No. 161 requires disclosureof the fair values of derivative instruments and their gains and losses in atabular format. It also requires disclosure of derivative features that arecredit risk-related and cross-referencing within footnotes to enable financialstatement users to locate important information about derivative instruments.Statement No. 161 is effective for financial statements issued for fiscalyears and interim periods after November 15, 2008, with early applicationencouraged. The Company is evaluating the impact of Statement No. 161 onits consolidated financial statements.

 

*FASBStatement No. 141(R), Business Combinations*

 

In December 2007, the FinancialAccounting Standards Board issued Statement No. 141(R), “BusinessCombinations.” Statement No. 141(R) requires the acquiring entity ina business combination to recognize all (and only) the assets acquired andliabilities assumed in the transaction; establishes the acquisition-date fairvalue as the measurement objective for all assets acquired and liabilitiesassumed; and requires the acquirer to disclose to investors and other users allof the information they need to evaluate and understand the nature andfinancial effect of the business combination. Statement No. 141(R) iseffective for fiscal years beginning after December 15, 2008. The Companyis evaluating the impact of Statement No. 141(R) on its consolidatedfinancial statements.

 

*FASBStatement No. 160, Noncontrolling Interests in Consolidated FinancialStatements*

 

In December 2007, the FinancialAccounting Standards Board issued Statement No. 160, “NoncontrollingInterests in Consolidated Financial Statements.” Statement No. 160requires that a reporting entity provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. Statement No. 160 is effective for fiscalyears beginning after December 15, 2008. The Company is evaluating theimpact of Statement No. 160 on its consolidated financial statements.

 

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

 

In February 2007, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“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 ofthe beginning of an entity’s first fiscal year that begins after November 15,2007. Early adoption is permitted as of the beginning of a fiscal year thatbegins on or before November 15, 2007, provided the entity also elects toapply the provisions of FASB Statement No. 157, “Fair Value Measurements.”The Company did not elect early adoption and is currently assessing theimplications of this Statement on its consolidated financial statements.

 

*FASB Statement No, 157, Fair ValueMeasurements*

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fairvalue in accordance with U.S. generally accepted accounting principles, andenhances disclosures about 

 

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fair valuemeasurements. SFAS 157 applies when other accounting pronouncements requirefair value measurements; it does not require new fair value measurements. SFAS157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and for interim periods within those years. TheCompany did not elect early adoption and is currently assessing theimplications of this Statement on its consolidated financial statements.

 

In February 2008, the Financial Accounting Standards Board issuedFASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157.”FSP No. 157-2 delays the effective date of FASB Statement No. 157, “FairValue Measurements,” for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually) to fiscal yearsbeginning after November 15, 2008 and interim periods within those fiscalyears for items within the scope of this FSP. The Company is currentlyassessing the implications of this Statement on its consolidated financialstatements.

 

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

 

Effective July 1, 2007, the Company adopted FinancialInterpretation No. 48, “Accounting for Uncertainty in Income Taxes-aninterpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 providesguidance on financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. According to FIN 48, a taxposition is recognized if it is more-likely-than-not that the tax position willbe sustained upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. If the taxposition meets the more-likely-than-not recognition threshold, the position ismeasured to determine the amount of benefit to recognize and should be measuredat the largest amount of benefit that is greater than 50 percent likely ofbeing realized upon ultimate settlement. FIN 48 also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. As of June 30, 2008, the Company hadno material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in non-interest expense in the year they are assessedand are treated as a non-deductible expense for tax purposes. Interest isrecorded in non-interest expense in the year it is assessed and is treated as adeductible expense for tax purposes. As of June 30, 2008, tax years 2005through 2007 remain subject to Federal examination as well as examination bystate taxing jurisdictions.

 

**SelectedQuarterly Financial Data**

 

The following table presents selected quarterly operating data for thefiscal years ended June 30, 2008 and 2007.

 
| ** **                   | ** ** | **For the quarter ended**                                        | ** ** |
|------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                   | ** ** | **06/30/08**                                                                    | ** ** | **03/31/08** | ** ** | **12/31/07** | ** ** | **09/30/07** | ** ** |
| ** **                   | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Total interest income        |       | $                                                                               | 19,569     |   | $ | 21,579 |   | $ | 21,768 |   | $ | 21,765 |   |
| Total interest expense       |       | 8,940                                                                           |       | 10,802 |   | 11,802 |   | 11,459 |   |
| Net interest income          |       | 10,629                                                                          |       | 10,777 |   | 9,966 |   | 10,306 |   |
| Provision for loan loss      |       | 1,688                                                                           |       | 824 |   | 419 |   | 242 |   |
| Total non-interest income    |       | 1,807                                                                           |       | 4,501 |   | 3,599 |   | 3,866 |   |
| Total non-interest expense   |       | 15,338                                                                          |       | 16,223 |   | 53,986 | * | 12,334 |   |
| Income tax (benefit) expense |       | (1,249                                                                          | )          | (92 | ) | (1,225 | ) | 438 |   |
| Net (loss) income            |       | (3,341                                                                          | )          | (1,677 | ) | (39,615 | ) | 1,158 |   |
| (Loss) Earnings per share    |       |                                                                            |       |   |   |   |   |   |   |
| Basic                        |       | $                                                                               | (0.23      | ) | $ | (0.11 | ) | $ | (2.62 | ) | $ | 0.08 |   |
| Diluted                      |       | $                                                                               | (0.23      | ) | $ | (0.11 | ) | $ | (2.62 | ) | $ | 0.08 |   |

 

----

                * Includes goodwill impairment charge of$40.0 million.

 

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The earnings per share amounts for periods prior to March 31, 2007have been adjusted to give retroactive effect to the 5% stock dividend.

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

 

**Item 8.    ConsolidatedFinancial Statements and Supplementary Data**

 

**Report of Independent Registered PublicAccounting Firm**

 

The Board ofDirectors and StockholdersWillow Financial Bancorp, Inc.:

 

We haveaudited the accompanying consolidated statements of financial condition ofWillow Financial Bancorp, Inc. and subsidiary (the Company) as of June 30,2008 and 2007, and the related consolidated statements of operations, changesin stockholders’ equity and comprehensive (loss) income, and cash flows foreach of the years in the three-year period ended June 30, 2008. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of the Company as of June 30,2008 and 2007, and the results of their operations and their cash flows foreach of the years in the three-year period ended June 30, 2008, inconformity with U.S. generally accepted accounting principles.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of June 30, 2008, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), and our report dated September 15, 2008, expressed an adverseopinion on the effectiveness of the Company’s internal control over financialreporting.

 
| /s/ KPMG LLP                |   |   |
|-----------------------------|--------|--------|
| Philadelphia,  Pennsylvania |   |   |
| September 15,  2008    |   |   |

 

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**Item 8.    ConsolidatedFinancial Statements and Supplementary Data**

 

**Report of Independent Registered PublicAccounting Firm**

 

The Board ofDirectors and StockholdersWillow Financial Bancorp, Inc.:

 

We haveaudited Willow Financial Bancorp, Inc. and subsidiary’s (the Company)internal control over financial reporting as of June 30, 2008, based oncriteria 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’s Report onInternal Control over Financial Reporting* in Item 9Ab. Ourresponsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,and testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk. Our audit also included performing suchother procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

 

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

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

 

A material weakness is a deficiency, or a combination of deficiencies,in internal control over financial reporting, such that there is a reasonablepossibility that a material misstatement of the company’s annual or interimfinancial statements will not be prevented or detected on a timely basis. Amaterial weakness has been identified and included in *Management’sReport on Internal Controls Over Financial Reporting* in the area ofeffective review and analysis of financial statement account reconciliations andreview of journal entries and considering the impact of routine and non-routinetransactions.

 

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated statementsof financial condition as of June 30, 2008 and 2007 and the relatedconsolidated statements of operations, stockholders’ equity and comprehensive(loss) income, and cash flows for each of the years in the three-year periodended June 30, 2008 of the Company. This material weakness was consideredin determining the nature, timing, and extent of audit tests applied in ouraudit of the June 30, 2008 consolidated financial statements, and thisreport does not affect our report dated September 15, 2008 which expressedan unqualified opinion on those consolidated financial statements.

 

In our opinion, because of the effect of the aforementioned materialweakness on the achievement of the objectives of the control criteria, theCompany has not maintained effective internal control over financial reportingas of June 30, 2008, based on criteria established in *InternalControl—Integrated Framework* issued by COSO.

 

 
| KPMG LLP                   |   |   |
|----------------------------|--------|--------|
| Philadelphia, Pennsylvania |   |   |
| September 15, 2008    |   |   |

 

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

 
| ** **                                                                                                                              | ** ** | **At  June 30, 2008**                                    | ** ** | **At  June 30, 2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                              | ** ** | **(Dollars in thousands,  except share data)** | ** ** |
| Assets:                                                                                                                                 |       |                                                               |       |                            |       |
| Cash and cash equivalents:                                                                                                              |       |                                                               |       |                            |       |
| Cash in banks                                                                                                                           |       | $                                                                  | 28,427     |                            | $          | 21,124 |   |
| Interest-bearing deposits                                                                                                               |       | 7,755                                                              |       | 39,153                          |       |
| Total cash and cash equivalents                                                                                                         |       | 36,182                                                             |       | 60,277                          |       |
| Investment securities — trading                                                                                                    |       | 1,282                                                              |       | 1,176                           |       |
| Federal Home Loan Bank Stock                                                                                                            |       | 15,803                                                             |       | 11,394                          |       |
| Investment securities available for sale  (amortized cost of $187,935 and $193,232, respectively)                                       |       | 181,262                                                            |       | 188,339                         |       |
| Investment securities held to maturity  (fair value of $73,614 and $86,488, respectively)                                               |       | 75,781                                                             |       | 88,363                          |       |
| Loans held for sale                                                                                                                     |       | 14,199                                                             |       | 8,075                           |       |
| Loans receivable                                                                                                                        |       | 1,150,820                                                          |       | 1,047,012                       |       |
| Deferred fees and costs, net                                                                                                            |       | 812                                                                |       | 491                             |       |
| Allowance for loan losses                                                                                                               |       | (14,793                                                            | )          | (12,210                         | )          |
| Loans receivable, net                                                                                                                   |       | 1,136,839                                                          |       | 1,035,293                       |       |
| Accrued interest receivable                                                                                                             |       | 6,181                                                              |       | 6,654                           |       |
| Property and equipment, net                                                                                                             |       | 10,412                                                             |       | 11,307                          |       |
| Bank owned life insurance                                                                                                               |       | 12,410                                                             |       | 11,930                          |       |
| Real estate owned                                                                                                                       |       | 166                                                                |       | —                          |       |
| Other intangible assets, net                                                                                                            |       | 14,589                                                             |       | 14,345                          |       |
| Goodwill                                                                                                                                |       | 56,959                                                             |       | 95,597                          |       |
| Other assets                                                                                                                            |       | 22,580                                                             |       | 18,546                          |       |
| Total Assets                                                                                                                            |       | $                                                                  | 1,584,645  |                            | $          | 1,551,296 |   |
| Liabilities and Stockholders’ Equity:                                                                                              |       |                                                               |       |                            |       |
| Liabilities:                                                                                                                            |       |                                                               |       |                            |       |
| Interest-bearing deposits                                                                                                               |       | $                                                                  | 872,440    |                            | $          | 951,629 |   |
| Non-interest-bearing deposits                                                                                                           |       | 130,438                                                            |       | 141,101                         |       |
| Securities sold under agreements to  repurchase                                                                                         |       | 75,000                                                             |       | 20,000                          |       |
| Advance payments from borrowers for taxes  and insurance                                                                                |       | 4,192                                                              |       | 4,254                           |       |
| Federal Home Loan Bank Advances                                                                                                         |       | 311,428                                                            |       | 189,764                         |       |
| Trust preferred securities and other  borrowings                                                                                        |       | 27,312                                                             |       | 25,774                          |       |
| Accrued interest payable                                                                                                                |       | 1,708                                                              |       | 2,303                           |       |
| Other liabilities                                                                                                                       |       | 12,030                                                             |       | 17,038                          |       |
| Total Liabilities                                                                                                                       |       | 1,434,548                                                          |       | 1,351,863                       |       |
| Commitments and contingencies                                                                                                           |       | —                                                             |       | —                          |       |
| Stockholders’ Equity:                                                                                                              |       |                                                               |       |                            |       |
| Common stock, $0.01 par value; (40,000,000  authorized; 17,493,825 and 17,487,770 issued at June 30, 2008 and 2007,  respectively) |       | 178                                                                |       | 175                             |       |
| Additional paid-in capital                                                                                                              |       | 190,943                                                            |       | 190,776                         |       |
| Retained (deficit) earnings—substantially  restricted                                                                              |       | (4,441                                                             | )          | 46,030                          |       |
| Treasury stock (1,822,606 and 1,920,025  shares at June 30, 2008 and 2007, respectively, at cost                              |       | (30,258                                                            | )          | (31,046                         | )          |
| Accumulated other comprehensive loss                                                                                                    |       | (4,406                                                             | )          | (3,180                          | )          |
| Obligation of deferred compensation plan                                                                                                |       | 1,293                                                              |       | 1,277                           |       |
| Unallocated common stock held by:                                                                                                       |       |                                                               |       |                            |       |
| Employee Stock Ownership Plan (ESOP)                                                                                                    |       | (2,141                                                             | )          | (2,958                          | )          |
| Recognition and Retention Plan Trust (RRP)                                                                                              |       | (1,071                                                             | )          | (1,641                          | )          |
| Total Stockholders’ Equity                                                                                                         |       | 150,097                                                            |       | 199,433                         |       |
| Total Liabilities and Stockholders’ Equity                                                                                         |       | $                                                                  | 1,584,645  |                            | $          | 1,551,296 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements

 

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

 
| ** **                                                                             | ** ** | **For the year ended June 30,**                        | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                                                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                             | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Interest Income:                                                                  |       |                                                                            |       |   |   |   |   |
| Loans                                                                                  |       | $                                                                               | 69,293     |   | $ | 69,315 |   | $ | 65,472 |   |
| Mortgage-backed and investment securities                                              |       | 15,388                                                                          |       | 16,735 |   | 16,058 |   |
| Total interest income                                                        |       | 84,681                                                                          |       | 86,050 |   | 81,530 |   |
| Interest expense:                                                                 |       |                                                                            |       |   |   |   |   |
| Deposits                                                                               |       | 28,220                                                                          |       | 28,698 |   | 18,476 |   |
| Securities sold under agreements to repurchase                |       | 2,510                                                                           |       | 1,135 |   | 228 |   |
| Borrowings                                                                             |       | 12,273                                                                          |       | 11,229 |   | 13,501 |   |
| Total interest expense                                                       |       | 43,003                                                                          |       | 41,062 |   | 32,205 |   |
| Net interest income                                                          |       | 41,678                                                                          |       | 44,988 |   | 49,325 |   |
| Provision for loan losses                                               |       | 3,173                                                                           |       | 653 |   | 3,380 |   |
| Net interest income after provision for loan losses |       | 38,505                                                                          |       | 44,335 |   | 45,945 |   |
| Non-interest income:                                                              |       |                                                                            |       |   |   |   |   |
| Investment services income, net                                         |       | 4,197                                                                           |       | 3,321 |   | 2,634 |   |
| Income from insurance operations                                        |       | 2,289                                                                           |       | 637 |   | — |   |
| Service charges and fees                                                |       | 5,476                                                                           |       | 5,423 |   | 4,980 |   |
| Gain (loss) on :                                                        |       |                                                                            |       |   |   |   |   |
| Sale of loans                                                                          |       | 2,554                                                                           |       | 616 |   | 357 |   |
| Securities available for sale                                           |       | (1,671                                                                          | )          | 228 |   | (919 | ) |
| Real estate                                                                       |       | 21                                                                              |       | 380 |   | 17 |   |
| Gain on termination of interest rate  corridor                                         |       | —                                                                          |       | 804 |   | — |   |
| Other                                                                                  |       | 907                                                                             |       | 858 |   | 1,045 |   |
| Total non-interest income                                                              |       | 13,773                                                                          |       | 12,267 |   | 8,114 |   |
| Non-interest expense:                                                                  |       |                                                                            |       |   |   |   |   |
| Salaries and employee benefits                                                         |       | 28,756                                                                          |       | 24,097 |   | 19,436 |   |
| Occupancy and equipment                                                                |       | 9,170                                                                           |       | 8,059 |   | 6,011 |   |
| Data processing                                                                        |       | 2,000                                                                           |       | 1,504 |   | 1,220 |   |
| Advertising                                                                            |       | 2,077                                                                           |       | 2,041 |   | 1,504 |   |
| Deposit insurance premiums                                                             |       | 120                                                                             |       | 120 |   | 124 |   |
| Amortization of intangible assets                                                      |       | 2,255                                                                           |       | 2,131 |   | 1,928 |   |
| Professional fees                                                                      |       | 7,421                                                                           |       | 2,444 |   | 2,303 |   |
| Goodwill impairment                                                                    |       | 40,000                                                                          |       | — |   | — |   |
| Other                                                                                  |       | 6,082                                                                           |       | 6,053 |   | 11,856 |   |
| Total non-interest expense                                                             |       | 97,881                                                                          |       | 46,449 |   | 44,382 |   |
| (Loss) income before income taxes                                                      |       | (45,603                                                                         | )          | 10,153 |   | 9,677 |   |
| Income tax (benefit) expense                                                           |       | (2,128                                                                          | )          | 2,886 |   | 3,010 |   |
| Net (Loss)/Income                                                                      |       | $                                                                               | (43,475    | ) | $ | 7,267 |   | $ | 6,667 |   |
| (Loss) Earnings per share:                                                             |       |                                                                            |       |   |   |   |   |
| Basic                                                                                  |       | $                                                                               | (2.88      | ) | $ | 0.48 |   | $ | 0.47 |   |
| Diluted                                                                                |       | $                                                                               | (2.88      | ) | $ | 0.47 |   | $ | 0.46 |   |
| Dividends per share paid during period                                                 |       | $                                                                               | 0.46       |   | $ | 0.46 |   | $ | 0.46 |   |
| Weighted average shares outstanding                                                    |       |                                                                            |       |   |   |   |   |
| Basic                                                                                  |       | 15,126,078                                                                      |       | 15,117,871 |   | 13,934,631 |   |
| Diluted                                                                                |       | 15,208,696                                                                      |       | 15,350,859 |   | 14,291,701 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements

 

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

 
| ** **                                                | ** ** | **Common  stock**                                                               | ** ** | **Additional  paid in  capital** | ** ** | **Retained  earnings  (deficit)** | ** ** | **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, 2005                            |       | $                                                                               | 115        |                                  | $          | 86,086                            |       | $                                                         | 55,681     |                                                 | $          | (1,353              | )          | $                                                  | 1,076      |      | $          | (28,072 | ) | $ | (6,855 | ) | $ | 106,678 |   |
| Net income                                                |       | —                                                                          |       | —                                |       | 6,667                             |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 6,667     |       |
| Other  comprehensive loss                                 |       | —                                                                          |       | —                                |       | —                            |       | (1,964                                                    | )          | —                                               |       | —              |       | —                                             |       | (1,964    | )          |
| Common stock  issued in acquisition                       |       | 50                                                                              |       | 90,966                                |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 91,016    |       |
| Exercise of Stock  Options                                |       | 1                                                                               |       | 1,274                                 |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 1,275     |       |
| Stock based  compensation                                 |       | —                                                                          |       | 306                                   |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 306       |       |
| ESOP shares  committed to be released                     |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | —              |       | 462                                                |       | 462       |       |
| Obligation of  deferred compensation plan                 |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | 182                                                  |       | —              |       | —                                             |       | 182       |       |
| Amortization of  RRP shares                               |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | —              |       | 645                                                |       | 645       |       |
| Treasury stock  acquired (15,132 shares at cost)     |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | (179                | )          | —                                             |       | (179      | )          |
| Tax benefit  related to employee stock benefit plans |       | —                                                                          |       | 254                                   |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 254       |       |
| Cash dividends  paid—($0.46 per share)     |       | —                                                                          |       | —                                |       | (6,718                            | )          |                                                      |       | —                                               |       | —              |       | —                                             |       | (6,718    | )          |
| Balance at  June 30, 2006                            |       | $                                                                               | 166        |                                  | $          | 178,886                           |       | $                                                         | 55,630     |                                                 | $          | (3,317              | )          | $                                                  | 1,258      |      | $          | (28,251 | ) | $ | (5,748 | ) | $ | 198,624 |   |
| Net income                                                |       | —                                                                          |       | —                                |       | 7,267                             |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 7,267     |       |
| Other  comprehensive income                               |       | —                                                                          |       | —                                |       | —                            |       | 137                                                       |       | —                                               |       | —              |       | —                                             |       | 137       |       |
| Stock dividend                                            |       | 8                                                                               |       | 9,929                                 |       | (9,937                            | )          | —                                                    |       | —                                               |       | —              |       | —                                             |       | —    |       |
| Cash issued in  lieu of fractional shares                 |       | —                                                                          |       | —                                |       | (10                               | )          | —                                                    |       | —                                               |       | —              |       | —                                             |       | (10       | )          |
| Exercise of Stock  Options                                |       | 1                                                                               |       | 1,391                                 |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 1,392     |       |
| Stock based  compensation                                 |       | —                                                                          |       | 756                                   |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 756       |       |
| ESOP shares  committed to be released                     |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | —              |       | 329                                                |       | 329       |       |
| Obligation of  deferred compensation plan                 |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | 19                                                   |       | —              |       | —                                             |       | 19        |       |
| Amortization of  RRP shares                               |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | —              |       | 820                                                |       | 820       |       |
| Restricted shares  issued from Treasury                   |       | —                                                                          |       | (447                                  | )          | —                            |       | —                                                    |       | —                                               |       | 447                 |       | —                                             |       | —    |       |
| Treasury stock  acquired (269,200 shares at cost)    |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | (3,242              | )          | —                                             |       | (3,242    | )          |
| Tax benefit  related to employee stock benefit plans      |       | —                                                                          |       | 261                                   |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 261       |       |
| Cash dividends  paid—($0.46 per share)     |       | —                                                                          |       | —                                |       | (6,920                            | )          | —                                                    |       | —                                               |       | —              |       | —                                             |       | (6,920    | )          |
| Balance at  June 30, 2007                            |       | $                                                                               | 175        |                                  | $          | 190,776                           |       | $                                                         | 46,030     |                                                 | $          | (3,180              | )          | $                                                  | 1,277      |      | $          | (31,046 | ) | $ | (4,599 | ) | $ | 199,433 |   |
| Net loss                                                  |       | —                                                                          |       | —                                |       | (43,475                           | )          | —                                                    |       | —                                               |       | —              |       | —                                             |       | (43,475   | )          |
| Common stock  issued in acquisition                       |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | 1,068               |       | —                                             |       | 1,068     |       |
| Other  comprehensive loss                                 |       | —                                                                          |       | —                                |       | —                            |       | (1,226                                                    | )          | —                                               |       | —              |       | —                                             |       | (1,226    | )          |
| Exercise of stock  options                                |       | 3                                                                               |       | 39                                    |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 42        |       |
| Stock based  compensation                                 |       | —                                                                          |       | 38                                    |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 38        |       |
| ESOP shares  committed to be released                     |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | —              |       | 607                                                |       | 607       |       |
| Obligation of  deferred compensation plan                 |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | 16                                                   |       | —              |       | (16                                                | )          | —    |       |
| Amortization of  RRP shares                               |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | —              |       | 883                                                |       | 883       |       |
| Grant of  restricted shares                               |       | —                                                                          |       | 87                                    |       | —                            |       | —                                                    |       | —                                               |       | —              |       | (87                                                | )          | —    |       |
| Restricted shares  issued from Treasury                   |       | —                                                                          |       | (19                                   | )          | —                            |       | —                                                    |       | —                                               |       | 19                  |       | —                                             |       | —    |       |
| Treasury stock  acquired (25,000 shares, at cost)    |       | —                                                                          |       | —                                |       | —                            |       | —                                                    |       | —                                               |       | (299                | )          | —                                             |       | (299      | )          |
| Tax benefit  related to employee stock benefit plans      |       | —                                                                          |       | 22                                    |       | —                            |       | —                                                    |       | —                                               |       | —              |       | —                                             |       | 22        |       |
| Cash dividends  paid—($0.46 per share)     |       |                                                                            |       |                                  |       | (6,996                            | )          |                                                      |       |                                                 |       |                |       |                                               |       | (6,996    | )          |
| Balance at  June 30, 2008                            |       | $                                                                               | 178        |                                  | $          | 190,943                           |       | $                                                         | (4,441     | )                                                    | $          | (4,406              | )          | $                                                  | 1,293      |      | $          | (30,258 | ) | $ | (3,212 | ) | $ | 150,097 |   |

 

 
| ** **                                                                        | ** ** | **For the year ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net (loss) income                                                                 |       | $                                                        | (43,475    | ) | $ | 7,267 |   | $ | 6,667 |   |
|                                                                              |       |                                                     |       |   |   |   |   |
| Other comprehensive (loss) income, net of  tax:                                   |       |                                                     |       |   |   |   |   |
| Net unrealized (losses) gains on securities  available for sale during the period |       | (2,291                                                   | )          | 1,051 |   | (2,937 | ) |
| Change in tax rate                                                                |       | (38                                                      | )          | — |   | — |   |
| Gain on termination of interest rate  corridor                                    |       | —                                                   |       | (523 | ) | — |   |
| Reclassification adjustments for losses  (gains) included in net income           |       | 1,103                                                    |       | (148 | ) | 597 |   |
| Net unrealized (loss) gain on cash flow  hedge                                    |       | —                                                   |       | (243 | ) | 376 |   |
| Comprehensive (loss) income                                                       |       | $                                                        | (44,701    | ) | $ | 7,404 |   | $ | 4,703 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

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

 
| ** **                                                                                     | ** ** | **For the year ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                     | ** ** | **(Dollars in thousands)**                     | ** ** |
| Net (loss) income                                                                              |       | $                                                        | (43,475    | ) | $ | 7,267 |   | $ | 6,667 |   |
| Add (deduct) items not affecting cash flows  from operating activities:                        |       |                                                     |       |   |   |   |   |
| Depreciation                                                                                   |       | 2,956                                                    |       | 2,598 |   | 1,837 |   |
| Amortization of premium and accretion of  discount, net                                        |       | 291                                                      |       | 180 |   | 347 |   |
| Impairment of goodwill                                                                         |       | 40,000                                                   |       | — |   | — |   |
| Amortization of intangible assets                                                              |       | 2,255                                                    |       | 2,131 |   | 1,928 |   |
| Provision for loan losses                                                                      |       | 3,173                                                    |       | 653 |   | 3,380 |   |
| Gain on sale of loans held for sale                                                            |       | (2,554                                                   | )          | (616 | ) | (357 | ) |
| Loss (gain) on sale of investment  securities                                                  |       | (200                                                     | )          | (228 | ) | 919 |   |
| Investment impairment                                                                          |       | 1,869                                                    |       | — |   | — |   |
| Gain on termination of interest rate  corridor                                                 |       | —                                                   |       | (804 | ) | — |   |
| Gain on sale of real estate                                                                    |       | (21                                                      | )          | (380 | ) | (17 | ) |
| Origination of loans held for sale                                                             |       | (201,258                                                 | )          | (57,313 | ) | (79,068 | ) |
| Proceeds from the sale of loans held for  sale                                                 |       | 197,688                                                  |       | 52,489 |   | 81,911 |   |
| Increase in trading account securities                                                         |       | (106                                                     | )          | (274 | ) | (820 | ) |
| (Accretion) amortization of deferred loan  fees, discounts and premiums                        |       | 306                                                      |       | (843 | ) | (1,056 | ) |
| Decrease (increase) in accrued interest  receivable                                            |       | 473                                                      |       | (7 | ) | 335 |   |
| (Increase) decrease in value of bank owned  life insurance                                     |       | (480                                                     | )          | (447 | ) | (369 | ) |
| (Increase) decrease in other assets                                                            |       | (3,476                                                   | )          | (2,502 | ) | 6,908 |   |
| (Decrease) increase in other liabilities                                                       |       | (5,008                                                   | )          | 7,242 |   | (13,391 | ) |
| Stock based compensation                                                                       |       | 1,529                                                    |       | 1,931 |   | 1,963 |   |
| Excess tax benefits from stock-based  compensation                                             |       | (22                                                      | )          | (261 | ) | (254 | ) |
| (Decrease) increase in accrued interest  payable                                               |       | (595                                                     | )          | 18 |   | (271 | ) |
| Net cash (used in) provided by operating  activities                                           |       | (6,655                                                   | )          | 10,834 |   | 10,592 |   |
| Cash flows from investing activities:                                                          |       |                                                     |       |   |   |   |   |
| Capital expenditures                                                                           |       | (2,009                                                   | )          | (5,080 | ) | (3,948 | ) |
| Proceeds from sale of office buildings                                                         |       | —                                                   |       | 1,914 |   | 11,139 |   |
| Net (increase) decrease in loans                                                               |       | (103,983                                                 | )          | 26,419 |   | (24,709 | ) |
| Proceeds from maturities, sales, payments  and calls of investment securities held to maturity |       | 12,593                                                   |       | 17,205 |   | 59,159 |   |
| Purchase of securities available for sale                                                      |       | (73,307                                                  | )          | (62,737 | ) | (23,027 | ) |
| (Increase) decrease in FHLB stock                                                              |       | (4,409                                                   | )          | 5,462 |   | 11,544 |   |
| Proceeds from sales and calls of securities  available for sale                                |       | 76,830                                                   |       | 72,768 |   | 80,132 |   |
| Proceeds from sale of other real estate  owned                                                 |       | 302                                                      |       | 2,572 |   | 388 |   |
| Net cash used for acquisition                                                                  |       | (2,779                                                   | )          | (4,433 | ) | (22,936 | ) |
| Net cash (used in) provided by investing  activities                                           |       | (96,762                                                  | )          | 54,090 |   | 87,742 |   |
| Cash flows from financing activities:                                                          |       |                                                     |       |   |   |   |   |
| Net (decrease) increase in deposits                                                            |       | (89,852                                                  | )          | 76,230 |   | (50,795 | ) |
| Increase in securities sold under  agreements to repurchase                                    |       | 55,000                                                   |       | — |   | 20,000 |   |
| Proceeds from FHLB advances                                                                    |       | 655,288                                                  |       | 107,400 |   | 215,700 |   |
| Repayment of FHLB advances                                                                     |       | (533,821                                                 | )          | (200,191 | ) | (293,589 | ) |
| Repayment of trust preferred securities                                                        |       | —                                                   |       | (10,000 | ) | — |   |
| (Decrease) increase in advance payments  from borrowers for taxes and insurance                |       | (62                                                      | )          | (522 | ) | 1,429 |   |
| Net proceeds from the issuance of trust  preferred securities                                  |       | —                                                   |       | — |   | 25,000 |   |
| Cash dividends on common stock                                                                 |       | (6,996                                                   | )          | (6,920 | ) | (6,718 | ) |
| Common stock repurchased                                                                       |       | (299                                                     | )          | (3,242 | ) | (179 | ) |
| Cash in lieu of fractional shares                                                              |       | —                                                   |       | (10 | ) | — |   |
| Stock options exercised                                                                        |       | 42                                                       |       | 1,392 |   | 1,275 |   |
| Excess tax benefit from stock-based  compensation                                              |       | 22                                                       |       | 261 |   | 254 |   |
| Net cash provided by (used in) financing  activities                                           |       | 79,322                                                   |       | (35,602 | ) | (87,623 | ) |
| Net (decrease) increase in cash and cash  equivalents                                          |       | (24,095                                                  | )          | 29,322 |   | 10,711 |   |
| Cash and cash equivalents:                                                                     |       |                                                     |       |   |   |   |   |
| Beginning of year                                                                              |       | 60,277                                                   |       | 30,955 |   | 20,244 |   |
| End of year                                                                                    |       | $                                                        | 36,182     |   | $ | 60,277 |   | $ | 30,955 |   |
| Supplemental disclosures                                                                       |       |                                                     |       |   |   |   |   |
| Cash payments during the year for:                                                             |       |                                                     |       |   |   |   |   |
| Taxes                                                                                          |       | $                                                        | 51         |   | $ | 416 |   | $ | 2,628 |   |
| Interest                                                                                       |       | 43,598                                                   |       | 41,044 |   | 32,476 |   |
| Noncash items:                                                                                 |       |                                                     |       |   |   |   |   |
| Net unrealized (loss) gain on investment  securities available for sale, net of tax            |       | (1,226                                                   | )          | 1,051 |   | (2,937 | ) |
| Net unrealized (loss) gain on cash flow  hedge, net of tax                                     |       | —                                                   |       | (766 | ) | 376 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements

 

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**1.****                                 Descriptionof Business and Basis of Consolidated Financial Statement Presentation**

 

On May 21, 2008, theCompany and Harleysville National Corporation (“HNC”) announced that they hadentered into an Agreement and Plan of Merger (“HNC Merger Agreement”), dated May 20,2008, which sets forth the terms and conditions pursuant to which the Companywill be merged with and into HNC (the “HNC Merger”). The HNC Merger Agreementprovides, among other things, that as a result of the HNC Merger eachoutstanding share of common stock of the Company, par value $0.01 per share,will be converted into a right to receive 0.7300 share of common stock of HNC,par value $1.00 per share (“HNC Common Stock”), plus cash in lieu of anyfractional share interest.

 

Consummation of the HNCMerger is subject to a number of customary conditions, including but notlimited to (i) the approval of the HNC Merger Agreement by both theshareholders of the Company and HNC and (ii) the requisite regulatoryapprovals of the HNC Merger and the proposed merger of the Company’s bankingsubsidiary, the Bank, with and into HNC’s banking subsidiary HarleysvilleNational Bank, following consummation of the HNC Merger. The HNC Merger isintended to qualify as reorganization for federal income tax purposes, suchthat the shares of the Company exchanged for shares of HNC Common Stock will beissued to the Company’s shareholders on a tax-free basis.

 

The HNC Merger Agreementcontains certain termination rights for each of the Company and HNC and furtherprovides that, upon termination of the Merger Agreement under specifiedcircumstances, the Company may be required to pay to HNC a termination fee of$7.0 million.

 

Effective on September 21, 2006, Willow Grove Bancorp, Inc.and Willow Grove Bank changed their names to Willow Financial Bancorp, Inc.and Willow Financial Bank, respectively. As contained herein, referencesto the Company include both Willow Financial Bancorp, Inc. and WillowGrove 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 Pennsylvaniacorporation and parent holding company for Willow Financial Bank (the “Bank”).The Bank, which was originally organized in 1909, is a federally charteredsavings bank and wholly owned subsidiary of the Company. The Bank’s businessconsists primarily of making commercial business and consumer loans as well asreal estate loans, both commercial and residential, funded primarily by retailand business deposits along with borrowings obtained from the Federal Home LoanBank (“FHLB”) of Pittsburgh.

 

After the close of business on August 31, 2005, the Companycompleted its acquisition of Chester Valley Bancorp Inc. (“Chester Valley”),a registered bank holding company headquartered in Downingtown, Pennsylvania,with over $654 million in assets. Chester Valley had two wholly ownedsubsidiaries, First Financial Bank (“FFB”), a Pennsylvania chartered commercialbank  with 13 full-service bankingoffices, and Willow Investment Services (“WIS”), formerly PhiladelphiaCorporation for Investment Services (“PCIS”), a registered investment advisorand broker dealer. Pursuant to the Agreement and Plan of Merger, dated as of January 20,2005 (the “Merger Agreement”), Chester Valley was merged with and into theCompany, with the Company as the surviving corporation (the “Merger”), andChester Valley was merged with and into the Bank with the Bank as the survivingbank (the “Bank Merger”). As a result of the Merger, each outstanding share ofChester Valley common stock, par value $1.00 per share (the “Chester ValleyCommon Stock”), was converted into the right to receive, at the election of theshareholder, either $27.90 in cash or 1.4823 shares of the Company commonstock, par value $0.01 per share (the “Company Common Stock”), subject to theallocation and pro ration provisions set forth in the Merger Agreement. Theacquisition resulted in the Company’s issuance of an aggregate of 4,977,256shares of Company Common Stock and $51.0 million in cash. The total mergerconsideration paid for the Chester Valley Common Stock was $145.3 million. Thisincluded capitalized acquisition costs and the value of Chester Valley vestedstock options converted to options of the Company at the average stock price ofthe Company on the four days surrounding the announcement of the acquisition.The Company used general corporate funds to pay the aggregate cashconsideration of approximately $51.0 million for the shares of ChesterValley Common Stock acquired in the Merger for cash, as well as the approximate$3.2 million in acquisition costs.

 

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

 

Effective February 28, 2006, the Bank completed the sale of alloutstanding shares of capital stock of PCIS to Uvest BD-A, Inc. (“Uvest”),a North Carolina Corporation and registered broker-dealer for consideration of$100 but providing that such shares may be repurchased for $100 at any timeafter the closing date of the stock sale. Concurrently with the execution ofthe sale of PCIS, the parties entered into a related Sub-Clearing and BrokerageServices Agreement, which provides that an affiliate of Uvest will providesecurities clearing and certain supervisory and compliance services for theBank, and a Financial Services Agreement between 

 

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PCIS and theBank which provides that the Bank will be entitled to 90% of the revenuegenerated by the securities brokerage activities conducted at the PCIS officeand will bear substantially all operational and overhead expenses. Since March 2007,PCIS has been doing business as “Willow Investment Services” (“WIS”). Uponconsummation of the sale of PCIS stock to Uvest, WIS is no longer a subsidiaryof the Company. However, under the provisions of Financial Accounting StandardsBoard 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 its acquisition ofBeneServ, Inc. (“BeneServ”) for a purchase price of up to $5.5million. The purchase price includes a payment of $4.2 million at closing plusan additional amount up to $1.3 million in payments through the three-yearanniversary date of the acquisition, subject to the achievement of certainperformance thresholds. As of June 30, 2008, approximately $400 thousandof additional payments were earned and paid based on BeneServ achieving theestablished performance thresholds. Approximately $143 thousand of the additional payments were accrued andare included in other liabilities on the consolidated statement of financialcondition. BeneServ is an insurance agency serving the corporate employeebenefit market segment. BeneServ and the Company share a target market in smallbusinesses located in Chester, Montgomery, Bucks, Delaware, and Philadelphiacounties, Pennsylvania, thereby providing a number of cross sellingopportunities for both companies. The Company has recorded goodwill and otherintangibles of $4.5 million as a result of this acquisition.

 

On December 21, 2007, the Bank completed its acquisition ofCarnegie Wealth Management (‘Carnegie”) for a purchase price of up to $4.8million in cash plus approximately $1.1 million in the Company’s common stock.The purchase price includes a payment of $2.3 million at closing plus an amountup to an additional $2.5 million in payments through the three-year anniversarydate of the acquisition, subject to the achievement of certain performancethresholds. Carnegie is a $200 million wealth management firm that providesprofessional investment consulting services to retirement plan administrators,foundations, corporations and high net worth investors. The Company recordedgoodwill and other intangibles of $3.2 million as a result of this acquisition basedon the preliminary purchase price allocation.

 

References to Company include its three business segments, the Bank,WIS, and BeneServ, unless the context of the reference indicates otherwise. SeeNote 22 to the Consolidated Financial Statements included herein. For periodsafter December 21, 2007, the WIS segment includes the operations ofCarnegie.

 

Net gains or losses resulting from the termination of derivativeinstruments are recorded on the statement of operations as a component ofnon-interest income.

 

The consolidated financial statements include the balances of theCompany and its wholly owned subsidiaries and business segments. All materialintercompany balances and transactions have been eliminated in consolidation.The Company follows accounting and reporting practices, which are in accordancewith U.S. GAAP.

 

In preparing the consolidated financial statements, the Company isrequired to make certain estimates and assumptions that affect the reportedamounts of assets and liabilities as of the date of the statement of financialcondition and statement of operations for the period. Actual reports coulddiffer significantly from those estimates. Material estimates that areparticularly susceptible to significant change in the near-term include thedetermination of the allowance for loan losses, income taxes, investmentimpairment, and intangible asset impairment.

 

The Company follows the provisions of SFAS No. 142, “Goodwill andOther Intangibles,” and performs an annual impairment test of goodwill.However, when circumstances indicate that an event has occurred during aninterim period, the Company will perform an impairment test at that time. TheCompany has determined that such an event occurred during the quarter ended December 31,2007. Based upon an interim impairment test, the Company recorded a goodwillimpairment charge of $40.0 million in the consolidated statement of operationsfor the three-month period ended December 31, 2007. The impairment chargehad no impact on the Company’s or the Bank’s tangible capital nor did it impactthe Company’s tangible book value per share. Additionally, this impairmentcharge did not result from a deterioration in the Company’s core depositintangible. See Note 9 for additional information on the goodwill impairment.

 

**2.****                                      Risksand Uncertainties**

 

In the normalcourse of its business, the Company encounters two significant types of risk:economic and regulatory. There are three main components of economic risk:interest rate risk, credit risk and market risk. The Company is subject tointerest rate risk to the degree that its interest-bearing liabilities matureor re-price at different speeds, or on a different basis, from itsinterest-earning assets. The Company’s primary credit risk is the risk ofdefault on the Company’s loan portfolio that results from the borrower’sinability to make contractually required payments. The Company’s lendingactivities are concentrated in Pennsylvania. The largest 

 

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concentration of the Company’s loan portfoliois located in southeastern Pennsylvania. The ability of the Company’s borrowersto repay 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 (“AFS”) and mortgage servicingassets. The Company is subject to certain Federal banking laws and regulationsas further described herein and in Note 19. Compliance with regulationscauses the Company to incur significant costs. In addition, the possibility offuture changes to such regulations presents the risk that future additionalcosts will be incurred that may impact the Company.

 

**3.****                                      Acquisitionof Chester Valley Bancorp**

 

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

 

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

 

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

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

 

The followingtable summarizes the pro forma operating results of the Company had theacquisition 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    |   | 34,390 |   |
| Provision for loan losses |   | 3,824  |   |
| Other income              |   | 8,620  |   |
| Other expense             |   | 53,955 |   |
| Income before tax         |   | 3,957  |   |
| Income tax                |   | 1,000  |   |
| Net income                |   | 2,957  |   |
| Non-recurring items(a)    |   | 5,492  |   |
| Adjusted net income(b)    |   | $      | 8,449  |   |
| Earnings per Share:       |   |   |   |
| Basic                     |   | $      | 0.21   |   |
| Diluted                   |   | $      | 0.20   |   |

 

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(a)       Reflects gross losses onsecurities sales ($1.8 million), professional fees ($1.8 million) and stockoption compensation payments to holders of certain Chester Valley options ($4.7million).

 

(b)      Adjusted for non-recurringitems at an effective tax rate of 34%.

 

The Companyhas deemed the acquisitions of BeneServ and Carnegie to be immaterial to theconsolidated financial statements.

 

**4.****                                      Summaryof Significant Accounting Policies**

 

***Use of Estimates***

 

In preparingthe consolidated financial statements, the Company is required to make certainestimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the statement of financial condition andstatement of operations for the period. Actual results could differsignificantly from those estimates. Material estimates that are particularlysusceptible to significant change in the near-term include the determination ofthe allowance for loan losses, securities valuation, income taxes andintangible asset impairment. Management believes that the allowance for loanlosses, the balances in income tax accounts and the determination of theintangible asset and investment impairment are adequate.

 

Variousregulatory agencies, as an integral part of their examination process,periodically review the Bank’s allowance for loan losses and valuations of realestate owned. Such agencies may require the Bank to recognize additions to theallowance or adjustments to the valuations based on their judgments aboutinformation available to them at the time of their examination.

 

***Cash and Cash Equivalents***

 

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

 

***Investment Securities***

 

The Companydivides its securities portfolio into three segments: (a) Held-to-maturity(“HTM”), (b) AFS and (c) trading. Securities in the HTM category arecarried at cost, adjusted for amortization of premiums and accretion ofdiscounts, using the level yield method, based on the Company’s intent andability to hold the securities until maturity. Marketable securities includedin the AFS category are carried at fair value, with unrealized gains or lossesthat are temporary in nature, net of taxes, reflected as an adjustment toequity. Trading securities consist of mutual funds related to the Company’sdeferred compensation plan for certain executive level employees. Changes inthe fair value of trading securities are recorded through earnings. There is acorresponding liability in other liabilities on the consolidated statements offinancial condition. Securities HTM and AFS 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 and reflected in the consolidated statements of income.

 

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

 

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

 

***Loans Held for Sale***

 

Real estateloans originated and intended for sale in the secondary market are carried atthe lower of cost or market calculated on an aggregate basis, with anyunrealized losses reflected in the consolidated statements of income. Loanstransferred from loans held 

 

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for sale to loans receivable are transferredat the lower of cost or market value at the date of transfer. Gains arerecognized upon delivery to the purchaser of said loans.

 

***Loans Receivable***

 

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

 

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

 

Loans areconsidered past due after one payment has been missed. Loans are charged offwhen they reach “loss” status in accordance with the Bank’s assetclassification policy. There are three classifications for problem assets: “substandard,”“doubtful,” and “loss.”  Substandardassets have one or more defined weaknesses and are characterized by thedistinct possibility that the Bank will sustain some loss if the deficienciesare not corrected. Doubtful assets have weaknesses of substandard assets withthe additional characteristic that the weaknesses make collection orliquidation in full on the basis of current existing facts, conditions andvalues, questionable, and there is a high probability of loss. An assetclassified as loss is considered uncollectible and of such little value thatcontinuance as an asset of the institution is not warranted.

 

***Allowance for Loan Losses***

 

The allowancefor loan losses is maintained at a level that management believes is adequateto cover known and inherent losses in the loan portfolio that are both probableand reasonable to estimate at each reporting date. Management establishes theloan loss allowance in accordance with guidance provided by the Securities andExchange Commission’s Staff Accounting Bulletin 102, “Selected Loan LossAllowance Methodology and Documentation Issues.” The determination of theadequacy of the allowance is based upon an evaluation of the portfolio, lossexperience, current economic conditions, volume, growth, composition of theportfolio, and other relevant factors. The Company uses historical loss factorsfor each loan type and, for loans that we consider higher risk for all butsingle-family mortgage loans and guaranteed consumer loans, qualitative factorsare also considered. This component establishes a range for factors such as,but not limited to, delinquency trends, asset classification trends and currenteconomic conditions. Management then assesses these conditions and establishes,to the best of its ability, the allowance for loan losses from within the rangecalculated, based upon the facts known at that time. The methodology does notimply that any portion of the allowance for loan loss is restricted, but theallowance for loan loss applies to the entire loan portfolio.

 

 In addition to using loss rates, securedcommercial non-accrual loans are reviewed for impairment as required under SFASNo. 114, “Accounting by Creditors for Impairment of a Loan.”  Those loans that have specific lossallocations are identified and included in the reserve allocation. Risk-ratedloans that are not reviewed for impairment are segregated into homogeneouspools with loss allocation rates that reflect the severity of risk. Loss ratesare adjusted by applying other factors to the calculations. These factorsinclude adjustment for current economic trends, delinquency and risk trends,credit concentrations, credit administration, migration analysis, and otherspecial allocations for unusual events or changes in products.

 

***Property and Equipment***

 

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

 

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***Goodwill and Other Intangible Assets***

 

Goodwillrepresents the excess cost over fair value of assets acquired over liabilitiesas a result of the Merger, and other previously disclosed acquisitions.Included in other intangibles are core deposit intangibles, a measure of thevalue of checking and savings deposits acquired in the Merger accounted forunder the purchase method. The core deposit intangible is being amortized toexpense over a twelve-year life using a method that approximates a level yield method.A customer intangible recorded as a result of the acquisitions of BeneServ andCarnegie are being amortized to expense over ten-year lives. The Company follows the provisions of SFAS No. 142,“Goodwill and Other Intangible Assets,” and performs impairment tests of theintangible assets at least annually and impairment losses are recognized if thecarrying value of the intangible exceeds its fair value. As discussed in Note 9of the Notes to the Consolidated Financial Statements, the Company recorded animpairment charge to goodwill for the quarter ended December 31, 2007 inthe amount of $40.0 million.

 

***Income Taxes***

 

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

 

***(Loss) / Earnings Per Share***

* *

(Loss) / Earnings  per share (“EPS”) consists of two separatecomponents, basic EPS and diluted EPS. Basic EPS is computed by dividing netincome by the weighted average number of common shares outstanding for eachperiod presented, which is computed in Note 6. Diluted EPS is calculatedby dividing net income by the weighted average number of common sharesoutstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist ofdilutive stock options granted through the Company’s stock option plans andunvested common stock awards.

 

***Recently Issued Accounting Pronouncements***

 

*FASB StaffPosition FSP No. EITF 03-6-1, Determining Whether Instruments Granted inShare-based Payment Transactions are Participating Securities*

 

In June 2008, the Financial AccountingStandards Board issued FASB Staff Position FSP No. EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-based Payment Transactions areParticipating Securities.” FSP No. EITF 03-6-1 states that unvestedshare-based payment awards that contain nonforfeitable rights to dividends ordividend equivalents (whether paid or unpaid) are participating securities andshall be included in the computation of EPS pursuant to the two-class method.FSP No. EITF 03-6-1 is effective for financial statements issued forfiscal years beginning after December 15, 2008. All prior-period EPS datapresented shall be adjusted retrospectively (including interim financialstatements, summaries of earnings, and selected financial data) to conform tothe provisions of this FSP. Early application is not permitted. The Company isevaluating the impact of FSP No. EITF 03-6-1.

 

*FASBStatement No. 162, The Hierarchy of Generally Accepted AccountingPrinciples*

 

In May 2008, the Financial AccountingStandards Board issued Statement No. 162, “The Hierarchy of GenerallyAccepted AccountingPrinciples.” Statement No. 162 improves financial reporting by identifyinga consistent framework, or hierarchy, for selecting accounting principles to beused in preparing financial statements that are presented in conformity withU.S. generally accepted accounting principles for nongovernmental entities.Statement No. 162 is effective sixty days following the SEC’s approval ofthe Public Company Accounting Oversight Board auditing amendments to AU Section 411,“The Meaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples.” The Company is evaluating the impact of Statement No. 162.

 

*FASB StaffPosition FSP No. FAS 142-3, Determination of the Useful Life of IntangibleAssets*

* *

In April 2008, theFinancial Accounting Standards Board issued FASB Staff Position FSP No. FAS142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. FAS142-3 is effective for financial statements issued for fiscal years beginningafter December 15, 2008, and interim periods within those fiscal years. TheCompany is evaluating the impact of FSP No. FAS 142-3.

 

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*FASBStatement No. 161, Disclosures about Derivative Instruments and HedgingActivities*

 

In March 2008, the Financial AccountingStandards Board issued Statement No. 161, “Disclosures about DerivativeInstruments and Hedging Activities.” Statement No. 161 requires disclosureof the fair values of derivative instruments and their gains and losses in atabular format. It also requires disclosure of derivative features that arecredit risk-related and cross-referencing within footnotes to enable financialstatement users to locate important information about derivative instruments.Statement No. 161 is effective for financial statements issued for fiscalyears and interim periods after November 15, 2008, with early applicationencouraged. The Company is evaluating the impact of Statement No. 161 onits consolidated financial statements.

 

*FASBStatement No. 141(R), Business Combinations*

 

In December 2007, the FinancialAccounting Standards Board issued Statement No. 141(R), “BusinessCombinations.” Statement No. 141(R) requires the acquiring entity ina business combination to recognize all (and only) the assets acquired andliabilities assumed in the transaction; establishes the acquisition-date fairvalue as the measurement objective for all assets acquired and liabilitiesassumed; and requires the acquirer to disclose to investors and other users allof the information they need to evaluate and understand the nature andfinancial effect of the business combination. Statement No. 141(R) iseffective for fiscal years beginning after December 15, 2008. The Company isevaluating the impact of Statement No. 141(R) on its consolidatedfinancial statements.

 

*FASBStatement No. 160, Noncontrolling Interests in Consolidated FinancialStatements*

 

In December 2007, the Financial Accounting Standards Board issuedStatement No. 160, “Noncontrolling Interests in Consolidated FinancialStatements.” Statement No. 160 requires that a reporting entity providesufficient disclosures that clearly identify and distinguish between theinterests of the parent and the interests of the noncontrolling owners.Statement No. 160 is effective for fiscal years beginning after December 15,2008. The Company is evaluating the impact of Statement No. 160 on itsconsolidated financial statements.

 

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

 

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

 

*FASB Statement No, 157, Fair Value Measurements*

 

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

 

In February 2008, the Financial Accounting Standards Board issuedFASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157.”FSP No. 157-2 delays the effective date of FASB Statement No. 157, “FairValue Measurements,” for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually) to fiscal years beginningafter November 15, 2008 and interim periods within those fiscal years foritems within the scope of this FSP. This FSP was effective upon issuance. TheCompany is currently assessing the implications of this Statement on itsconsolidated financial statements.

 

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**5.****                                      StockCompensation Plans**

 

Thestockholders of the Company approved a stock option plan in fiscal 2000 (the “1999Plan”) for officers, directors and certain employees of the Company and itssubsidiaries. Pursuant to the terms of the 1999 Plan, the number of commonshares reserved for issuance was a total of 536,509, of which 53,963 optionswere unawarded at June 30, 2008. Included in this amount are 419 sharesforfeited during the year ended June 30, 2008. Additionally, thestockholders of the Company approved a stock option plan in fiscal 2003 (the “2002Plan”) for officers, directors and certain employees of the Company and itssubsidiaries. Pursuant to the terms of the 2002 Plan, the number of commonshares reserved for issuance was 673,483 of which 224,913 were available forfuture grants at June 30, 2008. Included in this amount are 37,018 sharesforfeited during the year ended June 30, 2008. Generally, options weregranted with an exercise price equal to fair market value at the date of grantand expire in 10 years from the date of grant. Generally, stock optionsgranted vest over a five-year period commencing on the first anniversary of thedate of grant. In addition, as part of the Merger, options previously grantedunder plans of Chester Valley were converted into options to acquire 383,945shares of Company common stock. Unrecognized compensation cost on unvestedoption awards and weighted average period to be recognized are $145 thousandand 3.6 years, respectively at June 30, 2008. Compensation expense relatedto option awards was $134 thousand, $208 thousand, and $306 thousand for theyears ended June 30, 2008, 2007 and 2006, respectively.

 

The followingtable provides information about options outstanding for the year ended June 30,2008:

 
| ** **                               | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|------------------------------------------|------------|------------|------------|----------------------------------------|------------|---------------------------------------------------------|------------|
| Options outstanding, beginning of period |       | 902,493    |       | $                                      | 10.39      |                                                    | $          | 3.68 |   |
| Granted                                  |       | —     |       | —                                 |       | —                                                  |       |
| Forfeited                                |       | 37,437     |       | 13.34                                  |       | 3.73                                                    |       |
| Exercised                                |       | 6,055      |       | 7.05                                   |       | 5.42                                                    |       |
| Options outstanding, end of period       |       | 859,001    |       | $                                      | 10.28      |                                                    | $          | 3.65 |   |
| Options exercisable end of period        |       | 800,185    |       | 10.04                                  |       | 3.72                                                    |       |

 

The Companyexpects approximately 1,719 of unvested options to be forfeited.

 

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

 
| ** **                           | ** ** | **Year ended June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Proceeds of options exercised        |       | $                                      | 42,694     |   | $ | 1,390,643 |   | $ | 1,275,040 |   |
|                                 |       |                                   |       |   |   |   |   |
| Related tax benefit recognized       |       | 8,628                                  |       | 234,024 |   | 198,851 |   |
|                                 |       |                                   |       |   |   |   |   |
| Intrinsic value of options exercised |       | 19,159                                 |       | 687,451 |   | 1,134,995 |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

The followingtable provides information about options outstanding and exercisable options atJune 30, 2008:

 
| ** **                                 | ** ** | **Options  Outstanding** | ** ** | **Exercisable  Options** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| Number                                     |       | 859,001                  |       | 800,185                  |       |
| Weighted average exercise price            |       | $                        | 10.28      |                     | $          | 10.04 |   |
| Aggregate intrinsic value                  |       | $                        | 478,565    |                     | $          | 478,565 |   |
| Weighted average contractual term in years |       | 4.0                      |       | 1.4                      |       |
|                                            |            |                          |            |                          |            |  |  |  |  |

 

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The weightedaverage remaining contractual life for options outstanding and weighted averageexercise price per share for exercisable options at June 30, 2008 were asfollows:

 
| ** **              | ** ** | **Options Outstanding** | ** ** | **Exercisable Options**                               | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Shares**                   | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual Life  (in Years)** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** |
| $3.50- $5.00            |       | 104,817                      |       | $                                                          | 3.79       |   | 1.3 |   | 104,817 |   | $ | 3.79 |   |
| $7.50- $9.50            |       | 214,351                      |       | 8.29                                                       |       | 3.2 |   | 214,351 |   | 8.29 |   |
| $9.51- $14.00           |       | 501,580                      |       | 12.15                                                      |       | 4.7 |   | 452,361 |   | 12.04 |   |
| $14.01- $16.50          |       | 38,253                       |       | 14.78                                                      |       | 6.3 |   | 28,656 |   | 14.51 |   |
| Total                   |       | 859,001                      |       | $                                                          | 10.28      |   | 4.0 |   | 800,185 |   | $ | 10.04 |   |

 

The Companydid not grant any stock options during the year ended June 30, 2008.  During the years ended June 30, 2007 and2006, the Company granted 70,025 and 22,096 stock options respectively. Theweighted average grant date fair value of options granted was $2.61 for theyear ended June 30, 2007. The fair value for stock options granted isdetermined at the date of grant using a Black-Scholes options-pricing model.The fair value of option awards under the Option Plans is estimated on the dateof grant using the Black-Scholes valuation methodology, which is dependent uponcertain assumptions, as summarized in the following table:

 
| ** **                               | ** ** | **Year Ended  June 30** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| **Assumption**                           | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| Expected average risk-free interest rate |       | n/a                               |       | 4.63 | % |
| Expected average life (in years)         |       | n/a                               |       | 5.50 |   |
| Expected volatility                      |       | n/a                               |       | 25.03 | % |
| Expected dividend yield                  |       | n/a                               |       | 3.72 | % |

 

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

 

The fair valueof options vested was $313,111 and $241,918 for the years ended June 30,2008 and 2007, respectively.

 

**RRP**

 

Pursuant tothe 1999 Recognition and Retention Plan and Trust Agreement (the “1999 RRP”),the Company acquired 214,603 shares at a cost of $929 thousand. Pursuant to theterms of the agreement, all 214,603 shares have been awarded to directors andmanagement from the 1999 RRP Trust. As of June 30, 2008, 207,503 grantedshares were vested pursuant to the terms of the 1999 Plan. In fiscal 2003, theCompany adopted the 2002 Recognition and Retention Plan and Trust Agreement(the “2002 RRP”), and acquired 269,393 shares at a cost of $3.2 million.Pursuant to the terms of the 2002 RRP, 227,711 shares have been awarded todirectors and management; however 20,160 shares have been forfeited. As of June 30,2008, 207,551 granted shares were vested pursuant to the terms of the 2002 RRP.At the November 9, 2005 Annual Meeting, shareholders approved the 2005Recognition and Retention Plan and Trust Agreement (the “2005 RRP”). Under the2005 RRP, the Trust can purchase 367,500 shares of common stock for futureawards of restricted stock to certain officers and directors of theCompany.  Coincident with the approval ofthe 2005 RRP, the Company terminated its Directors Retirement Plan and theDirectors Incentive Compensation Plan, at which time the directors became fullyvested in their accrued benefit under the Directors Retirement Plan. As of June 30,2008, 192,382 shares were granted under the 2005 RRP; however, 23,285 shareswere forfeited.

 

Compensationexpense related to the RRP shares was $883 thousand, $833 thousand and $701thousand for the years ended June 30, 2008, 2007 and 2006, respectively.Unrecognized compensation cost on unvested RRP shares and weighted averageperiod to be recognized are $908 thousand and 1.5 years, respectively.

 

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Activity inissued but unvested RRP shares under the three plans during the year ended June 30,2008 was as follows:

 
| **RRP Shares**                 | ** ** | **RRP Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value** | ** ** |
|-------------------------------------|------------|---------------------|------------|---------------------------------------------------------|------------|
| Unvested awards beginning of period |       | 166,520             |       | $                                                       | 13.85      |   |
| Granted                             |       | 16,871              |       | 8.39                                                    |       |
| Vested                              |       | (83,424             | )          | 13.58                                                   |       |
| Forfeited                           |       | (11,118             | )          | 14.08                                                   |       |
| Unvested awards period end          |       | 88,849              |       | $                                                       | 13.08      |   |

 

The aggregateintrinsic value of unvested RRP awards under the three plans at June 30,2008 was $4 thousand.

 

**6.****                                      (Loss)/ Earnings Per Share**

 

For the yearsended June 30, 2008, 2007 and 2006 (loss) /earnings per share, basic anddiluted, were ($2.88) and ($2.88),  $0.48and $0.47, and $0.47 and, $0.46, respectively.

 

The followingis a reconciliation of the numerators and denominators of the basic and diluted(loss) / earnings per share calculations.

 
| ** **                                                                    | ** ** | **Year Ended June 30,**                                 | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2008**                                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                    | ** ** | **Basic**                                                              | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| ** **                                                                    | ** ** | **(Dollars in thousands, except share data)** | ** ** |
| Net (loss) / income                                                           |       | $                                                                      | (43,475    | ) | $ | (43,475 | ) | $ | 7,267 |   | $ | 7,267 |   | $ | 6,667 |   | $ | 6,667 |   |
| Dividends on unvested stock awards                                            |       | (34                                                                    | )          | (34 | ) | (56 | ) | (56 | ) | (76 | ) | (76 | ) |
| Income available to common stock holders                                      |       | $                                                                      | (43,509    | ) | $ | (43,509 | ) | $ | 7,211 |   | $ | 7,211 |   | $ | 6,591 |   | $ | 6,591 |   |
| Weighted average shares outstanding                                           |       | 15,126,078                                                             |       | 15,126,078 |   | 15,117,871 |   | 15,117,871 |   | 13,934,631 |   | 13,934,631 |   |
| Effect of dilutive securities:                                                |       |                                                                   |       |   |   |   |   |   |   |   |   |   |   |
| Common stock equivalents                                                      |       | —                                                                 |       | — |   | — |   | 226,283 |   | — |   | 338,155 |   |
| Unvested stock awards                                                         |       | —                                                                 |       | — |   | — |   | 6,705 |   | — |   | 18,915 |   |
| Adjusted weighted average shares used  in earnings per share calculation |       | 15,126,078                                                             |       | 15,126,078 |   | 15,117,871 |   | 15,350,859 |   | 13,934,631 |   | 14,291,701 |   |
| (Loss) / Earnings per share                                                   |       | $                                                                      | (2.88      | ) | $ | (2.88 | ) | $ | 0.48 |   | $ | 0.47 |   | $ | 0.47 |   | $ | 0.46 |   |

 

The Companyhad 625,871 anti-dilutive shares at June 30, 2008.

 

**7.****                                      InvestmentSecurities**

 

HTM and AFSinvestment securities at June 30, 2008 and 2007 consisted of thefollowing:

 
| ** **                                      | ** ** | **June 30, 2008**          | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **Amortized  cost**                  | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Investment securities held to maturity:         |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed securities:                     |       |                                 |       |   |   |   |   |   |   |
| FNMA                                            |       | $                                    | 13,507     |   | $ | 130 |   | $ | (144 | ) | $ | 13,493 |   |
| FHLMC                                           |       | 9,525                                |       | — |   | (155 | ) | 9,370 |   |
| CMOs                                            |       | 52,749                               |       | — |   | (1,998 | ) | 50,751 |   |
| Total investment securities held to  maturity   |       | 75,781                               |       | 130 |   | (2,297 | ) | 73,614 |   |
| Investment securities available for sale:       |       |                                 |       |   |   |   |   |   |   |
| US government agency securities                 |       | 24,330                               |       | 55 |   | (335 | ) | 24,050 |   |
| Municipal bonds                                 |       | 27,129                               |       | 86 |   | (1,477 | ) | 25,738 |   |
| Mortgage-backed securities:                     |       |                                 |       |   |   |   |   |   |   |
| FNMA                                            |       | 63,011                               |       | 101 |   | (1,451 | ) | 61,661 |   |
| GNMA                                            |       | 1,983                                |       | — |   | (63 | ) | 1,920 |   |
| FHLMC                                           |       | 27,867                               |       | 63 |   | (421 | ) | 27,509 |   |
| CMOs                                            |       | 12,802                               |       | 1 |   | (947 | ) | 11,856 |   |
| Corporate debt securities                       |       | 20,586                               |       | 34 |   | (2,260 | ) | 18,360 |   |
| Equity securities                               |       | 10,227                               |       | 23 |   | (82 | ) | 10,168 |   |
| Total investment securities available for  sale |       | 187,935                              |       | 363 |   | (7,036 | ) | 181,262 |   |
| Total investment securities                     |       | $                                    | 263,716    |   | $ | 493 |   | $ | (9,333 | ) | $ | 254,876 |   |

 

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| ** **                                      | ** ** | **June 30, 2007**          | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **Amortized  cost**                  | ** ** | **Unrealized  gains** | ** ** | **Unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Investment securities 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 investment securities held to  maturity   |       | 88,363                               |       | 4 |   | (1,879 | ) | 86,488 |   |
| Investment securities 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 |   |
| CMOs                                            |       | 22,080                               |       | 20 |   | (331 | ) | 21,769 |   |
| Corporate debt securities                       |       | 19,978                               |       | 73 |   | (625 | ) | 19,426 |   |
| Equity securities                               |       | 11,464                               |       | 69 |   | (371 | ) | 11,162 |   |
| Total investment securities available for  sale |       | 193,232                              |       | 224 |   | (5,117 | ) | 188,339 |   |
| Total investment securities                     |       | $                                    | 281,595    |   | $ | 228 |   | $ | (6,996 | ) | $ | 274,827 |   |

 

Proceeds fromthe sales of investment securities AFS for the years ended June 30, 2008,2007 and 2006 were $76.8 million, $47.8 million, and $103.3 million,respectively. Gross gains of $198 thousand, $279 thousand and $533 thousandwere realized in fiscal 2008, 2007, and 2006, respectively. There were grosslosses of $0, $51 thousand and $1.5 million for fiscal 2008, 2007 and 2006,respectively. Additionally, there were no recognized losses in fiscal 2007 and2006 resulting from other-than-temporary declines in values of certain equitysecurities; however, in fiscal 2008, the Company recorded an impairment chargeof approximately $1.9 million related to the holding of certain debtsecurities, mutual funds, and common stock on two Pennsylvania financialinstitutions and another financial services related equity security.

 

At June 30,2008, investment securities with a total carrying value of $85.7 million areheld as collateral for the Company’s reverse repurchase arrangements. Accruedinterest receivable on investment securities amounted to $1.7 million and$1.5 million at June 30, 2008 and 2007, respectively.

 

The amortizedcost and estimated fair value of investment securities HTM and AFS at June 30,2008, 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                |       | $                                    | —     |                                                              | $          | 7,424                                                               |       | $                                                                    | 1,973      |      | $          | 14,653 |   | $ | 24,050 |   |
| Mortgage-backed securities and CMOs            |       | 1,291                                |       | 4,497                                                             |       | 25,750                                                              |       | 145,022                                                              |       | 176,560   |       |
| Municipal bonds                                |       | 343                                  |       | 1,171                                                             |       | 1,709                                                               |       | 22,515                                                               |       | 25,738    |       |
| Corporate bonds                                |       | —                               |       | —                                                            |       | 1,208                                                               |       | 17,152                                                               |       | 18,360    |       |
| Equity securities                              |       | —                               |       | —                                                            |       | —                                                              |       | 10,168                                                               |       | 10,168    |       |
| Total investment securities at fair value      |       | $                                    | 1,634      |                                                              | $          | 13,092                                                              |       | $                                                                    | 30,640     |      | $          | 209,510 |   | $ | 254,876 |   |
|                                           |       |                                 |       |                                                              |       |                                                                |       |                                                                 |       |      |       |
| Total investment securities at amortized  cost |       | $                                    | 1,633      |                                                              | $          | 13,108                                                              |       | $                                                                    | 31,309     |      | $          | 217,666 |   | $ | 263,716 |   |

 

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The Companymust maintain ownership of specified amounts of stock as a member of the FHLB.The Company’s ownership of FHLB stock was $15.8 million and $11.4 million as ofJune 30, 2008 and 2007, respectively.

 

Formortgage-backed securities, expected maturities will differ from contractualmaturities because borrowers may have the right to prepay the obligation. Ofthe Company’s $24.1 million of U.S. Government agency securities at June 30,2008, none are callable within one year.

 

As describedin Note 12, certain investment securities AFS are maintained tocollateralize advances from the FHLB. Provided below is a summary of investmentsecurities classified as HTM and AFS, which were in an unrealized loss positionat June 30, 2008 and 2007. Approximately $2.2 million, or 23.8%, of theunrealized loss at June 30, 2008 was comprised of securities in acontinuous loss position for twelve months or more, which included certainequity securities. Approximately $3.4 million, or 66.0%, of the unrealized lossat June 30, 2007 was comprised of securities in a continuous loss positionfor twelve months or more, which included certain equity securities.

 
| ** **                                      | ** ** | **June 30, 2008**          | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **Under One Year**         | ** ** | **One Year or More** | ** ** |
| ** **                                      | ** ** | **Estimated  Fair Value**       | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| ** **                                      | ** ** | **(Dollars in thousands)** | ** ** |
| Investment securities held to maturity:         |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed securities:                     |       |                                 |       |   |   |   |   |   |   |
| FNMA                                            |       | $                                    | 6,777      |   | $ | (144 | ) | $ | — |   | $ | — |   |
| FHLMC                                           |       | 9,370                                |       | (155 | ) | — |   | — |   |
| CMOs                                            |       | 34,988                               |       | (887 | ) | 15,763 |   | (1,111 | ) |
| Total investment securities held to  maturity   |       | 51,135                               |       | (1,186 | ) | 15,763 |   | (1,111 | ) |
| Investment securities available for sale:       |       |                                 |       |   |   |   |   |   |   |
| US government agency securities                 |       | 12,722                               |       | (192 | ) | 4,351 |   | (143 | ) |
| Mortgage-backed securities:                     |       |                                 |       |   |   |   |   |   |   |
| FNMA                                            |       | 47,466                               |       | (1,353 | ) | 6,728 |   | (98 | ) |
| GNMA                                            |       | 1,920                                |       | (63 | ) | — |   | — |   |
| FHLMC                                           |       | 19,996                               |       | (400 | ) | 1,527 |   | (21 | ) |
| CMOs                                            |       | 10,100                               |       | (834 | ) | 1,390 |   | (113 | ) |
| Corporate debt securities                       |       | 7,055                                |       | (1,456 | ) | 7,148 |   | (804 | ) |
| Municipal bonds                                 |       | 16,914                               |       | (1,477 | ) | — |   | — |   |
| Equity securities                               |       | 1,941                                |       | (82 | ) | — |   | — |   |
| Total investment securities available for  sale |       | 118,114                              |       | (5,857 | ) | 21,144 |   | (1,179 | ) |
| Total investment securities                     |       | $                                    | 169,249    |   | $ | (7,043 | ) | $ | 36,907 |   | $ | (2,290 | ) |

 
| ** **                                      | ** ** | **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)** | ** ** |
| Investment securities held to maturity:         |       |                                 |       |   |   |   |   |   |   |
| Mortgage-backed securities:                     |       |                                 |       |   |   |   |   |   |   |
| FNMA                                            |       | $                                    | —     |   | $ | — |   | $ | 15,007 |   | $ | (414 | ) |
| FHLMC                                           |       | —                               |       | — |   | 11,384 |   | (455 | ) |
| CMOs                                            |       | —                               |       | — |   | 59,261 |   | (1,010 | ) |
| Total investment securities held to  maturity   |       | —                               |       | — |   | 85,652 |   | (1,879 | ) |
| Investment securities 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 investment securities available for  sale |       | 51,481                               |       | (1,742 | ) | 110,019 |   | (3,375 | ) |
| Total investment securities                     |       | $                                    | 51,481     |   | $ | (1,742 | ) | $ | 195,671 |   | $ | (5,254 | ) |

 

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Securities are evaluated periodically to determine whether a decline intheir fair value is other-than-temporary. Management utilizes criteria such asthe magnitude and duration of the decline, in addition to the reasonsunderlying the decline, to determine whether the loss in value isother-than-temporary. The term “other-than-temporary” is not included toindicate that the decline is permanent, but indicates that 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 through a charge toearnings in the statement of operations. Based upon an evaluation performed asof June 30, 2008, the Company recorded impairment charges of approximately$1.9 million for the year ended June 30, 2008 related to the holding ofcertain debt securities, mutual funds, and common stock on two Pennsylvaniafinancial institutions and another financial services related equity security.

 

For the remaining unrealized loss not considered other-than-temporarilyimpaired, the Company has both the ability and intent to hold fixed incomesecurities until such time as the value recovers or the security matures andfor the equity securities management believes that, other than theaforementioned impairment charge, the unrealized losses are temporary andoverall not significant to the value of equity securities and thereforebelieves that the above individual unrealized losses at June 30, 2008 arenot other-than-temporary impairments.

 

**8.****                                      LoanPortfolio**

 

Informationabout the Bank’s loans receivable is presented below as of and for the periodsindicated:

 
| ** **                                              | ** ** | **June 30, 2008**          | ** ** | **June 30, 2007** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | **(Dollars in thousands)** | ** ** |
| Real estate loans:                                      |       |                                 |       |                        |       |
| Single-family residential                               |       | $                                    | 240,659    |                        | $          | 273,247 |   |
| Commercial real estate and multi-family  residential    |       | 338,037                              |       | 316,099                     |       |
| Construction                                            |       | 90,848                               |       | 93,180                      |       |
| Home equity                                             |       | 335,420                              |       | 272,295                     |       |
| Total real estate loans                                 |       | 1,004,964                            |       | 954,821                     |       |
| Consumer loans                                          |       | 3,598                                |       | 3,917                       |       |
| Commercial business loans                               |       | 142,258                              |       | 88,274                      |       |
| Total loans receivable                                  |       | 1,150,820                            |       | 1,047,012                   |       |
| Allowance for loan losses                               |       | (14,793                              | )          | (12,210                     | )          |
| Deferred net loan origination fees and  other discounts |       | 812                                  |       | 491                         |       |
| Loans receivable, net                                   |       | $                                    | 1,136,839  |                        | $          | 1,035,293 |   |

 

Included inloans receivable are loans on non-accrual status in the amounts of $10.9million, $3.9 million and $15.5 million at June 30, 2008, 2007 and2006, respectively. Interest income that would have been recognized on suchnon-accrual loans during the years ended June 30, 2008, 2007 and 2006, hadthey been current in accordance with their original terms, was $765 thousand,$224 thousand, and $1.4 million, respectively. There were no loans that were 90days or more delinquent for which the Company continued to accrue interest at June 30,2008.

 

As of June 30,2008, 2007 and 2006, the Company had impaired loans with a total recordedinvestment of $829 thousand, $1.4 million, and $12.8 million, respectively.Average impaired loans were $1.0 million, $7.0 million and$5.0 million for the years ended June 30, 2008, 2007 and 2006,respectively. Cash of $242 thousand, $116 thousand and $281 thousand wascollected on these impaired loans during the years ended June 30, 2008,2007 and 2006, respectively. Interest income of $19 thousand, $0 and $196thousand was recognized on such loans during the years ended June 30,2008, 2007 and 2006, respectively. As of June 30, 2008, 2007 and 2006,there were no recorded investments in impaired loans for which there was arelated specific allowance for credit losses.

 

The followingis a summary of the activity in the allowance for loan losses for the yearsended June 30, 2008, 2007 and 2006:

 
| ** **                             | ** ** | **For the year ended June 30,** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)**                     | ** ** |
| Balance at the beginning of the period |       | $                                                        | 12,210     |   | $ | 16,737 |   | $ | 6,113 |   |
| Plus: Provisions for loan losses       |       | 3,173                                                    |       | 653 |   | 3,380 |   |
| Less charge-offs for:                  |       |                                                     |       |   |   |   |   |
| Real estate loans                      |       | (82                                                      | )          | (76 | ) | (24 | ) |
| Consumer loans                         |       | (517                                                     | )          | (277 | ) | (237 | ) |
| Commercial real estate loans           |       | —                                                   |       | (1,848 | ) | — |   |
| Commercial business loans              |       | (87                                                      | )          | (3,185 | ) | (47 | ) |
| Total charge-offs                      |       | (686                                                     | )          | (5,386 | ) | (308 | ) |
| Plus: Recoveries                       |       | 96                                                       |       | 206 |   | 615 |   |
| Allowance acquired in the Merger       |       | —                                                   |       | — |   | 6,937 |   |
| Balance at the end of the period       |       | $                                                        | 14,793     |   | $ | 12,210 |   | $ | 16,737 |   |

 

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**9.****             Goodwilland Other Intangible Assets**

 

The Companyrecorded goodwill of $959 thousand during fiscal 2008 relating to theacquisition of Carnegie, $1.0 million during fiscal 2007 related to theacquisition of BeneServ and $93.7 million in 2006 that resulted from theMerger. The remaining goodwill balance, which approximates $836 thousand at June 30,2008, relates to a branch acquisition in 1994. The net other intangible balanceof $14.6 million at June 30, 2008 primarily resulted from the acquisitionof Chester Valley Bancorp as well as the customer intangibles from theacquisition of BeneServ and Carnegie. The amortization expense of the otherintangible assets for the fiscal year ended June 30, 2008 was $2.3 million.

 

The estimatedaggregate amortization expense related to other intangible assets for each ofthe five succeeding calendar years is:

 
| **Year ending** | ** ** | **(Dollars in  thousands)** | ** ** |
|----------------------|------------|----------------------------------|------------|
| June 30, 2009   |       | $                                | 2,285      |   |
| June 30, 2010   |       | 2,108                            |       |
| June 30, 2011   |       | 1,930                            |       |
| June 30, 2012   |       | 1,752                            |       |
| June 30, 2013   |       | 1,574                            |       |
|                 |       | $                                | 9,649      |   |

 

The Company follows the provisions of SFAS No. 142, “Goodwill andOther Intangibles,” and performs an annual impairment test of goodwill.However, when circumstances indicate that an event has occurred during aninterim period, the Company will perform an impairment test at that time. TheCompany determined that such an event occurred during the quarter ended December 31,2007.

 

During this period, conditions in the housing market continued todeteriorate resulting in a tightening of available credit in the marketplace.Additionally, several companies that specialized in sub-prime lending declaredbankruptcy. These market conditions and related concerns surrounding creditcaused valuations for thrifts and other financial institutions to decreasesignificantly during the quarter ended December 31, 2007. The market priceof the Company’s stock declined from $12.43 on October 1, 2007 to $8.39 atDecember 31, 2007.

 

As a result of the above conditions, the Company completed an interimimpairment test of goodwill. The review encompasses a two-step process. Thefirst step requires the Company to identify the reporting units and compare thefair value of each reporting unit, which an earnings multiple approach andvarious transaction market approaches are used in the computation. Valuationswere performed for each of the Company’s three reporting units. The Company’scompletion of Step 1 indicated that impairment may exist in the Banking unitand therefore the Company completed the second step. In the second step, theimplied fair value of goodwill is calculated as the excess of the fair value ofthe reporting unit over the fair values assigned to its assets and liabilities.As a result of this impairment test, the Company recorded an impairment chargeof $40.0 million related to its Banking unit for the quarter ended December 31,2007. The impairment charge had no impact on the Company’s or the Bank’stangible capital nor did it impact the Company’s tangible book value per share.Additionally, this impairment charge did not result from deterioration in theCompany’s core deposit intangible.  TheCompany performed an additional impairment evaluation at June 30, 2008 andconcluded that no additional impairment had occurred from the date of theprevious assessment.

 

**10.****                               Propertyand Equipment**

 

Property andequipment by major classification are summarized as follows:

 
| ** **                        | ** ** | ** **                | ** ** | **For the year ended  June 30,** | ** ** |
|-----------------------------------|------------|---------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **Depreciable life** | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                        | ** ** | ** **                | ** ** | **(Dollars in thousands)**                 | ** ** |
| Land                              |       |                      |       | $                                                    | 1,129      |   | $ | 1,129 |   |
| Buildings                         |       | 15 to 40 years       |       | 8,680                                                |       | 6,849 |   |
| Furniture, fixtures and equipment |       | 3 to 7 years         |       | 10,982                                               |       | 10,806 |   |
| Total                             |       |                      |       | 20,791                                               |       | 18,784 |   |
| Accumulated depreciation          |       |                      |       | (10,379                                              | )          | (7,477 | ) |
| Property and equipment, net       |       |                      |       | $                                                    | 10,412     |   | $ | 11,307 |   |

 

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Depreciationexpense for the years ended June 30, 2008, 2007 and 2006 amounted to $3.0million, $2.6 million and $1.8 million, respectively.

 

In February 2006,the Bank completed a sale-leaseback of eight of its branch officers resultingin the receipt of approximately $11.1 million in cash and an excess over bookvalue of approximately $722 thousand. The premium attributed to the former FFBbranches of $194 thousand reduced goodwill while the balance of such premium of$528 thousand is deferred and amortized as a reduction of rent expense over theterm of the leases.

 

**11.****                               Deposits**

 

Depositbalances consisted of the following at June 30, 2008, and 2007:

 
| ** **                             | ** ** | **June 30, 2008**          | ** ** | **June 30, 2007** | ** ** |
|----------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **Amount**                           | ** ** | **Percent of  total**  | ** ** | **Amount** | ** ** | **Percent of  total** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** | ** ** |
| Savings accounts                       |       | $                                    | 80,982     |                        | 8.1        | % | $ | 87,565 |   | 8.0 | % |
| Money market deposit accounts          |       | 408,990                              |       | 40.8                        |       | 403,487 |   | 36.9 |   |
| Certificates less than $100,000        |       | 192,484                              |       | 19.2                        |       | 239,967 |   | 22.0 |   |
| Certificates $100,000 and greater      |       | 57,048                               |       | 5.7                         |       | 94,705 |   | 8.7 |   |
| Interest-bearing checking accounts     |       | 132,936                              |       | 13.2                        |       | 125,905 |   | 11.5 |   |
| Non-interest bearing checking accounts |       | 130,438                              |       | 13.0                        |       | 141,101 |   | 12.9 |   |
| Total deposits                         |       | $                                    | 1,002,878  |                        | 100.0      | % | $ | 1,092,730 |   | 100.0 | % |

 

Whilecertificates are frequently renewed at maturity rather than paid out, a summaryof certificates by contractual maturity and rate at June 30, 2008 is asfollows:

 
| ** **               | ** ** | **Amounts maturing in**    | ** ** |
|--------------------------|------------|--------------------------------------|------------|
| **Interest rates:** | ** ** | **Six months  or less**    | ** ** | **Over six  months  through one  year** | ** ** | **Over one  year through  two years** | ** ** | **Over two  years through  three years** | ** ** | **Over three  years** | ** ** |
| ** **               | ** ** | **(Dollars in thousands)** | ** ** |
| 0.00% to 2.99%           |       | $                                    | 30,871     |   | $ | 26,666 |   | $ | 7,650 |   | $ | 1,401 |   | $ | 1,135 |   |
| 3.00% to 3.99%           |       | 10,311                               |       | 25,536 |   | 7,898 |   | 866 |   | 931 |   |
| 4.00% to 4.99%           |       | 53,353                               |       | 29,804 |   | 30,063 |   | 3,728 |   | 4,532 |   |
| 5.00% to 5.99%           |       | 8,454                                |       | 1,888 |   | 2,945 |   | 141 |   | 712 |   |
| 6.00% and over           |       | 38                                   |       | 5 |   | 327 |   | 149 |   | 128 |   |
| Total                    |       | $                                    | 103,027    |   | $ | 83,899 |   | $ | 48,883 |   | $ | 6,285 |   | $ | 7,438 |   |

 

As of June 30, 2008, contractualmaturities of certificates of deposit were:

 
| **Year ending** | ** ** | **(Dollars in thousands)** | ** ** |
|----------------------|------------|--------------------------------------|------------|
| June 30, 2009   |       | $                                    | 186,926    |   |
| June 30, 2010   |       | 48,883                               |       |
| June 30, 2011   |       | 6,285                                |       |
| June 30, 2012   |       | 3,834                                |       |
| June 30, 2013   |       | 2,368                                |       |
| Thereafter           |       | 1,236                                |       |
|                 |       | $                                    | 249,532    |   |

 

Interestexpense on deposits for the years ended June 30, 2008, 2007 and 2006consisted of the following:

 
| ** **             | ** ** | **For the year ended June 30,** | ** ** |
|------------------------|------------|----------------------------------------------------------|------------|
| ** **             | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **             | ** ** | **(Dollars in thousands)**                     | ** ** |
| Savings accounts       |       | $                                                        | 14,419     |   | $ | 15,460 |   | $ | 6,808 |   |
| Checking accounts      |       | 452                                                      |       | 349 |   | 1,962 |   |
| Certificates           |       | 13,349                                                   |       | 12,889 |   | 9,706 |   |
| Total interest expense |       | $                                                        | 28,220     |   | $ | 28,698 |   | $ | 18,476 |   |

 

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**12.****                               FederalHome Loan Bank Advances**

 

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

 

At June 30,2008, the Company’s FHLB advances have contractual maturities as follows:

 
| ** **         | ** ** | **Amount  outstanding**              | ** ** | **Weighted  average rate** | ** ** |
|--------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **(dollars in thousands)** | ** ** |
| Due by:            |       |                                 |       |                            |       |
| June 30, 2009 |       | $                                    | 24,696     |                            | 4.0        | % |
| June 30, 2010 |       | 24,724                               |       | 3.9                             |       |
| June 30, 2011 |       | 37,127                               |       | 4.7                             |       |
| June 30, 2012 |       | 48,969                               |       | 3.6                             |       |
| June 30, 2013 |       | 54,937                               |       | 3.3                             |       |
| Thereafter         |       | 120,975                              |       | 3.6                             |       |
| Total              |       | $                                    | 311,428    |                            | 3.8        | % |

 

At June 30,2008, $242.5 million of the above advances were callable at the directionof the FHLB within certain parameters, of which $192.5 million could becalled within one year. Included in the $192.5 million are $47.5 million inadvances which could only be called if an index reaches a certain strike rate.At June 30, 2008, these advances were between approximately 2.13 % and4.25% from the strike rate.

 

**13.****                               TrustPreferred Securities and Other Borrowings**

 

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

 

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

 

The Bankutilizes outside borrowings to supplement its funding needs. At June 30,2008, the Bank had $75.0 million outstanding in repurchase agreements with aweighted average interest rate of 4.01%. The underlying securitiescollateralizing these repurchase agreements had a market value of $85.7 millionat June 30, 2008. In addition, the Company had $1.5 million in securedborrowings at June 30, 2008 related to certain commercial business loanrelationships.

 

**14.****                               CapitalStock**

 

On July 24,2007, the Company declared a cash dividend on its common stock of $0.115 pershare, paid on August 24, 2007, to owners of record on August 10,2007. On October 23, 2007, the Company declared a cash dividend on itscommon stock of $0.115 per share, paid on November 23, 2007, to owners ofrecord on November 9, 2007. On February 11, 2008, the Companydeclared a cash dividend on its common stock of $0.115 per share, paid on February 29,2008, to owners of record on February 22, 2008. On May 21, 2008, theCompany declared a cash dividend on its common stock of $0.115 per share, paidon May 29, 2008, to shareholders of record on May 22, 2008.

 

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**15.****          IncomeTaxes**

 

Income tax expense (benefit) for the years ended June 30, 2008,2007 and 2006 consisted of the following:

 
| ** **                            | ** ** | ** ** | ** ** | **Current**                          | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|------------|------------|--------------------------------------|------------|--------------|------------|-----------|------------|
| ** **                            | ** ** | ** ** | ** ** | **(Dollars in thousands)** | ** ** |
| For the year ended June 30, 2008 |       | Federal    |       | $                                    | 567        |         | $          | (2,780    | )          | $ | (2,213 | ) |
|                                  |       | State      |       | 85                                   |       | —       |       | 85        |       |
|                                  |       | Total      |       | $                                    | 652        |         | $          | (2,780    | )          | $ | (2,128 | ) |
| For the year ended June 30, 2007 |       | Federal    |       | $                                    | 1,150      |         | $          | 1,718     |       | $ | 2,868 |   |
|                                  |       | State      |       | 18                                   |       | —       |       | 18        |       |
|                                  |       | Total      |       | $                                    | 1,168      |         | $          | 1,718     |       | $ | 2,886 |   |
| For the year ended June 30, 2006 |       | Federal    |       | $                                    | 697        |         | $          | 2,289     |       | $ | 2,986 |   |
|                                  |       | State      |       | 24                                   |       | —       |       | 24        |       |
|                                  |       | Total      |       | $                                    | 721        |         | $          | 2,289     |       | $ | 3,010 |   |

 

The expense (benefit) for income taxes differed from that computed atthe statutory federal corporate rate for the years ended June 30, 2008,2007 and 2006 as follows:

 
| ** **                            | ** ** | **For the year ended June 30,** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                            | ** ** | **Amount**                                               | ** ** | **Percent of  pretax  loss** | ** ** | **Amount** | ** ** | **Percent of  pretax  income** | ** ** | **Amount** | ** ** | **Percent of  pretax  income** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands)**                     | ** ** |
| At statutory rate                     |       | $                                                        | (15,505    | ) | 34.0 | % | $ | 3,554 |   | 35.0 | % | $ | 3,387 |   | 35.0 | % |
| State tax, net of federal tax benefit |       | 56                                                       |       | (0.1 | ) | 12 |   | 0.1 |   | 15 |   | 0.2 |   |
| Low income housing credits            |       | (183                                                     | )          | 0.4 |   | (162 | ) | (1.6 | ) | (154 | ) | (1.6 | ) |
| Tax-exempt interest                   |       | (676                                                     | )          | 1.5 |   | (601 | ) | (5.9 | ) | (269 | ) | (2.8 | ) |
| Meals and entertainment               |       | 14                                                       |       | 0.0 |   | 11 |   | 0.1 |   | 6 |   | 0.1 |   |
| BOLI                                  |       | (163                                                     | )          | 0.4 |   | (152 | ) | (1.5 | ) | (130 | ) | (1.3 | ) |
| Dividends on ESOP shares              |       | (63                                                      | )          | 0.1 |   | (93 | ) | (0.9 | ) | (106 | ) | (1.1 | ) |
| ESOP compensation expense             |       | 91                                                       |       | (0.2 | ) | 138 |   | 1.4 |   | 174 |   | 1.8 |   |
| Change in statutory federal tax rate  |       | 108                                                      |       | (0.3 | ) | — |   | — |   | (93 | ) | (1.0 | ) |
| Goodwill impairment                   |       | 13,600                                                   |       | (29.8 | ) | — |   | — |   | — |   | — |   |
| HNC transaction costs                 |       | 80                                                       |       | (0.2 | ) | — |   | — |   | — |   | — |   |
| Valuation allowance                   |       | 354                                                      |       | (0.8 | ) | — |   | — |   | — |   | — |   |
| Other                                 |       | 159                                                      |       | (0.3 | ) | 179 |   | 1.7 |   | 180 |   | 1.8 |   |
| Income tax (benefit) expense          |       | $                                                        | (2,128     | ) | 4.7 | % | $ | 2,886 |   | 28.4 | % | $ | 3,010 |   | 31.1 | % |

 

Significant deferred tax assets and liabilities included in otherassets and liabilities of the Company as of June 30, 2008 and 2007 are asfollows:

 
| ** **                                                   | ** ** | **June 30,**                    | ** ** |
|--------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Deferred loan fees                                           |       | $                                    | 81         |   | $ | 84 |   |
| Retirement plan reserves                                     |       | 473                                  |       | 488 |   |
| Employee benefits                                            |       | 180                                  |       | 234 |   |
| Uncollected interest                                         |       | 260                                  |       | 78 |   |
| Book bad debt reserves                                       |       | 5,030                                |       | 4,274 |   |
| Unrealized loss on investment securities  available for sale |       | 2,270                                |       | 1,712 |   |
| Investment impairment                                        |       | 1,060                                |       | 1,360 |   |
| Investment in joint venture                                  |       | 190                                  |       | 236 |   |
| Loan discounts                                               |       | 40                                   |       | 66 |   |
| Sale/Leaseback                                               |       | 184                                  |       | 159 |   |
| Purchase accounting fair value adjustments                   |       | 77                                   |       | 88 |   |
| Securities write-downs                                       |       | 313                                  |       | — |   |
| Money market fee reserves                                    |       | 322                                  |       | — |   |
| Net operating loss carryover                                 |       | 616                                  |       | — |   |
| Charitable contribution carryover                            |       | 67                                   |       | — |   |
| Low income housing credit carryover                          |       | 1,103                                |       | 686 |   |
| AMT credit carryover                                         |       | 876                                  |       | 691 |   |
| Other, net                                                   |       | 247                                  |       | 222 |   |
| Gross deferred tax assets                                    |       | 13,389                               |       | 10,378 |   |
| Valuation allowance                                          |       | (354                                 | )          | — |   |
| Gross deferred tax assets, net of valuation  allowance       |       | 13,035                               |       | 10,378 |   |
| Intangible asset amortization                                |       | (2,463                               | )          | (3,022 | ) |
| Depreciation                                                 |       | (293                                 | )          | (372 | ) |
| Other                                                        |       | (56                                  | )          | (99 | ) |
| Gross deferred tax liabilities                               |       | (2,812                               | )          | (3,493 | ) |
| Net tax deferred asset                                       |       | $                                    | 10,223     |   | $ | 6,885 |   |

 

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The realizability of deferred tax assets is dependent upon a variety offactors, including the generation of future taxable income, the existence oftaxes paid and recoverable, the reversal of deferred tax liabilities and taxplanning strategies. Based upon these and other factors, management believes itis more likely than not that the Company will realize the benefits of thesedeferred tax assets.

 

AtJune 30, 2008, the Company had a gross operating loss carryforward forU.S. federal income tax purposes of $1.8 million that expires in2028.  The Company believes that all of its federal net operating losscarryforward, tax credits and a majority of the deferred tax assets are morelikely than not to be recovered. The remaining deferred tax assets are offsetby a valuation allowance of $354 thousand and $0 at June 30, 2008 and2007, respectively.  The valuation allowance for the year ended June 30,2008 of $354 thousand relates entirely to unrealized capital losses that theCompany believes are not more likely than not to be recovered.

 

At June 30, 2008, the Company had $1.1 million in low incomehousing tax credit carry-forwards. These carry-forwards expire after June 30,2026 if not utilized. In addition, the Company has $876 thousand of alternativeminimum tax credit carry-forwards that have an indefinite life.

 

The Small Business Job Protection Act of 1996 (the “1996 Act”)eliminated the use of the reserve method of accounting for bad debt reserves bysavings institutions, effective for taxable years beginning after 1995. Priorto the 1996 Act, bad debt reserves created prior to January 1, 1988 weresubject to recapture into taxable income if the Bank failed to meet certainthrift asset and definitional tests. New federal legislation eliminated thesethrift related recapture rules. However, under current law, pre-1988 reservesremain subject to recapture should the Bank make certain non-dividenddistributions or ceases to maintain a bank charter.

 

At June 30, 2008, the Bank’s total federal pre-1988 tax bad debtreserve was approximately $8.9 million. The reserve reflects thecumulative effects of federal tax deductions for which no federal income taxprovisions have been made.

 

Effective July 1, 2007, the Company adopted FinancialInterpretation No. 48, “Accounting for Uncertainty in Income Taxes-aninterpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 providesguidance on financial statement recognition and measurement of a tax positiontaken or expected to be taken in a tax return. According to FIN 48, a taxposition is recognized if it is more-likely-than-not that the tax position willbe sustained upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position. If the taxposition meets the more-likely-than-not recognition threshold, the position ismeasured to determine the amount of benefit to recognize and should be measuredat the largest amount of benefit that is greater than 50 percent likely ofbeing realized upon ultimate settlement. FIN 48 also provides guidance onde-recognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. As of June 30, 2008, the Company hadno material unrecognized tax benefits, accrued interest or penalties. Penalties are recorded in non-interest expense in the year they are assessedand are treated as a non-deductible expense for tax purposes. Interest isrecorded in non-interest expense in the year it is assessed and is treated as adeductible expense for tax purposes. As of June 30, 2008, tax years 2005through 2007 remain subject to Federal examination as well as examination bystate taxing jurisdictions.

 

**16.****                              BenefitPlans**

 

*Employee Stock Ownership Plan / 401(k) Plan*

 

The Bank’s benefit plans cover all eligible employees and permits themto make certain contributions to their 401(k) accounts in the plan on a pretaxbasis. Effective January 1, 2006, employees are permitted to contribute upto 25% of their salary to this plan. The Company matches every dollarcontributed up to 4% of salary, plus 50% of the amount of an employee’s salaryreductions in excess of 4% of salary, but not in excess of 6% of salary. Theexpense related to the 401(k) portion of this plan was $773 thousand, $628thousand, and $255 thousand for the years ended June 30, 2008, 2007, and2006, respectively.

 

On December 23, 1998, the Company adopted an Employee StockOwnership Plan (“ESOP”). The ESOP borrowed $1.8 million from the Companyand used the funds to purchase 429,207 shares (179,270 shares pre-exchange) ofthe Company’s common stock. The loan has an interest rate of 7.75% and has anamortization schedule of 15 years. In April 2002, an additional ESOPloan was made of $5.1 million to purchase an additional 538,787 shares ofthe Company’s common stock issued in its “second step” reorganization. Thisloan has an interest rate of 4.75% and an amortization schedule of15 years. Shares purchased are held in a suspense account for allocationamong the participants as the loans are repaid. Effective January 31,2000, the Company merged the 401(k) Plan and ESOP. Contributions to theESOP portion of the 401(k)/ESOP and shares released from the loan collateralwill be in an amount proportional to repayment of the original ESOP loans.Shares are allocated to participants based on compensation as described in the401(k)/ESOP Plan Documents, in the year of allocation. At June 30, 2008,there were 496,323 ESOP shares allocated to participants, representing a fairvalue of $4.0 million, in addition, there were 64,533 shares committed to bereleased. The 

 

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Company recorded compensation expense of $618thousand, $890 thousand and $955 thousand for the ESOP for the years endedJune 30, 2008, 2007 and 2006, respectively.

 

*Supplemental Retirement Plans*

 

Effective June 30, 1998, the Company adopted non-qualifiedsupplemental retirement plans for the Company’s Board of Directors (the “Directors’Plan”) and for the Company’s former president (the “President’s Plan”). TheDirectors’ Plan provided for fixed annual payments to qualified directors for aperiod of ten years from retirement. Benefits to be paid accrued at the rate of20% per year on completion of six full years of service, with full benefitaccrual at ten years of service. At the time these plans were adopted creditwas given for past service. The President’s Plan provides for payments for aperiod of ten years beginning at retirement based on a percentage of annualcompensation not to exceed an established cap. Full benefits become accrued atage 68 with partial vesting prior thereto. Both plans provide for fullpayments 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 accruedliability of the Directors’ Plan and the President’s Plan were $784 thousandand $608 thousand, and $801 thousand and $648 thousand at June 30,2008 and 2007, respectively. Effective in fiscal year 2008, the Companymaintains a Supplemental Executive Retirement Plan for certain executives. Theaccrued liability of this plan was $307 thousand at June 30, 2008.

 

In November 2005, the Company terminated its Directors RetirementPlan and the Directors Incentive Compensation Plan, at which time the directorsbecame fully vested in their accrued benefit as of October 31, 2005, underthe Directors Retirement Plan. The Company’s former President has retired andis fully vested in the President’s Plan.

 

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

 

At June 30, 2008 and 2007, the Company was committed to fund loansas follows:

 
| ** **                         | ** ** | **June 30,**                    | ** ** |
|------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| Loans with fixed interest rates    |       | $                                    | 23,985     |   | $ | 21,316 |   |
| Loans with variable interest rates |       | 12,371                               |       | 6,041 |   |
| Total commitments to fund loans    |       | $                                    | 36,356     |   | $ | 27,357 |   |

 

**Financial Instruments With Off-Balance SheetRisk**

 

The Company is a party to financial instruments with off-balance-sheetrisk in the normal course of business to meet the financing needs of itscustomers. These financial instruments include commitments to extend credit andstandby letters of credit. Those instruments involve, to varying degrees,elements of credit risk in excess of the amount recognized in the balancesheet. The Company’s exposure to credit loss in the event of non-performance bythe other party to the financial instrument for commitments to extend creditand standby letters of credit is represented by the contractual notional amountof those instruments. The Company uses the same credit policies in makingcommitments and conditional obligations as it does for on-balance-sheetinstruments. At June 30, 2008 and June 30, 2007, respectively, theCompany was committed to the funding of first single family residential realestate loans of $31.8 million and $15.3 million, respectively, constructionloans of $58.8 million and $48.7 million, respectively, commercial real estateloans of $4.0 million and $1.8 million, respectively, lines of credit of $172.7million and $164.8 million, respectively, and standby letters of credit of$10.9 million and $16.8 million, respectively.

 

**Guarantees**

 

In the normal course of business, the Company sells loans in the secondarymarket. As is customary in such sales, the Company provides indemnification tothe buyer under certain circumstances. This indemnification may include theobligation to repurchase loans by the Company, under certain circumstances. Inmost cases repurchases and losses are rare, and no provision is made for lossesat the time of sale. When repurchases and losses are probable and reasonablyestimable, a provision is made in the consolidated financial statements forsuch estimated losses.

 

On May 12, 2003, the Company entered into a sales and servicingmaster agreement with the FHLB of Pittsburgh. The agreement allows the Companyto sell loans to the FHLB while retaining servicing and providing for a creditenhancement. Under the terms of the agreement, the Company receives a ten basispoint annual fee in exchange for assuming the credit risk on losses in excessof its contractual obligation up to a maximum of $605 thousand. The Company hassold $16.6 million in loans under this agreement and had a maximum credit riskexposure of $461 thousand at June 30, 2008. The fair value of theseguarantees was determined to be insignificant at June 30, 2008.

 

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**Concentration of Credit Risk**

 

The Company offers residential and construction real estate loans aswell as commercial and consumer loans. The Company’s lending activities areconcentrated in Pennsylvania. The largest concentration of the Company’s loanportfolio is located in eastern Pennsylvania. The ability of the Company’sborrowers to repay amounts owed is dependent on several factors, including theeconomic conditions in the borrower’s geographic region and the borrower’sfinancial condition.

 

**Legal Proceedings**

 

As previously described in the company’s prospectus/joint proxystatement dated April 27, 2005 and included in its registration statementon Form S-4 (file No. 333-123622) filed in connection with theMerger, FFB previously received a subpoena from the Regional MunicipalSecurities Counsel in the Philadelphia Office of the Securities and ExchangeCommission (the “SEC”). The subpoena arose out of a non-public SECinvestigation titled “Hummelstown General Authority,” which Authority issuednon-rated revenue bonds now in default, underwritten by the firm of a formerdirector of Chester Valley and FFB. The SEC subpoena requested the productionof certain documents concerning FFB’s involvement with non-rated municipalsecurities, including those issued to finance the Whitetail Golf Course by theDauphin County General Authority and the Hummelstown General Authority, throughthe former director’s firm, and related matters. FFB previously produceddocuments to the SEC and certain officers of FFB provided testimony to the SECin response to the SEC’s voluntary request for assistance in this matter. On August 3,2006, the SEC filed a complaint in federal court against the former director,his wife, and the former director’s firm. The Bank is not named as a defendantin the complaint filed by the SEC.

 

FFB is a party to three civil actions relating to some of the revenuebonds, which are the subject of the SEC investigation described above. On August 30,2005, a writ of summons was filed by the Boyertown Area School District (“Boyertown”)in the Court of Common Pleas, Montgomery County, Pennsylvania commencing acivil action against, *inter alia,*FFB. *Boyertown Area School District v. First FinancialBank et. al.* , No. 05­21799. A complaint was filed onNovember 9, 2005, asserting the following claims against FFB: Breach ofTrust Indenture and Fiduciary Duties (Count 1), Breach of Fiduciary Duties(Count 2), Civil Conspiracy (Count 3), and Concerted Action (Count 4). On September 19,2005, Red Lion Area School District (“Red Lion”) filed a complaint in theCourt of Common Pleas, York County, Pennsylvania, against *inter alia* , FFB. *Red Lion Area SchoolDistrict v. Bradbury et. al.* , No. 2005-SU­1656­Y01; No. 2005­SU­2544­Y01.This case has been transferred to the Court of Common Pleas of MontgomeryCounty, Pennsylvania, and an amended complaint was filed on October 18,2006. The amended complaint asserts the following claims against FFB:Declaratory Judgment (Count 15), Breach of Trust Indenture (Count 16), CivilConspiracy (Count 17), Civil Conspiracy—Alternative Legal Basis (Count 18),Breach of Common Law Duties as Trustee (Count 19), Tortious Action inConcert/Aiding and Abetting Fraud (Count 20), Breach of Trust Indenture (Count21), Breach of Fiduciary Duties (Count 22), Vicarious Liability andRespondeat Superior (Count 23), Unjust Enrichment (Count 24), and UnjustEnrichment (Count 25). On March 16, 2006, Perkiomen Valley School District(“Perkiomen”) filed a complaint in the Court of Common Pleas, MontgomeryCounty, Pennsylvania, against, *inter alia* ,FFB *Perkiomen Valley School District v. First FinancialBank et.al.* , No. 06­06533. The complaint asserts the followingclaims against FFB: Breach of Trust Indenture (Count 1), Breach of FiduciaryDuties (Count 2), Vicarious Liability and Respondeat Superior (Count 3), CivilConspiracy (Count 4), and Concert of Action (Count 5). The actions havebeen consolidated for discovery and case management purposes, but not for trial. TheBank’s answers were provided on September 6, 2007, with respect to the RedLion matter, and September 10, 2007, with respect to the Boyertown andPerkiomen matters. Discovery is in its initial stages. The Company believes theabove noted lawsuits are without merit and intends to vigorously defend itselfin 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 Cincinnati 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 Bank et al*.,07-02389 (E.D. Pa.).  .), (the “SchoolDistrict Litigation”). Willow Financial Bank filed an answer and counterclaimon September 20, 2007 seeking damages for Cincinnati’s breach of contractfor failure to defend and for bad faith. Cincinnati answered the Counterclaim and denied all of the Bank’sallegations. Willow Financial Bank has served discovery and received documentsfrom Cincinnati and its counsel. Cincinnati has not served any discovery. Willow Financial Bank filed aMotion for Judgment on the Pleadings as to Cincinnati’s duty to defend the Bankin the School District Litigation. Cincinnati filed its own Motion for Judgmenton the Pleadings. Willow Financial Bank filed an opposition to Cincinnati’sMotion, and Boyertown also filed an opposition to Cincinnati’s Motion. Thetrial judge heard argument on the Bank’s Motion and Cincinnati’s Motion on May 30,2008.

 

In the normal course of business, the Company is involved in variouslegal proceedings. Management of the Company, based on discussions with legalcounsel, believes that such proceedings will not have a material adverse effecton the financial condition or operations of the Company. There can be noassurance that any of the outstanding legal proceedings to which the Company isa party will not be decided adversely to the Company’s interests and have amaterial adverse effect on the financial condition and operations of theCompany.

 

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**Other Commitments**

 

In connection with the operation of 29 of its banking offices and anoperations center, the Company leases certain office space. The leases areclassified as operating leases, with rent expense of $3.0 million, $2.9 million,and $2.0 million for the years ended June 30, 2008, 2007 and 2006,respectively. Minimum payments over the remainder of the leases are summarizedas follows:

 
| ** **         | ** ** | **Minimum lease  payments**     | ** ** |
|--------------------|------------|--------------------------------------|------------|
| ** **         | ** ** | **(Dollars in thousands)** | ** ** |
| Year ended:        |       |                                 |       |
| June 30, 2009 |       | $                                    | 2,740      |   |
| June 30, 2010 |       | 2,368                                |       |
| June 30, 2011 |       | 2,179                                |       |
| June 30, 2012 |       | 1,914                                |       |
| June 30, 2013 |       | 1,769                                |       |
| Thereafter         |       | 15,403                               |       |
| Total              |       | $                                    | 26,373     |   |

 

**18.****                              Accountingfor Derivative Instruments and Hedging**

 

The Company may from time to time utilize derivative instruments suchas interest rate swaps, interest rate collars, interest rate floors, interestrate swap options or combinations thereof to assist in its asset/liabilitymanagement. In accordance with SFAS No. 133, “Accounting for DerivativeInstruments,” the Company must document its hedge relationships, includingidentification of the hedging instruments and the hedged items, as well as itsrisk management objectives and strategies for undertaking the hedge in order toqualify for hedge accounting treatment. The Company also assesses, both atinception and at least quarterly thereafter, whether the derivative instrumentsthat are used in hedging transactions are highly effective in offsetting thechanges in either the fair value or cash flows of the hedged item. For fairvalue hedges, both the effective and ineffective portions of the changes in thefair value of the derivative, along with the gain or loss on the hedged itemthat is attributable to the hedged risk, are recorded in the statement ofoperations within interest income or interest expense. For cash flow hedges,the effective portion of the change in the fair value of the derivative isrecorded in accumulated other comprehensive income. When the hedged itemimpacts the statement of operations, the gain or loss included in accumulatedother comprehensive income is reported on the same line in the statement ofoperations as the hedged item. In addition, the ineffective portion of thechanges in the fair value of derivatives used as cash flow hedges is reportedin the statement of operations.

 

At June 30, 2008, the Company had four interest rate swaparrangements used to hedge specific loans originated by the Bank. The swapseffectively convert the rates from a fixed rate to a floating rate based onLibor throughout the life of the underlying loans. At June 30, 2008, thetotal outstanding notional amount on these swaps was $7.6 million. The weightedaverage floating and fixed rates on these transactions were 2.95% and 4.73%,respectively at June 30, 2008. The Company does not maintain sufficientdocumentation for these transactions to receive hedge accounting treatment andthus all changes in the fair value of the derivatives is recorded in theconsolidated statement of operations. As such, based on the decrease in themarket value of the interest rate swaps during fiscal 2008, the Companyrecognized a loss of $251 thousand in other income in the consolidatedstatement of operations with respect to these four swap agreements. The Companyhas recorded a net payable of $55 thousand at June 30, 2008 as compared toa net receivable of $196 thousand at June 30, 2007.

 

As part of the Chester Valley 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 Chester Valley Merger, the interest rateswap and the hedged borrowings were marked to fair value in purchaseaccounting. In September 2005, the hedged borrowings were repaid and $10million notional amount of the interest rate swap was unwound with thecounter-party. After performing the appropriate documentation of the derivativeinstrument, the Company designated the remaining $10 million notional amountinterest rate swap as a fair value hedge of certain existing borrowings of theBank. The swap had the effect of converting a fixed rate borrowing to anadjustable rate borrowing. During the quarter ended December 31, 2005, thederivative instrument ceased to be a highly effective hedge; therefore, theCompany discontinued hedge accounting resulting in a pre-tax charge of $47thousand. The interest rate swap was unwound in February 2006 withoutresulting in any additional impact to the statement of operations. The basisadjustment 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 $30.0million notional amount 3.50% six month Libor interest rate cap whilesimultaneously selling a $30.0 million notional amount 6.00% six-month Liborinterest rate cap (“Interest Rate Corridor”), 

 

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which was to expire in August 2008. ChesterValley paid 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 the Bank, which werevariable in nature and indexed to six-month Libor. The Interest Rate Corridorwas being used to hedge the cash flows of this borrowing. Prior to October 23,2006, the Interest Rate Corridor reduced the negative impact on earnings of theborrowings in a rising interest rate environment. The fair market value of theInterest Rate Corridor had two components: the intrinsic value and the timevalue of the option. The Interest Rate Corridor was marked-to-market quarterly,with changes in the intrinsic value of the Interest Rate Corridor, net of tax,included as a separate component of other comprehensive income, and the changein the time value of the option included directly as interest expense as requiredunder SFAS 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 the Interest RateCorridor and recognized a gain of $804 thousand in the statement of operationsupon repayment of the $30 million FHLB advance.

 

**19.****                              RegulatoryMatters**

 

The Bank is subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capitalrequirements can initiate certain mandatory, and possibly additionaldiscretionary actions by regulators that if undertaken, could have a directmaterial effect on the Company’s consolidated financial statements. Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under accounting practices. The Bank’scapital amounts and classifications are also subject to qualitative judgmentsby the regulators about components, risk weightings, and other factors.

 

At June 30, 2008, the Bank had regulatory capital, which was wellin excess of regulatory limits set by the OTS. The current requirements and theBank’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, 2008*                    |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| Tangible capital (to tangible assets)         |       | $                                    | 109,164    |                                                       | 7.2        | %                                                                                                             | $          | 22,845 |   | 1.5 | % | $ | 30,460 |   | 2.0 | % |
| Core capital (to adjusted tangible assets)    |       | 109,164                              |       | 7.2                                                        | %          | 60,920                                                                                                        |       | 4.0 | % | 76,151 |   | 5.0 | % |
| Tier I capital (to risk-weighted assets)      |       | 109,164                              |       | 11.3                                                       | %          | N/A                                                                                                           |       | N/A |   | 57,684 |   | 6.0 | % |
| Risk-based capital (to risk-weighted  assets) |       | 120,720                              |       | 12.6                                                       | %          | 76,912                                                                                                        |       | 8.0 | % | 96,140 |   | 10.0 | % |
| *As of June 30, 2007*                    |       |                                 |       |                                                       |       |                                                                                                          |       |   |   |   |   |   |   |
| Tangible capital (to tangible assets)         |       | $                                    | 117,703    |                                                       | 8.2        | %                                                                                                             | $          | 21,580 |   | 1.5 | % | $ | 28,773 |   | 2.0 | % |
| Core capital (to adjusted tangible assets)    |       | 117,703                              |       | 8.2                                                        | %          | 57,547                                                                                                        |       | 4.0 | % | 71,933 |   | 5.0 | % |
| Tier I capital (to risk-weighted assets)      |       | 117,703                              |       | 12.2                                                       | %          | N/A                                                                                                           |       | N/A |   | 57,682 |   | 6.0 | % |
| Risk-based capital (to risk-weighted  assets) |       | 127,983                              |       | 13.3                                                       | %          | 76,909                                                                                                        |       | 8.0 | % | 96,136 |   | 10.0 | % |

 

In its letter approving the Chester Valley Merger Agreement, the OTS,as one of the conditions for approval, indicated that, for the periods ending December 31,2005, 2006, and 2007, the Bank was required to have tier one core capitalratios at least equal to 6.50%, 6.75%, and 7.25%, respectively, and totalrisk-based capital equal to 11.97%, 12.02% and 12.40%, respectively. The Bankalso was required to submit to the OTS, quarterly status reports detailing itscompliance with the conditions on regulatory capital outlined in its approvalletter. The OTS’ conditions for approval of the Chester Valley Merger alsoindicated that, for the periods ending December 31, 2005, 2006, and 2007,the Company must have consolidated tangible capital ratios at least equal to5.14%, 5.59% and 6.12%, respectively. Both the Company and the Bank met theserequirements on the respective dates required, and there are no furtherrequirements other than for normal reporting purposes.

 

**20.****                              FairValue of Financial Instruments**

 

The Company’s methods for determining the fair value of its financialinstruments as well as significant assumptions and limitations are set forthbelow.

 

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**Limitations**

 

Estimates of fair value are made at a specific point in time, basedupon, where available, relevant market prices and information about thefinancial instrument. Such estimates do not include any premium or discountthat could result from offering for sale at one time the Company’s entireholdings of a particular financial instrument. For a substantial portion of theCompany’s financial instruments, no quoted market price exists. Therefore,estimates of fair value are necessarily based on a number of significantassumptions (many of which involve events outside the control of management).Such assumptions include assessments of current economic condition, perceivedrisks associated with these financial instruments and their counterparties,future expected 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 would be likely to result insignificantly different fair value estimates.

 

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

 

The following methods and assumptions were used to estimate the fairvalue of each major classification of financial instruments at June 30,2008 and 2007:

 

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

 

These financial instruments have carrying values that approximate fairvalue.

 

***Investment Securities Trading, Available forSale and Held to Maturity***

 

Current quoted market prices were used to determine fair value.

 

***Loans Receivable***

 

Fair values were estimated for portfolios of loans with similarfinancial characteristics. Loans were segregated by type and each loan categorywas further segmented by fixed and adjustable-rate interest terms. Theestimated fair value of the segregated portfolios was calculated by discountingcash flows based on estimated maturity and prepayment speeds using estimatedmarket discounted rates that reflected credit and interest risk inherent in theloans. The estimate of the maturities and prepayment speeds was based on theCompany’s historical experience. Cash flows were discounted using market ratesadjusted for portfolio differences.

 

***Loans Held for Sale***

 

The fair value of real estate loans originated and intended for sale inthe secondary market is based on contractual cash flows using current marketrates, calculated on an aggregate basis.

 

***FHLB Advances***

 

Fair value was estimated using discounted cash flow analysis based onthe Company’s current incremental borrowing rate for similar types of borrowingarrangements.

 

***Trust Preferred Securities***

 

Fair value was determined using discounted cash flow analysis based onchanges in the market rates since date of issuance.

 

***Commitments to Extend Credit***

 

The majority of the Company’s commitments to extend credit carrycurrent interest rates if converted to loans. Because commitments to extendcredit are generally not assignable by the borrower, they only have value tothe Company and the borrower. The estimated fair value approximates the recordeddeferred fee amounts.

 

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The carrying amounts and estimated fair values of the Company’sfinancial instruments, including off-balance sheet financial instruments, at June 30,2008 and 2007 are as follows:

 
| ** **                               | ** ** | **June 30, 2008**          | ** ** | **June 30, 2007** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | **Carrying  Amount**                 | ** ** | **Fair  Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                                  |       |                                 |       |                        |       |   |   |   |   |
| Cash and cash equivalents                |       | $                                    | 36,182     |                        | $          | 36,182 |   | $ | 60,277 |   | $ | 60,277 |   |
| Investment securities — trading     |       | 1,282                                |       | 1,282                       |       | 1,176 |   | 1,176 |   |
| Investment securities available for sale |       | 181,262                              |       | 181,262                     |       | 188,339 |   | 188,339 |   |
| Investment securities held to maturity   |       | 75,781                               |       | 73,614                      |       | 88,363 |   | 86,488 |   |
| Loans held for sale                      |       | 14,199                               |       | 14,199                      |       | 8,075 |   | 8,075 |   |
| Loans receivable, net                    |       | 1,136,839                            |       | 1,114,375                   |       | 1,035,293 |   | 1,020,289 |   |
| Accrued interest receivable              |       | 6,181                                |       | 6,181                       |       | 6,654 |   | 6,654 |   |
| Liabilities:                             |       |                                 |       |                        |       |   |   |   |   |
| Deposits with no stated maturities       |       | 622,908                              |       | 622,908                     |       | 758,058 |   | 758,058 |   |
| Certificates                             |       | 249,532                              |       | 250,563                     |       | 334,672 |   | 315,561 |   |
| FHLB advances                            |       | 311,428                              |       | 296,940                     |       | 189,764 |   | 183,429 |   |
| Trust preferred securities               |       | 27,312                               |       | 26,176                      |       | 25,774 |   | 24,537 |   |
| Accrued interest payable                 |       | 1,708                                |       | 1,708                       |       | 2,303 |   | 2,303 |   |
|                                          |            |                                      |            |                             |            |  |  |  |  |  |  |  |  |

 

**21.      Comprehensive (Loss) Income**

 

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

 
| ** **                                                        | ** ** | **Year ended June 30, 2008** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                        | ** ** | **Before tax  amount**                      | ** ** | **Tax Effect** | ** ** | **After tax  Amount** | ** ** |
| ** **                                                        | ** ** | **(Dollars in thousands)**             | ** ** |
| Other comprehensive loss:                                         |       |                                             |       |   |   |   |   |
| Unrealized holding losses during the period                       |       | $                                                | (3,455     | ) | $ | 1,174 |   | $ | (2,281 | ) |
| Reclassification adjustment for losses  included in net loss |       | 1,671                                            |       | (568 | ) | 1,103 |   |
| Change in tax rate                                                |       | —                                           |       | (48 | )  | (48 | ) |
| Total other comprehensive loss                                    |       | $                                                | (1,784     | ) | $ | 558 |   | $ | (1,226 | ) |

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

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

 

** **

**22.       SegmentInformation**

 

Under thedefinition of SFAS No. 131, “Disclosures About Segments of an Enterpriseand Related Information,” the Company has three operating segments atJune 30, 2008; Willow Financial Bank (“WFB”), BeneServ, and WIS (includingCarnegie), 

 

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as compared totwo operating segments at 2007; WFB and WIS. The WFB segment primarily providesloan and deposit services to commercial and retail customers through itsnetwork of 29 branch locations. BeneServ, which was acquired on March 30,2007, is an insurance agency serving the corporate employee benefit marketsegment. The WIS segment operates a full service investment advisory andsecurities brokerage firm.

 

Segment information for the twelve months ended June 30, 2008 and2007 is as follows:

 
| ** **                   | **For the year ended June 30,** | ** **                           |
|------------------------------|----------------------------------------------------------|--------------------------------------|
| ** **                   | **2008**                                                 | ** **                           | **2007** | ** ** |
| ** **                   | ** **                                               | **WFB**                              | ** ** | **BeneServ** | ** ** | **WIS** | ** ** | **Total** | ** ** | **WFB** | ** ** | **WIS** | ** ** | **Total** | ** ** |
| ** **                   | ** **                                               | **(Dollars in Thousands)** | ** ** |
|                         |                                                     |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income              |                                                     | $                                    | 84,681 |   | $ | — |   | $ | — |   | $ | 84,681 |   | $ | 86,050 |   | $ | — |   | $ | 86,050 |   |
| Interest expense             |                                                     | 43,003                               |   | — |   | — |   | 43,003 |   | 41,062 |   | — |   | 41,062 |   |
| Net interest income          |                                                     | 41,678                               |   | — |   | — |   | 41,678 |   | 44,988 |   | — |   | 44,988 |   |
| Non-interest income          |                                                     | 8,728                                |   | 2,288 |   | 2,757 |   | 13,773 |   | 9,958 |   | 2,309 |   | 12,267 |   |
| Depreciation expense         |                                                     | 2,924                                |   | 12 |   | 20 |   | 2,956 |   | 2,598 |   | — |   | 2,598 |   |
| Income tax (benefit) expense |                                                     | (2,388                               | ) | 239 |   | 21 |   | (2,128 | ) | 2,752 |   | 134 |   | 2,886 |   |
| Total net (loss) income      |                                                     | (43,980                              | ) | 465 |   | 40 |   | (43,475 | ) | 6,988 |   | 279 |   | 7,267 |   |
| Goodwill                     |                                                     | 54,574                               |   | 1,426 |   | 959 |   | 56,959 |   |   |   |   |   |   |   |
| Total assets                 |                                                     | 1,573,744                            |   | 6,762 |   | 4,139 |   | 1,584,645 |   | 1,550,343 |   | 953 |   | 1,551,296 |   |
|                              |                                                          |                                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

*Condensed Statements of Financial Condition*

 
| ** **                                                                                  | ** ** | **At  June 30, 2008**      | ** ** | **At  June 30, 2007** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Assets:                                                                                     |       |                                 |       |                            |       |
| Cash in banks                                                                               |       | $                                    | 407        |                            | $          | 440 |   |
| Note receivable from subsidiary                                                             |       | 4,446                                |       | 4,770                           |       |
| Investment in subsidiaries                                                                  |       | 166,653                              |       | 213,742                         |       |
| Investment securities — trading                                                        |       | 1,282                                |       | 1,176                           |       |
| Investment securities available for sale  (amortized cost of $ and $789, respectively) |       | 664                                  |       | 827                             |       |
| Goodwill                                                                                    |       | 6,526                                |       | 6,526                           |       |
| Other assets                                                                                |       | 2,032                                |       | 1,963                           |       |
| Total Assets                                                                                |       | $                                    | 182,010    |                            | $          | 229,444 |   |
| Liabilities and Stockholders’ Equity:                                                  |       |                                 |       |                            |       |
| Subordinated debentures                                                                     |       | $                                    | 25,744     |                            | $          | 25,744 |   |
| Other liabilities                                                                           |       | 6,169                                |       | 4,267                           |       |
| Total Liabilities                                                                           |       | 31,913                               |       | 30,011                          |       |
| Total Stockholders’ Equity                                                             |       | 150,097                              |       | 199,433                         |       |
| Total Liabilities and Stockholders’ Equity                                             |       | $                                    | 182,010    |                            | $          | 229,444 |   |

 

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*Condensed Statements of Operations*

 
| ** **                                  | ** ** | **For the year ended June 30,** | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands)**                     | ** ** |
| Interest income:                            |       |                                                     |       |   |   |   |   |
| Interest income                             |       | $                                                        | 19         |   | $ | 542 |   | $ | 401 |   |
| Total interest income:                      |       | 19                                                       |       | 542 |   | 401 |   |
| Non-interest income:                        |       |                                                     |       |   |   |   |   |
| Realized (loss) gain on investments         |       | (133                                                     | )          | 49 |   | 51 |   |
| Other                                       |       | —                                                   |       | 2 |   | 48 |   |
| Total non-interest income                   |       | (133                                                     | )          | 51 |   | 99 |   |
| Total income                                |       | (114                                                     | )          | 593 |   | 500 |   |
| Expense:                                    |       |                                                     |       |   |   |   |   |
| Professional fees                           |       | 15                                                       |       | 14 |   | 281 |   |
| Stationery and printing                     |       | —                                                   |       | — |   | 27 |   |
| Consulting services                         |       | —                                                   |       | — |   | 38 |   |
| Interest expense on subordinated debentures |       | 1,553                                                    |       | 2,434 |   | 1,109 |   |
| Investor relations                          |       | 10                                                       |       | 14 |   | 70 |   |
| Other                                       |       | 169                                                      |       | 600 |   | 425 |   |
| Total expense                               |       | 1,747                                                    |       | 3,062 |   | 1,950 |   |
| Loss before taxes                           |       | (1,861                                                   | )          | (2,469 | ) | (1,450 | ) |
| Income tax benefit                          |       | (633                                                     | )          | (129 | ) | — |   |
| Loss before equity in income of subsidiary  |       | (1,228                                                   | )          | (2,340 | ) | (1,450 | ) |
| Equity in income of subsidiary              |       | (42,247                                                  | )          | 9,607 |   | 8,117 |   |
| Net (loss) income                           |       | $                                                        | (43,475    | ) | $ | 7,267 |   | $ | 6,667 |   |

 

*Condensed Statements of Cash Flows*

 
| ** **                                                                   | ** ** | **For the year ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**                     | ** ** |
| Net (loss) income:                                                           |       | $                                                        | (43,475    | ) | $ | 7,267 |   | $ | 6,667 |   |
| Add (deduct) items not affecting cash flows  from operating activities: |       |                                                     |       |   |   |   |   |
| Equity in undistributed income of  subsidiary                                |       | 42,247                                                   |       | (9,607 | ) | (8,117 | ) |
| Realized loss (gain) on investments                                          |       | 133                                                      |       | (49 | ) | (51 | ) |
| Increase in other assets                                                     |       | (1,855                                                   | )          | (2,872 | ) | (2,644 | ) |
| Purchase of investment securities — trading                             |       | (106                                                     | )          | (274 | ) | (849 | ) |
| Net tax payments received from subsidiary                                    |       | 2,062                                                    |       | 8,438 |   | — |   |
| Increase (decrease) in other liabilities                                     |       | 1,902                                                    |       | 4,108 |   | (191 | ) |
| Net cash provided by (used in) operating  activities                         |       | 908                                                      |       | 7,011 |   | (5,185 | ) |
| Cash flows from investing activities:                                        |       |                                                     |       |   |   |   |   |
| Purchase of investment securities available  for sale                        |       | —                                                   |       | — |   | (10,054 | ) |
| Proceeds from sales and calls of securities  available for sale              |       | 30                                                       |       | 10,054 |   | 4,476 |   |
| Net repayment (funding) of notes receivable                                  |       | 324                                                      |       | (1,284 | ) | 1,367 |   |
| Net cash used for acquisition                                                |       | —                                                   |       | — |   | (35,032 | ) |
| Net cash provided by (used in) investing  activities                         |       | 354                                                      |       | 8,770 |   | (39,243 | ) |
| Cash flows from financing activities:                                        |       |                                                     |       |   |   |   |   |
| Capital contribution to subsidiaries                                         |       | —                                                   |       | — |   | (15,000 | ) |
| Dividends received from subsidiary                                           |       | 6,000                                                    |       | — |   | 43,806 |   |
| Proceeds from stock issuance                                                 |       | —                                                   |       | 1,392 |   | 1,275 |   |
| Proceeds from issuance of subordinated  debentures                           |       | —                                                   |       | — |   | 25,000 |   |
| Repayment of trust preferred securities                                      |       | (299                                                     | )          | (10,454 | ) | — |   |
| Treasury stock purchases                                                     |       | —                                                   |       | (3,242 | ) | (179 | ) |
| Dividends paid                                                               |       | (6,996                                                   | )          | (6,920 | ) | (6,718 | ) |
| Net cash (used in) provided by financing  activities                         |       | (1,295                                                   | )          | (19,224 | ) | 48,184 |   |
| Net (decrease) increase in cash and cash  equivalents                        |       | (33                                                      | )          | (3,443 | ) | 3,756 |   |
| Cash and cash equivalents at beginning of  period                            |       | 440                                                      |       | 3,883 |   | 127 |   |
| Cash and cash equivalents at end of period                                   |       | $                                                        | 407        |   | $ | 440 |   | $ | 3,883 |   |

 

**24.       RelatedParty Transactions**

 

The Bankroutinely enters into transactions with its directors and officers. Suchtransactions are made in the ordinary course of business on substantially thesame terms and conditions, including interest rates and collateral, as thoseprevailing at the same time for comparable transactions with other customers,and do not, in the opinion of management, involve more than the normal creditrisk or present other unfavorable features. The aggregate amount of loans tosuch related parties was $154 thousand and $137 thousand at June 30, 2008and 2007, respectively, and all such loans were performing in accordance withtheir terms at such dates.

 

**25.        Dividend Policy**

 

The Company’s ability to pay dividends is dependent, in part, upon itsability to obtain dividends from the Bank. The future dividend policy of theCompany is subject to the discretion of the Board of Directors and will dependupon a number of factors, including future earnings, financial conditions, cashneeds, and general business conditions. Holders of common stock will beentitled to receive dividends as and when declared by the Board of Directors ofthe Company out of funds legally available for that purpose. Such payment,however, will be subject to the regulatory restrictions set forth by the OTS.In addition, OTS regulations provides that, 

 

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as a generalrule, a financial institution may not make a capital distribution if it wouldbe undercapitalized after making the capital distribution. During fiscal 2008,the Company paid cash dividends of $7.0 million, or $0.46 per share.

 

**Item 9A.     Controls and Procedures**

** **

**9Aa.Disclosure Controls and Procedures**

** **

Disclosurecontrols and procedures (as defined in Rules 13a – 15(e) or 15d-15(e) under theExchange Act) are designed to ensure that information required to be disclosedin our reports filed under the Exchange Act is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms.This information is accumulated and communicated to management, including ourChief Executive Officer and Principal Financial Officer, as appropriate, toallow timely decisions regarding required disclosures. Our management, underthe supervision and with the participation of our Chief Executive Officer andPrincipal Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the periodcovered under this report.  Based on theevaluation, our Chief Executive Officer and Principal Financial Officerconcluded that our disclosure controls and procedures were not effective as ofJune 30, 2008 because of the material weakness discussed below.

 

**9Ab.Internal Control over Financial Reporting**

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Management ofthe Company and the Bank is responsible for establishing and maintainingadequate internal control over financial reporting as such term is defined inthe Exchange Act. Under the supervision and with the participation ofmanagement, including our Chief Executive Officer and Principal FinancialOfficer, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO Framework). 

 

In connection with thecompletion of our testing of the internal controls and a review of ourfinancial statements for the year ended June 30, 2008 under the COSOFramework, in our Form 10-K filed for the year ended June 30, 2008,management identified a material weakness in our internal control overfinancial reporting as described below:

 

·                  Adequate accounting personnel time was notallocated to permit an effective review and analysis of journal entries andgeneral ledger account reconciliations and to consider the financial reportingimpact of routine and non-routine transactions.

 

Thisresulted in misstatements that were corrected prior to the issuance of theconsolidated financial statements. As a result of this material weakness, thereis more than a reasonable possibility that a material misstatement of theCompany’s annual or interim financial statements will not be prevented ordetected on a timely basis.

 

Basedon our assessment under the COSO Framework, management concluded that ourinternal control over financial reporting was not effective as of June 30,2008.

 

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

 

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

 

See Item 9Ad. below for details on the Company’s implementation of itsremediation plan during the fiscal quarter ended June 30, 2008.

 

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

 

In connectionwith the restatement of the Company’s June 30, 2007 financial statements in May2008, management formulated a remediation program and dedicated considerableresources to implement the necessary changes. As a result of this effort, progress has been made in the remediation ofthe material weaknesses reported in the restated financial statements.  Those remediation efforts included:

 

·                  Keypersonnel in the Accounting and Finance department were changed and additionalresources were added.  In May 2008, theChief Accounting Officer also assumed the role of principal financialofficer.  A Corporate Controller withbank accounting and internal audit experience was hired in November 2007.  In addition, in May 2008, the Company createdthe position of Financial Controls Manager and filled it with an individual withboth accounting 

 

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and operations experience.  

·                  Athorough review of the internal audit risk assessment and related scope wasinitiated and a plan was developed to include a comprehensive review of generalledger account reconciliations and related processes beginning in July2008.  

 

·                  Policiesand procedures regarding the reconciliation and journal entry process werereinforced through training sessions held throughout the second half of thefiscal year to ensure appropriate supporting documentation existed for allsignificant transactions.  In addition,management implemented a monthly checklist process to monitor the timelycompletion of general ledger account reconciliations. 

 

In addition to the remediation efforts noted above, the Company hascommenced the following corrective actions in fiscal year 2009 to remediate thematerial weakness noted above:

 

·                  Additionalpersonnel were added to the accounting staff, through the use of externalconsultants and experienced temporary staff, to ensure that management hasappropriate accounting resources to more effectively review and analyze journalentries and general ledger account reconciliations and to consider sufficientlythe financial reporting impact of routine and non-routine transactions. 

 

·                  Internalaudit began to execute on its enhanced audit plan which includes acomprehensive review of general ledger account reconciliations and the relatedprocesses.  

 

·                  Managementimplemented a general ledger close within a specified time period whereby anysubsequent entries would require the approval of a member of accountingmanagement.  In addition management implementeda process of monitoring the aging of reconciling items by appropriate level ofmanagement.

 

Inlight of the efforts made to address the out of balance condition and otherprevious material weaknesses, the Company was unable to fully remediate the previouslydisclosed material weaknesses. While Management believes that progresshas been made towards resolving the material weakness described in 9Ab above,sufficient time has not transpired for management to fully validate whether theremediation procedures in place have resolved the material weakness which isidentified and described above.  

 

**Item9B.   Other Information**

 

Not applicable.

 

**PART III**

 

### **Item10.   Directors, Executive Officers andCorporate Governance**

### ** **

The information required by this item will be filed by amendment within120 days after the end of the fiscal year covered by this report pursuant toGeneral Instruction G(3) to Form 10-K.

 

### **Item11.    Executive Compensation**

### ** **

The information required by this item will be filed by amendment within120 days after the end of the fiscal year covered by this report pursuant toGeneral Instruction G(3) to Form 10-K.

 

### **Item12.    Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

### ** **

### **Theinformation required by this item will be filed by amendment within 120 daysafter the end of the fiscal year covered by this report pursuant to GeneralInstruction G(3) to Form 10-K.**

### ** **

### **Item13.      Certain Relationships andRelated Transactions, and Director Independence**

### ** **

The information required by this item will be filed by amendment within120 days after the end of the fiscal year covered by this report pursuant toGeneral Instruction G(3) to Form 10-K.

 

### **Item14.       Principal Accounting Fees andServices**

### ** **

The information required by this item will be filed by amendment within120 days after the end of the fiscal year covered by this report pursuant toGeneral Instruction G(3) to Form 10-K.

 

**PART IV**

 

### **Item15.       Exhibits and FinancialStatement Schedules**

### ** **

(a)           Documents Filed as Part ofthis Report.

 

(1)           The followingfinancial statements are incorporated by reference from Item 8 hereof:

 

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Consolidated Statements of Financial Condition

Consolidated Statements of Operations

Consolidated Statements of Changes in Stockholders’ Equity andComprehensive (Loss) / Income

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

 

(2)                                  Allschedules for which provision is made in the applicable accounting regulationsof the SEC are omitted because of the absence of conditions under which theyare required or because the required information is included in the consolidatedfinancial statements and related notes thereto.

 

(3)           The followingexhibits are filed as part of this Form 10-K , and this list includes the Exhibit Index.

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| 2.                   | 1          |            | Agreement and Plan  of Merger by and between Harleysville National Corporation and Willow  Financial Bancorp, Inc. dated May 20, 2008 (1) |
| 3.                   | 1          |            | Articles of  Incorporation, as amended, of Willow Financial Bancorp, Inc. (2) |
| 3.                   | 2          |            | Amended and Restated  Bylaws of Willow Grove Bancorp, Inc. (as amended through August 31,  2005)(3) |
| 4.                   | 0          |            | Form of Stock  Certificate of Willow Grove Bancorp, Inc. (4) |
| 4.                   | 1          |            | Indenture, dated as  of March 31, 2006, between Willow Grove Bancorp, Inc. and U.S. Bank  National Association, as trustee (5) |
| 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 (5) |
| 4.                   | 3          |            | Guarantee Agreement,  dated as of March 31, 2006, between Willow Grove Bancorp, Inc. and  U.S. Bank National Association, as guarantee trustee (5) |
| 10.                  | 1          |            | Willow Grove  Bancorp, Inc. 1999 Recognition and Retention Plan and Trust Agreement  (6) |
| 10.                  | 2          |            | Willow Grove  Bancorp, Inc. 2002 Recognition and Retention Plan and Trust Agreement  (7) |
| 10.                  | 3          |            | Willow Grove  Bancorp, Inc. Deferred Compensation Plan (8) |
| 10.                  | 4          |            | 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 (9) |
| 10.                  | 5          |            | First Financial Bank  Executive Deferred Compensation Plan, as amended and restated effective  January 1, 2003, and amendment thereto (10) |
| 10.                  | 6          |            | First Financial Bank  Board of Directors Deferred Compensation Plan, as amended and restated  effective January 1, 2003, and amendment thereto (10) |
| 10.                  | 7          |            | Willow Grove  Bancorp, Inc. 2005 Recognition and Retention Plan and Trust Agreement  (11) |
| 10.                  | 8          |            | Memorandum Agreement  between the Company, the Bank and William M. Wright, dated December 27,  2006 (12) |
| 10.                  | 9          |            | Amended and Restated  Employment Agreement between Willow Financial Bancorp, Inc., Willow  Financial Bank and Donna M. Coughey (13) |
| 10.                  | 10         |            | Amended and Restated  Employment Agreement between Willow Financial Bank and Ammon J. Baus (13) |
| 10.                  | 11         |            | Amended and Restated  Employment Agreement between Willow Financial Bank and Matthew D. Kelly (13) |
| 10.                  | 12         |            | Amended and Restated  Employment Agreement between Willow Financial Bank and G. Richard Bertolet  (13) |
| 10.                  | 13         |            | Amended and Restated  Change in Control Severance Agreement between Willow Financial Bank and  Neelesh Kalani (13) |
| 10.                  | 14         |            | Willow Financial  Bank Amended and Restated 2005 Executive Deferred Compensation Plan (13) |
| 10.                  | 15         |            | Willow Financial  Bank Amended and Restated Directors 2005 Deferred Compensation Plan (13) |
| 10.                  | 16         |            | Willow Financial  Bank Amended and Restated Non-Employee Directors’ Retirement Plan (13) |
| 10.                  | 17         |            | Willow Financial  Bancorp, Inc. Amended and Restated 2007 Supplemental Executive  Retirement Plan (13) |
| 10.                  | 18         |            | Willow Financial  Bancorp, Inc. Amended and Restated 1999 Stock Option Plan (13) |
| 10.                  | 19         |            | Willow Financial  Bancorp, Inc. Amended and Restated 2002 Stock Option Plan (13) |
| 10.                  | 20         |            | Amendment Number One  to Chester Valley Bancorp, Inc. 1993 Stock Option Plan (13) |
| 10.                  | 21         |            | Amendment Number One  to Chester Valley Bancorp, Inc. 1997 Stock Option Plan (13) |

 

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| 10. | 22 |   | Amended and Restated  Employment Agreement between Willow Financial Bank and Colin N. Maropis (13)                                                                                                                                                              |
|-----|----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10. | 23 |   | Amended and Restated  Employment Agreement between Willow Financial Bank and Thomas Saunders (13)                                                                                                                                                               |
| 10. | 24 |   | Form of Amended  and Restated Employment Agreement between Willow Financial Bank,  BeneServ, Inc. and certain executives (13)                                                                                                                         |
| 10. | 25 |   | Form of Amended  and Restated Change in Control Severance Agreement between Willow Financial  Bank and certain officers (13)                                                                                                                               |
| 10. | 26 |   | Termination of  Employment Agreement and Release Agreement by and among Willow Financial  Bancorp, Inc., Willow Financial Bank, Harleysville National Corporation,  Harleysville National Bank and Trust and Donna M. Coughey dated May 20,  2008 (1) |
| 10. | 27 |   | Employment Agreement  by and between Harleysville Management Services LLC and Donna M. Coughey  dated May 20, 2008 (1)                                                                                                                                     |
| 10. | 28 |   | Form of Letter  Agreement dated May 20, 2008 entered into by each director of Willow  Financial Bancorp, Inc. and Harleysville National Corporation (1)                                                                                          |
| 10. | 29 |   | Form of  Non-Competition and Non-Solicitation Agreement dated May 20, 2008  entered into by each director of Willow Financial Bancorp, Inc. and  Harleysville National Corporation (1)                                                           |
| 10. | 30 |   | Severance and  Release Agreement by and among Willow Financial Bancorp, Inc., Willow  Financial Bank and Joseph T. Crowley (14)                                                                                                                            |
| 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 Principal Financial Officer                                                                                                                                                                                             |
| 32. | 1  |   | Section 906  Certification of the Chief Executive Officer                                                                                                                                                                                                  |
| 32. | 2  |   | Section 906  Certification of the Principal Financial Officer                                                                                                                                                                                              |

 

----

| (1)    |   | Incorporated by  reference from the Company’s Form 8-K, dated May 20, 2008 and filed  with the SEC on May 21, 2008 (SEC File No. 000-49706)                                                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                           |
| (2)    |   | Incorporated by  reference from the Company’s Form 8-K, dated September 21, 2006 and  filed with the SEC on September 22, 2006 (SEC File No. 000-49706)                                                                                               |
|   |   |                                                                                                                                                                                                                                                                           |
| (3)    |   | Incorporated by  reference from the Company’s Form 8-K, dated August 31, 2005 and  filed with the SEC on September 1, 2005 (SEC File No. 000-49706)                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                           |
| (4)    |   | Incorporated by  reference from the Company’s Registration Statement on Form S-1 filed on  December 14, 2001, as amended, and declared effective on  February 11, 2002 (Registration No. 333-75106)                                                   |
|   |   |                                                                                                                                                                                                                                                                           |
| (5)    |   | Exhibit not  included pursuant to Item 601(b) (4) (iii) of Regulation S-K.  The Company will provide a copy of such exhibit to the SEC upon request.                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                           |
| (6)    |   | Incorporated by  reference from the Definitive Proxy Statement on Schedule 14A filed by  the Company’s predecessor, a federal corporation known as Willow Grove  Bancorp, Inc. (the “Mid-Tier”) on June 23, 1999 (SEC File  No. 000-25191). |
|   |   |                                                                                                                                                                                                                                                                           |
| (7)    |   | Incorporated by  reference from the Company’s Definitive Proxy Statement on Schedule 14A  filed on October 9, 2002 (SEC File No. 000-49706).                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                           |
| (8)    |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  December 31, 2003, filed with the SEC on February 12, 2004 (SEC  File No. 000-49706).                                                                                  |
|   |   |                                                                                                                                                                                                                                                                           |
| (9)    |   | Incorporated by  reference from the Company’s Form 10-K for the fiscal year ended  June 30, 2006, filed with the SEC on September 13, 2005 (SEC File  No. 000-49706).                                                                                 |
|   |   |                                                                                                                                                                                                                                                                           |
| (10)   |   | 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).                                                                                           |

 

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| (11)   |   | Incorporated by  reference from the Company’s Definitive Proxy Statement on Schedule 14A as  filed on October 5, 2005 (SEC File No. 000-49706).                                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                   |
| (12)   |   | Incorporated by  reference from the Company’s Form 10-Q for the quarter ended  December 31, 2006, filed with the SEC on February 9, 2007 (SEC File  No. 000-49706).           |
|   |   |                                                                                                                                                                                                   |
| (13)   |   | Incorporated by  reference from the Company’s Current Report on Form 8-K, dated as of  October 23, 2007 and filed with the SEC on October 29, 2007 (SEC  File No. 000-49706). |
|   |   |                                                                                                                                                                                                   |
| (14)   |   | Incorporated by  reference from the Company’s Form 8-K, dated June 20, 2008 and  filed with the SEC on June 23, 2008 (SEC File No. 000-49706).                                |

 

(b)            *Exhibits*

 

Theexhibits listed under (a)(3) of this Item 15 are filed herewith.

 

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

 

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**SIGNATURES**

 

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

 
| ** **               | **WILLOW FINANCIAL BANCORP, INC.** |
|--------------------------|-----------------------------------------|
| ** **               | ** **                              |
| Date: September 15, 2008 | By:                                     | /s/ DONNA M. COUGHEY |
|                     |                                    | Donna M. Coughey |
| * *                 | * *                                | *President and Chief Executive Officer* |
|                     |                                    |   |
| Date: September 15, 2008 | By:                                     | /s/ NEELESH KALANI |
|                     |                                    |  Neelesh Kalani |
| * *                 | * *                                | *Principal Financial Officer* |

 

Pursuant tothe 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                              |   |
|----------------------------------------------------|--------|
| Donna M. Coughey                                   |
| *President, Chief Executive Officer  and Director* |
| * *                                           |
| /s/ NEELESH KALANI                                 |   |
| Neelesh Kalani                                     |
| *Principal Financial Officer*                      |
| * *                                           |
| /s/ MADELEINE WING  ADLER                          |   |
| Madeleine Wing Adler                               |
| *Director*                                         |
| * *                                           |
| /s/ JOHN J.  CUNNINGHAM, III                  |   |
| John J.  Cunningham, III                      |
| *Director*                                         |
| * *                                           |
| /s/ GERARD F. GRIESSER                             |   |
| Gerard F. Griesser                                 |
| *Director*                                         |

 
| /s/  CHARLES F. KREMP, 3RD              |   |
|-----------------------------------------|--------|
| Charles F. Kremp, 3rd                   |
| *Director*                              |
| * *                                |
| /s/ WILLIAM W. LANGAN                   |   |
| William W. Langan                       |
| *Director*                              |
| * *                                |
|  /s/ ROSEMARY C. LORING, ESQ. |   |
| Rosemary C.  Loring, Esq.          |
| *Chair of the Board*                    |
| * *                                |
| /s/ ROBERT J. MCCORMACK                 |   |
| Robert J. McCormack                     |
| *Director*                              |
| * *                                |
| /s/ JAMES E. MCERLANE                   |   |
| James E. McErlane                       |
| *Director*                              |
| * *                                |
| /s/ A. BRENT O’BRIEN               |   |
| A. Brent O’Brien                   |
| *Director*                              |
| * *                                |
| /s/ SAMUEL H.  RAMSEY, III         |   |
| Samuel H.  Ramsey, III             |
| *Director*                              |
| * *                                |
| /s/ EMORY S. TODD                       |   |
| Emory S. Todd                           |
| *Director*                              |
| * *                                |
| /s/ WILLIAM B.  WEIHENMAYER             |   |
| William B. Weihenmayer                  |
| *Director*                              |

 

86

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