UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended JUNE 30, 2007

-or-

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

For the transition period from to

Commission File Number: 0-49706

WILLOW FINANCIAL BANCORP, INC.

(Exact Name of Registrant as Specified 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 Principal Executive Offices)

Registrant’s telephone number: (including area code) (610) 995-1700

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act: NONE

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

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

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant based on the closing price of $14.92 on December 31, 2006, the last business day of the Registrant’s second quarter was $185,242,587 (16,640,575 shares outstanding less 4,224,852 shares held by affiliates at $14.92 per share). Although directors and executive officers of the Registrant and certain employee benefit plans were assumed to be “affiliates” of the Registrant for purposes of the calculation, the classification is not to be interpreted as an admission of such status.

As of the close of business on September 24, 2007 there were 15,543,943 shares of the Registrant’s Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

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

EXPLANATORY NOTE

This Amendment to our Annual Report on Form 10-K amends our Annual Report on Form 10-K for the fiscal year ended June 30, 2007, originally filed with the Securities and Exchange Commission on October 1, 2007 (the “Original Filing”). We are filing this Amendment to correct certain information disclosed in Part II Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” and Item 8, “Financial Statements and Supplementary Data,” and to include Item 9, “Changes in and Disagreements with Accountants and Financial Disclosure” (which had been inadvertently omitted in the Original Filing) on pages 62, 69, 91 and 103 of the Original Filing. Except as described in this Explanatory Note, no other changes have been made to the Original Filing, and this Amendment does not amend or update any other information set forth in the Original Filing.

Item 7A. Quantitative and Qualitative Disclosure of Market Risk

Asset/Liability Management and Interest Rate Risk

The market value of assets and liabilities, as well as future earnings, can be affected by interest rate risk. Market values of certain financial assets 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 of the Company are loans to borrowers who often have the ability to prepay their loan. Therefore, in a falling rate environment, the increase in the market value of the Company’s assets is limited by this option for the borrower to prepay the loan.

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

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

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

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

relationship between interest rates used to re-price assets and interest rates used in the re-pricing of liabilities.

The Company has adopted asset/liability management policies designed to quantify the interest rate risk caused by mismatches in the maturities and re-pricing of our interest-earning assets and interest-bearing liabilities. These interest rate risk and asset/liability management actions are taken under the guidance of the Finance Committee. The Finance Committee’s purpose is to communicate, coordinate and control asset/liability management consistent with our business plan and Board approved policies. The objective of the Finance Committee is to manage asset and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The Finance Committee meets at least quarterly and monitors the volume and mix of assets and funding sources taking into account the relative costs and spreads, the interest rate sensitivity gap and liquidity needs. The Finance Committee also reviews economic conditions and interest rate projections, current and projected liquidity needs and capital positions, anticipated changes in the mix of assets and liabilities, and interest rate exposure limits versus current projections pursuant to gap analysis and interest income simulations. At each meeting, the Finance Committee recommends changes in strategy as appropriate. Interest rate risk issues are also discussed by the Board of Directors on a regular basis. Management meets periodically to monitor progress in achieving asset/liability targets approved by the Board, particularly the type and rate on asset generation and sources of funding.

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

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

Presented below, as of June 30, 2007 and 2006, is an analysis of the interest rate risk position as measured by NPV and sensitivity based upon various rate scenarios. These values were obtained from an internal model produced 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 for hypothetical rate scenarios of down 300 basis points at June 30, 2007. It only provides an estimate of economic value at a point in time and the economic value of the same portfolio under the above referenced interest rate scenarios.

Estimated change in NPV and Sensitivity
At June 30, 2007

	Net Portfolio Value
	Amount of Change			Percent of change		To Assets
	(in thousands)
Hypothetical change in interest rates
up 300 basis points	$	(53,648	)	(33.8	)%	7.46	%
up 200 basis points	(35,035		)	(22.1	)	8.65
up 100 basis points	(16,798		)	(10.6	)	10.32
no change—base case	—			—		10.78
down 100 basis points	13,757			8.7		11.55
down 200 basis points	21,829			13.8		11.97

Estimated change in NPV and Sensitivity
At June 30, 2006

	Net Portfolio Value
	Amount of Change			Percent of change		To Assets
	(in thousands)
Hypothetical change in interest rates
up 300 basis points	$	(56,211	)	(27.5	)%	9.76	%
up 200 basis points	(33,116		)	(16.2	)	11.12
up 100 basis points	(14,395		)	(7.1	)	12.16
no change—base case	—			—		12.91
down 100 basis points	8,812			4.3		13.34
down 200 basis points	1,726			0.8		12.89
down 300 basis points	(15,299		)	(7.5	)	11.87

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

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

Recent Accounting Pronouncements

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

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 provides entities with the opportunity to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective as of the 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 that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value

Measurements.” The Company is currently assessing the implications of this Statement on its financial statements.

FASB Statement No, 157, Fair Value Measurements

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

Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements

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

FASB Interpretation 48, Accounting for Uncertainty in Income Tax Positions

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

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

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

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

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

Selected Quarterly Financial Data

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

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

	For the quarter ended
	06/30/06		03/31/06		12/31/05		09/30/05
	(Dollars in thousands, except per share data)
Total interest income	$	22,561	$	21,792	$	21,605	$	15,572
Total interest expense	9,326		8,586		7,971		6,355
Net interest income	13,235		13,206		13,634		9,217
Provision for loan loss	2,485		—		207		513
Total non-interest income	2,880		2,078		2,326		363
Total non-interest expense	10,290		9,503		9,767		7,842
Income tax expense	991		1,857		2,109		299
Net income	2,349		3,924		3,877		926
Earnings per share
Basic	$	0.16	$	0.25	$	0.26	$	0.08
Diluted	$	0.15	$	0.25	$	0.26	$	0.08

The results for the first through third quarters of the current fiscal year as reported on the Company’s Form 10-Q have been adjusted by the following amounts:

	For the quarter ended
	03/31/07			12/31/06			09/30/06
	(Dollars in thousands, except per share data)
Total interest income(a)	$	(87.0	)	$	(115.0	)	$	(21.0	)
Total interest expense(a)	386.0			347.0			70.0
Net interest income	(473.0		)	(462.0		)	(91.0		)
Provision for loan losses	—			—			—
Total non-interest income(b)	131.0			18.0			154.0
Total non-interest expense(c)	143.0			(286.0		)	355.0
Income tax expense(d)	(169.0		)	(54.0		)	(99.0		)
Net income	(316.0		)	(104.0		)	(193.0		)
Earnings per share:
Basic	$	(0.01	)	$	(0.01	)	$	(0.02	)
Diluted	$	(0.02	)	$	(0.01	)	$	(0.01	)

(a) Adjustments relate to items identified in various reconciliations for which reconciling items were not investigated in a timely manner.

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

(c) Adjustments relate primarily to stale-dated items identified in reconciliations as well as the accrual for paid time off.

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

A balance sheet reclassification of $9.9 million was recorded from retained earnings to additional paid-in capital to properly reflect the stock dividend issued on February 23, 2007, revising the previously reported amounts.

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Willow Financial Bancorp, Inc.:

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

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

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

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 28, 2007 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP
Philadelphia, Pennsylvania
September 28, 2007

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Willow Financial Bancorp, Inc.:

We have audited Willow Financial Bancorp, Inc. and subsidiary’s (the Company) internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Effectiveness on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies 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 reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment: (1) inadequate review and analysis of financial statement account reconciliations primarily related to the support for the manual posting of certain accounting entries and the clearing of reconciling items in a timely manner and (2) improper application of accounting resources to effectively evaluate the financial reporting impact of significant matters including, but not limited to, interest rate swap transactions. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition as of June 30, 2007 and 2006 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2007 of the Company. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the June 30, 2007

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

In our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control—Integrated Framework issued by COSO.

/s/ KPMG LLP
Philadelphia, Pennsylvania
September 28, 2007

Willow Financial Bancorp, Inc.
Consolidated Statements of Financial Condition

	At June 30, 2007			At June 30, 2006
	(Dollars in thousands, except share data)
Assets:
Cash and cash equivalents:
Cash on hand and non-interest-earning deposits	$	26,253		$	32,930
Interest-bearing deposits	32,475			4,289
Total cash and cash equivalents	58,728			37,219
Investment securities:
Trading	1,176			902
Available for sale (amortized cost of $193,232 and $203,221, respectively)	188,339			196,925
Held to maturity (fair value of $86,488 and $102,087, respectively)	88,363			105,561
Federal Home Loan Bank Stock	11,394			16,856
Loans (net of allowance for loan losses of $12,210 and $16,737, respectively)	1,036,098			1,063,882
Loans held for sale	8,075			2,635
Accrued interest receivable	6,738			6,647
Property and equipment, net	11,307			10,064
Bank owned life insurance	11,930			11,483
Real estate owned	—			51
Other intangible assets, net	14,432			12,975
Goodwill	95,100			94,072
Other assets	18,664			17,788
Total assets	$	1,550,344		$	1,577,060
Liabilities and Stockholders’ Equity:
Interest-bearing deposits	$	941,895		$	855,526
Non-interest-bearing deposits	151,160			162,864
Securities sold under agreements to repurchase	20,000			20,000
Federal Home Loan Bank advances	190,063			282,717
Advance payments from borrowers for taxes	4,254			4,776
Trust preferred securities	25,525			36,149
Accrued interest payable	2,223			2,205
Other liabilities	9,889			9,425
Total liabilities	1,345,009			1,373,662
Commitments and contingencies	—			—
Stockholders’ equity:
Common stock, $0.01 par value; (40,000,000 authorized; 17,487,770 and 16,584,870 issued at June 30, 2007 and 2006, respectively)	175			166
Additional paid-in capital	191,223			178,886
Retained earnings—substantially restricted	51,932			60,404
Accumulated other comprehensive loss	(3,180		)	(3,317		)
Obligation of deferred compensation plan	1,277			1,258
Treasury stock at cost, 1,991,427 and 1,823,123 shares at June 30, 2007 and 2006, respectively	(31,493		)	(28,251		)
Unallocated common stock held by:
Employee Stock Ownership Plan (ESOP)	(2,733		)	(3,287		)
Recognition and Retention Plan Trust (RRP)	(1,866		)	(2,461		)
Total stockholders’ equity	205,335			203,398
Total liabilities and stockholders’ equity	$	1,550,344		$	1,577,060

See accompanying Notes to Consolidated Financial Statements

Willow Financial Bancorp, Inc.
Consolidated Statements of Income

	For the year ended June 30,
	2007		2006			2005
	(Dollars in thousands, except per share data)
Interest and dividend income:
Loans	$	69,538	$	65,472		$	34,536
Investment securities and interest-bearing deposits	16,735		16,058			15,143
Total interest income	86,273		81,530			49,679
Interest expense:
Deposits	28,698		18,476			9,931
Securities sold under agreements to repurchase	1,135		228			—
Borrowings	11,435		13,534			8,818
Total interest expense	41,268		32,238			18,749
Net interest income	45,005		49,292			30,930
Provision for loan losses	653		3,205			1,232
Net interest income after provision for loan losses	44,352		46,087			29,698
Non-interest income:
Investment services income, net	3,321		2,634			—
Income from insurance operations	637		—			—
Service charges and fees	5,438		5,000			2,418
Realized gain (loss) on sale of:
Loans held for sale	616		357			597
Investment securities available for sale	228		(919		)	73
Real estate	303		17			—
Gain on termination of interest rate corridor	804		—			—
Other income	1,151		558			389
Total non-interest income	12,498		7,647			3,477
Non-interest expense:
Salaries and employee benefits	24,265		20,106			13,062
Occupancy and equipment	8,059		6,011			2,646
Data processing	1,504		1,220			960
Advertising	2,041		1,504			978
Deposit insurance premiums	120		124			85
Amortization of intangible assets	2,043		1,928			57
Professional fees	2,444		2,303			1,441
Other expense	4,583		4,206			4,168
Total non-interest expense	45,059		37,402			23,397
Income before income taxes	11,791		16,332			9,778
Income tax expense	3,396		5,256			3,052
Net Income	$	8,395	$	11,076		$	6,726
Earnings per share:
Basic	$	0.55	$	0.79		$	0.70
Diluted	$	0.54	$	0.77		$	0.67

See accompanying Notes to Consolidated Financial Statements

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

	Common stock		Additional paid in capital		Retained earnings			Accumulated other comprehensive income (loss)			Obligation of deferred compensation plan		Treasury stock			Common stock acquired by benefit plans			Total
	(Dollars in thousands, except per share data)
Balance at June 30, 2004	$	114	$	84,915	$	53,516		$	(2,463	)	$	525	$	(24,926	)	$	(7,905	)	$	103,776
Net income	—		—		6,726			—			—		—			—			6,726
Other comprehensive income	—		—		—			1,110			—		—			—			1,110
Exercise of Stock Options	1		284		—			—			—		—			—			285
ESOP shares committed to be released	—		566		—			—			—		—			462			1,028
Obligation of deferred compensation plan	—		—		—			—			551		—			—			551
Amortization of RRP shares	—		9		—			—			—		—			588			597
Treasury stock acquired (155,577 shares at cost)	—		—		—			—			—		(3,146		)	—			(3,146		)
Tax benefit related to employee stock benefit plans	—		312		—			—			—		—			—			312
Cash dividends paid—($0.44 per share)	—		—		(4,196		)	—			—		—			—			(4,196		)
Balance at June 30, 2005	$	115	$	86,086	$	56,046		$	(1,353	)	$	1,076	$	(28,072	)	$	(6,855	)	$	107,043
Net income	—		—		11,076			—			—		—			—			11,076
Other comprehensive income	—		—		—			(1,964		)	—		—			—			(1,964		)
Common stock issued in acquisition	50		90,966		—			—			—		—			—			91,016
Exercise of Stock Options	1		1,274		—			—			—		—			—			1,275
Stock based compensation	—		306		—			—			—		—			—			306
ESOP shares committed to be released	—		—		—			—			—		—			462			462
Obligation of deferred compensation plan	—		—		—						182		—			—			182
Amortization of RRP shares	—		—		—			—			—		—			645			645
Treasury stock acquired (15,132 shares at cost)	—		—		—			—			—		(179		)	—			(179		)
Tax benefit related to employee stock benefit plans	—		254		—			—			—		—			—			254
Cash dividends paid—($0.46 per share)	—		—		(6,718		)				—		—			—			(6,718		)
Balance at June 30, 2006	$	166	$	178,886	$	60,404		$	(3,317	)	$	1,258	$	(28,251	)	$	(5,748	)	$	203,398
Net income	—		—		8,395			—			—		—			—			8,395
Other comprehensive income	—		—		—			137			—		—			—			137
Stock dividend	8		9,929		(9,937		)	—			—		—			—			—
Cash issued in lieu of fractional shares	—		—		(10		)	—			—		—			—			(10		)
Exercise of Stock Options	1		1,391		—			—			—		—			—			1,392
Stock based compensation	—		756		—			—			—		—			—			756
ESOP shares committed to be released	—		—		—			—			—		—			329			329
Obligation of deferred compensation plan	—		—		—			—			19		—			—			19
Amortization of RRP shares	—		—		—			—			—		—			820			820
Treasury stock acquired (269,200 shares at cost)	—		—		—			—			—		(3,242		)	—			(3,242		)
Tax benefit related to employee stock benefit plans	—		261		—			—			—		—			—			261
Cash dividends paid—($0.46 per share)	—		—		(6,920		)	—			—		—			—			(6,920		)
Balance at June 30, 2007	$	175	$	191,223	$	51,932		$	(3,180	)	$	1,277	$	(31,493	)	$	(4,599	)	$	205,335

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

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

See accompanying Notes to Consolidated Financial Statements.

Willow Financial Bancorp, Inc.
Consolidated Statements of Cash Flows

	For the year ended June 30,
	2007			2006			2005
	(Dollars in thousands)
Net cash flows from operating activities:
Net income	$	8,395		$	11,076		$	6,726
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	2,598			1,837			955
Amortization of premium and accretion of discount, net	180			347			595
Amortization of intangible assets	2,043			1,928			57
Provision for loan losses	653			3,205			1,232
Gain on sale of loans available for sale	(616		)	(370		)	(597		)
(Gain) loss on sale of securities available for sale and trading	(228		)	936			(73		)
Gain on sale of interest rate corridor	(804		)	—			—
Gain on sale of real estate	(303		)	—			—
Increase in loans held for sale	(57,313		)	(76,020		)	(108,823		)
Proceeds from sale of loans held for sale	52,489			81,911			108,761
Purchase of trading account securities	(274		)	(820		)	(53		)
Excess tax benefit from stock options exercised	(261		)	(198		)	—
Amortization of deferred loan fees, discounts and premiums	(1,266		)	(1,442		)	(124		)
(Increase) decrease in accrued interest receivable	(91		)	335			(529		)
(Increase) decrease in value of bank owned life insurance	(447		)	6,036			—
(Increase) decrease in other assets	(2,434		)	3,225			(1,129		)
Increase (decrease) in other liabilities	479			(8,455		)	3,536
Stock based compensation	1,931			1,963			1,625
Increase (decrease) in accrued interest payable	18			(351		)	78
Net cash provided by operating activities	4,749			25,143			12,237
Cash flows from investing activities:
Capital expenditures	(5,080		)	(3,287		)	(631		)
Proceeds from sale of office buildings	1,649			11,139			—
Net decrease (increase) in loans	26,118			(25,825		)	(61,029		)
Purchase of securities available for sale	(62,737		)	(23,027		)	(23,472		)
Purchase of investment securities held to maturity	—			—			(107,388		)
Proceeds from sales and calls of securities available for sale	72,768			80,132			98,063
Proceeds from maturities, payments and calls of investment securities held to maturity	17,205			59,159			41,450
Net decrease (increase) in FHLB stock	5,462			11,544			(2,053		)
Proceeds from sale of other real estate owned	2,572			388			262
Net cash used for acquisition	(4,433		)	(35,032		)	—
Net cash provided by (used in) investing activities	53,524			75,191			(54,798		)
Cash flows from financing activities:
Net increase (decrease) in deposits	74,932			(55,519		)	(437		)
Increase in securities sold under agreements to repurchase	—			26,636			—
Proceeds from FHLB advances	107,400			215,700			109,500
Repayment of FHLB advances	(200,054		)	(291,724		)	(78,268		)
(Decrease) increase in advance payments from borrowers for taxes and insurance	(522		)	1,428			(13		)
Net proceeds from the issuance of trust preferred securities	—			25,000			—
Repayment of trust preferred securities	(10,000		)	—			—
Cash dividends on common stock	(6,920		)	(6,718		)	(4,196		)
Proceeds from stock issuance	—			—			285
Cash in lieu of fractional shares	(10		)	—			—
Stock options exercised	1,392			1,275			—
Excess tax benefit from stock options exercised	261			198			—
Common stock repurchased as treasury stock	(3,242		)	—			(3,146		)
Net cash (used in) provided by financing activities	(36,763		)	(83,724		)	23,725
Net increase (decrease) in cash and cash equivalents	21,510			16,610			(18,836		)
Cash and cash equivalents:
Beginning of year	37,219			20,609			39,445
End of year	$	58,729		$	37,219		$	20,609
Supplemental disclosures of cash and cash flow information
Interest paid	$	41,126		$	32,589		$	18,671
Income taxes paid	416			2,628			2,941
Noncash items:
Net unrealized gain (loss) on investment securities available for sale, net of tax	1,051			(3,424		)	1,061
Net unrealized (loss) gain on cash flow hedge, net of tax	(766		)	505			—
Loans transferred to other real estate owned	—			—			532

See accompanying Notes to Consolidated Financial Statements

1. Description of Business and Basis of Financial Statement Presentation

Effective at 11:59 p.m., 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, references to the Company include both Willow Financial Bancorp, Inc. and Willow Grove Bancorp, Inc. and references to the Bank include both Willow Financial Bank and Willow Grove Bank. Coincident with the name change, the Company’s trading symbol on the NASDAQ Select Global Market was changed from “WGBC” to “WFBC.”

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

After the close of business on August 31, 2005, the Company completed 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 owned subsidiaries, First Financial Bank, a Pennsylvania chartered commercial bank (“Chester Valley”) with 13 full-service banking offices, and Willow Investment Services (“WIS”), formerly Philadelphia Corporation for Investment Services, a registered investment advisor and broker dealer (“PCIS”). Pursuant to the Agreement and Plan of Merger, dated as of January 20, 2005 (the “Merger Agreement”), Chester Valley was merged with and into the Company, with the Company as the surviving corporation (the “Merger”), and Chester Valley was merged with and into Willow Financial Bank with Willow Financial Bank as the surviving bank (the “Bank Merger”). WIS became a wholly owned subsidiary of the Company. As a result of the Merger, each outstanding share of Chester Valley common stock, par value $1.00 per share (the “Chester Valley Common Stock”), was converted into the right to receive, at the election of the shareholder, either $27.90 in cash or 1.4823 shares of the Company common stock, par value $0.01 per share (the “Company Common Stock”), subject to the allocation and pro ration provisions set forth in the Merger Agreement. The acquisition resulted in the Company’s issuance of an aggregate of 4,977,256 shares of Company Common Stock and $51.0 million in cash. The total merger consideration paid for the Chester Valley Common Stock was $145.3 million. This included capitalized acquisition costs and the value of Chester Valley vested stock options converted to options of the Company at the average stock price of the Company on the four days surrounding the announcement of the acquisition. The Company used general corporate funds to pay the aggregate cash consideration of approximately $51.0 million for the shares of Chester Valley 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 of accounting, which requires that our financial statements include activity of Chester Valley only subsequent to the acquisition date of August 31, 2005. Accordingly, our consolidated financial statements and the information herein include the combined results of the former Chester Valley and its former subsidiaries, Chester Valley and WIS, since September 1, 2005.

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

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

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

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

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

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

2. Risks and Uncertainties

In the normal course 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 to interest rate risk to the degree that its interest-bearing liabilities mature or re-price at different speeds, or on a different basis, from its interest-earning assets. The Company’s primary credit risk is the risk of default on the Company’s loan portfolio that results from the borrower’s inability to make contractually required payments. The Company’s lending activities are concentrated in Pennsylvania. The largest concentration of the Company’s loan portfolio is located in southeastern Pennsylvania. The ability of the Company’s borrowers to repay amounts owed is dependent on several factors, including the economic conditions in the borrower’s geographic region and the borrower’s financial condition. Market risk reflects changes in the value of collateral underlying loans, the valuation of real estate held by the Company, the valuation of loans held for sale, securities available for sale and mortgage servicing assets. The Company is subject to certain Federal banking laws and regulations as further described herein and in note 18. Compliance with regulations causes the Company to incur significant costs. In addition, the possibility of future changes to such regulations presents the risk that future additional costs will be incurred that may impact the Company.

3. Acquisition of Chester Valley Bancorp

The above noted Chester Valley acquisition cost was approximately $145.3 million, comprised of $88.5 million related to 4,977,256 shares of common stock issued by the Company, $54.2 million in

cash, consisting of $51.0 million paid to shareholders of Chester Valley and $3.2 million in capitalized acquisition costs along with $2.6 million related to the conversion of former stock options of Chester Valley to options of the Company. As a result of the Merger, the Company recorded an approximate $108.1 million intangible asset, including a $14.9 million core deposit intangible asset with the remainder recorded as goodwill. The Company’s statement of operations for the twelve months ended June 30, 2006 includes the results of operations of the former Chester Valley Bancorp and subsidiaries only for the period beginning on September 1, 2005. The fair values used in computing the purchase accounting adjustments were finalized at June 30, 2006.

The following table summarizes the purchase accounting adjustments resulting from the Merger:

Chester Valley Acquisition Summary
(Dollars in Thousands)

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

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

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

Total interest income	$	87,506
Total interest expense	34,423
Provision for loan losses	3,649
Other income	8,149
Other expense	46,971
Income before tax	10,612
Income tax	3,246
Net income	7,366
Non-recurring items(a)	8,426
Adjusted net income(b)	$	15,792
Earnings per Share:
Basic	$	0.56
Diluted	$	0.54

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

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

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

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

4. Summary of Significant Accounting Policies

Use of Estimates

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

Cash and Cash Equivalents

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

Loans Held for Sale

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market calculated on an aggregate basis, with any unrealized losses reflected in the consolidated statements of income. Loans transferred from loans held for sale to loans receivable are transferred at the lower of cost or market value at the date of transfer. Gains are recognized upon delivery to the purchaser of said loans.

Investment Securities

The Company divides its securities portfolio into three segments: (a) held to maturity, (b) available for sale and (c) trading. Securities in the held to maturity category are carried at cost, adjusted for amortization of premiums and accretion of discounts, using the level yield method, based on the Company’s intent and ability to hold the securities until maturity. Marketable securities included in the available for sale category are carried at fair value, with unrealized gains or losses that are temporary in nature, net of taxes, reflected as an adjustment to equity. Trading securities consist of mutual funds related to the Company’s deferred compensation plan for certain executive level employees. Changes in the fair value of trading securities are recorded through earnings. There is a corresponding liability in other liabilities on the consolidated statements of financial condition. Securities held to maturity and available for sale are evaluated periodically to determine 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 the loss in value is other than temporary. The term “other than temporary” is not intended to indicate that the decline is permanent, but indicates that

the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support realizable value equal to or greater than carrying value of the investment. Once a decline in fair value is determined to be other than temporary, the fair value of the security is reduced and reflected in the consolidated statements of income.

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

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

Allowance for Loan Losses

The allowance for loan losses is maintained at a level that management believes is adequate to cover known and inherent losses in the loan portfolio that are both probable and reasonable to estimate at each reporting date. Management establishes the loan loss allowance in accordance with guidance provided by the Securities and Exchange Commission’s Staff Accounting Bulletin 102 (SAB 102). The determination of the adequacy of the allowance is based upon an evaluation of the portfolio, loss experience, current economic conditions, volume, growth, composition of the portfolio, and other relevant factors. The Company uses historical loss factors for each loan type and, for loans that we consider higher risk for all but single-family mortgage loans and guaranteed consumer loans, qualitative factors are also considered. This component establishes a range for factors such as, but not limited to, delinquency trends, asset classification trends and current economic conditions. Management then assesses these conditions and establishes, to the best of its ability, the allowance for loan losses from within the range calculated, based upon the facts known at that time. The methodology does not imply that any portion of the allowance for loan loss is restricted, but the allowance for loan loss applies to the entire loan portfolio.

Loans

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

Interest receivable on loans is accrued to income as earned. Non-accrual loans are loans on which the accrual of interest has ceased because the collection of principal or interest payments is determined to be doubtful by management. It is the policy of the Company to discontinue the accrual of interest and reverse any accrued interest when principal or interest payments are delinquent more than 90 days (unless the loan principal and interest are determined by management to be fully secured and in the process of collection), or earlier if the financial condition of the borrower raises significant concern with regard to the ability of the borrower to service the debt in accordance with the terms of the loan. Interest income on such loans is not accrued until the financial condition and payment record of the borrower demonstrates the ability to service the debt. Subsequent cash receipts are applied either to the outstanding principal or recorded as interest income, depending on management’s assessment of ultimate collectibility of principal and interest.

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

for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Doubtful assets have weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of current existing facts, conditions and values, questionable, and there is a high probability of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the assets, which range from three to 40 years. Significant renovations and additions are capitalized. Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the related lease term. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income for the period. The cost of maintenance and repairs is charged to expense as incurred.

Goodwill and Other Intangibles

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

Income Taxes

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Earnings Per Share

Earnings per share (“EPS”) consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented, see Note 6. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans and unvested common stock awards.

Stock Based Compensation

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

	Year ended June 30, 2005
	As Reported		Pro Forma Adjustments			Pro Forma if under SFAS 123R
	(Dollars in thousands, except per share data)
Income before taxes	$	9,778	$	(350	)	$	9,428
Income taxes	3,052		(118		)	2,934
Net Income	$	6,726	$	(232	)	$	6,494

Net income available to common stockholders	$	6,627	$	(232	)	$	6,395

Basic earnings per share	$	0.70	$	(0.02	)	$	0.68
Diluted earnings per share	$	0.67	$	(0.02	)	$	0.65

Recent Accounting Pronouncements

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

In February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 provides entities with the opportunity to reduce volatility in reported earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective as of the 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 that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.” The Company is currently assessing the implications of this Statement on its financial statements.

FASB Statement No, 157, Fair Value Measurements

implications of this Statement on its financial statements.

Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements

FASB Interpretation 48, Accounting for Uncertainty in Income Tax Positions

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

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

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

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

5. Stock Compensation Plans

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

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

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

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

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

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

The following table provides information about options outstanding and exercisable options at June 30, 2007:

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

The weighted average remaining contractual life for options outstanding and weighted average exercise price per share for exercisable options at June 30, 2007 were as follows:

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

The Company granted 70,025, 22,096 and zero stock options during the years ended June 30, 2007, 2006 and 2005, respectively. The weighted average grant date fair value of options granted was $2.61 and $2.89 for the years ended June 30, 2007 and 2006, respectively. The fair value for stock options granted during the year ended June 30, 2007 was determined 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 date of grant using the Black-Scholes valuation methodology, which is dependent upon certain assumptions, as summarized in the following table:

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

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

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

RRP

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

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

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

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

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

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

6. Earnings Per Share

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

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share calculations.

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

7. Investment Securities

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

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

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

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

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

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

The amortized cost and estimated fair value of investment securities held to maturity, investment securities and available for sale at June 30, 2007, by contractual maturity, are shown below.

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

The Company must maintain ownership of specified amounts of stock as a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Company’s ownership of FHLB stock was $11.4 million and $16.9 million as of June 30, 2007 and 2006, respectively.

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

As described in note 12, certain investment securities available for sale are maintained to collateralize advances from the FHLB.

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

believes the deterioration in value is attributable to changes in market conditions as the loss relates to certain mutual fund investments and not the credit quality of the issuer.

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

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

Management does not believe any individual unrealized loss as of June 30, 2007 represents an other-than-temporary impairment. The temporary impairment is directly related to changes in market interest rates and/or rating downgrades. In general, as interest rates rise, the fair value of fixed-rate securities will decrease and, as interest rates fall, the fair value of fixed-rate securities will increase. The severity of the impairment as a percent of the total investment position is nominal and the duration of the impairment to date is short. The impairments are deemed temporary based on the direct relationship of the decline in fair value to movements in interest rates, as well as the relatively short duration of the investments and their high credit quality. In evaluating the securities portfolio for impairment, the Company has considered analyst reports and sector credit ratings. None of the bonds in the Company’s securities portfolio are below investment grade. Additionally, the Company has the ability and intent to hold these securities until such time as the value recovers or the securities mature.

8. Loans

Loans receivable as of June 30, 2007 and 2006 consisted of the following:

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

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

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

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

	For the year ended June 30,
	2007			2006			2005
	(Dollars in thousands)
Balance, beginning of the period	$	16,737		$	6,113		$	5,220
Plus: Provisions for loan losses	653			3,205			1,232
Less charge-offs for:
Mortgage loans	(76		)	(24		)	(7		)
Consumer loans	(277		)	(62		)	(22		)
Commercial real estate loans	(1,848		)	—			—
Commercial business loans	(3,185		)	(47		)	(316		)
Total Charge-offs	(5,386		)	(133		)	(345		)
Plus: Recoveries	206			615			6
Allowance acquired in the Merger	—			6,937			—
Balance, end of the period	$	12,210		$	16,737		$	6,113

9. Goodwill and Other Intangible Assets

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

The estimated aggregate amortization expense related to other intangibles for each of the five succeeding calendar years is:

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

10. Property and Equipment

Property and equipment by major classification are summarized as follows:

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

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

In February 2006, the Bank completed a sale-leaseback of eight of its branch offices resulting in the receipt of approximately $11.1 million in cash and an excess over book value of approximately $722 thousand. The premium attributed to the former First Financial branches of $194 thousand reduced oodwill while the balance of such premium of $528 thousand is deferred and amortized as a reduction of rent expense over the term of the leases.

11. Deposits

Deposit balances by type consisted of the following at June 30, 2007, and 2006:

	June 30, 2007				June 30, 2006
	Amount		Percent of total		Amount		Percent of total
	(Dollars in thousands)
Savings accounts (passbooks, statements, clubs)	$	87,565	8.0	%	$	101,119	9.9	%
Money market accounts	403,487		36.9		338,451		33.2
Certificates of deposit less than $100,000	239,967		22.0		238,603		23.5
Certificates of deposit greater or equal to $100,000	94,705		8.7		63,024		6.2
Interest-bearing checking accounts	116,171		10.6		114,329		11.2
Non-interest-bearing checking accounts	151,160		13.8		162,864		16.0
Total	$	1,093,055	100.0	%	$	1,018,390	100.0	%

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

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

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

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

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

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

12. Federal Home Loan Bank Advances

Under terms of its collateral agreement with the FHLB, the Company maintains otherwise unencumbered qualifying assets (principally qualifying 1-4 family residential mortgage 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’s FHLB stock is also pledged to secure these advances.

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

	Amount outstanding		Weighted average rate
	(dollars in thousands)
Due by:
June 30, 2008	$	14,636	3.5	%
June 30, 2009	27,459		3.9
June 30, 2010	9,032		4.9
June 30, 2011	23,242		5.3
June 30, 2012	29,675		4.4
Thereafter	86,019		4.0
Total	$	190,063	4.2	%

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

13. Trust Preferred Securities and Other Borrowings

Effective with the acquisition of Chester Valley, the Company assumed the liability for $10.5 million of Junior Subordinated Debentures to the Chester Valley Statutory Trust, a Pennsylvania Business Trust, in which the Company owned all of the common equity as a result of the acquisition of Chester Valley. The Trust issued $10.0 million of Trust Preferred Securities to investors, which were secured 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 Willow Grove Statutory Trust I, a Connecticut Statutory Trust, in which the Company owns all of the common equity. The Trust then issued $25.0 million of Trust Preferred Securities, which pay interest quarterly at three-month Libor plus 1.31% to investors, which are secured by the Junior Subordinated Debentures and the guarantee of the Company. The Junior Subordinated Debentures are treated as debt of the Company but qualify as Tier I capital of the Bank to the extent of the amount of the proceeds, which are invested in the Bank. The Trust Preferred Securities are callable by the Company on or after September 30, 2011. The Trust Preferred Securities must be redeemed by the Company upon their maturity in the year 2036.

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

14. Income Taxes

Income tax expense for the years ended June 30, 2007, 2006 and 2005 consisted of the following:

		Current		Deferred		Total
		(Dollars in thousands)
For the year ended June 30, 2007	Federal	$	1,453	$	1,926	$	3,379
	State	17		—		17
	Total	$	1,470	$	1,926	$	3,396
For the year ended June 30, 2006	Federal	$	2,646	$	2,586	$	5,232
	State	24		—		24
	Total	$	2,670	$	2,586	$	5,256
For the year ended June 30, 2005	Federal	$	3,050	$	2	$	3,052
	State	—		—		—
	Total	$	3,050	$	2	$	3,052

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

	For the year ended June 30,
	2007					2006					2005
	Amount			Percent of pretax income		Amount			Percent of pretax income		Amount			Percent of pretax income
	(Dollars in thousands)
At statutory rate	$	4,009		34.0	%	$	5,716		35.0	%	$	3,324		34.0	%
State tax, net of federal tax benefit	11			0.1		15			0.1		—			—
Low income housing credits	(162		)	(1.4	)	(154		)	(0.9	)	(29		)	(0.3	)
Tax-exempt interest	(601		)	(5.1	)	(269		)	(1.6	)	(280		)	(2.9	)
Meals and entertainment	11			0.1		6			0.0		6			0.1
BOLI	(152		)	(1.3	)	(130		)	(0.8	)	(65		)	(0.7	)
Dividends on ESOP shares	(93		)	(0.8	)	(106		)	(0.7	)	(108		)	(1.1	)
ESOP compensation expense	138			1.2		174			1.1		196			2.0
Stock based compensation	16			0.1		107			0.7		—			—
Change in statutory federal tax rate	73			0.6		(93		)	(0.6	)	—			—
Other	146			1.3		(10		)	(0.1	)	8			0.1
Income tax expense	$	3,396		28.8	%	$	5,256		32.2	%	$	3,052		31.2	%

Significant deferred tax assets and liabilities included in other assets and liabilities of the Company as of June 30, 2007 and 2006 are as follows:

	June 30,
	2007			2006
	(Dollars in thousands)
Deferred loan fees	$	84		$	115
Retirement plan reserves	488			586
Employee benefits	234			222
Uncollected interest	78			274
Book bad debt reserves	4,274			6,024
Unrealized loss on available for sale securities	1,712			1,966
Investment impairment reserves	1,360			1,504
Loan discounts	66			325
Sale/Leaseback	159			167
Purchase accounting fair value adjustments	88			292
Fixed asset write-downs	—			299
Investment in joint venture	236			188
Net operating loss carryover	—			196
Low income housing credit carryover	397			—
AMT credit carryover	182			—
Other, net	223			206
Gross deferred tax assets	9,581			12,364
Intangible asset amortization	(3,022		)	(3,534		)
Depreciation	(372		)	(411		)
Other	(99		)	(151		)
Gross deferred tax liabilities	(3,493		)	(4,096		)
Net tax deferred asset	$	6,088		$	8,268

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

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

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

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

15. Benefit Plans

401(k) Plan

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

Employee Stock Ownership Plan

On December 23, 1998, the Company adopted an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed $1.8 million from the Company and used the funds to purchase 429,207 shares (179,270 shares pre-exchange) of the Company’s common stock. The loan has an interest rate of 7.75% and has an amortization schedule of 15 years. In April 2002, an additional ESOP loan was made of $5.1 million to purchase an additional 538,787 shares of the Company’s common stock issued in its “second step” reorganization. This loan has an interest rate of 4.75% and an amortization schedule of 15 years. Shares purchased are held in a suspense account for allocation among the participants as the loans are repaid. Effective January 31, 2000, the Company merged the 401(k) Plan and ESOP. Contributions to the ESOP portion of the 401(k)/ESOP and shares released from the loan collateral will be in an amount proportional to repayment of the original ESOP loans. Shares are allocated to participants based on compensation as described in the 401(k)/ESOP Plan Documents, in the year of allocation. At June 30, 2007, there were 431,791 ESOP shares allocated to participants, representing a fair value of $2.8 million, in addition, there were 32,267 shares committed to be released. The Company recorded compensation expense of $890 thousand, $955 thousand and $1.0 million for the ESOP for the years ended June 30, 2007, 2006 and 2005, respectively.

Supplemental Retirement Plans

Effective June 30, 1998, the Company adopted non-qualified supplemental retirement plans for the Company’s Board of Directors (the “Directors’ Plan”) and for the Company’s former president (the “President’s Plan”). The Directors’ Plan provided for fixed annual payments to qualified directors for a period of ten years from retirement. Benefits to be paid accrued at the rate of 20% per year on completion of six full years of service, with full benefit accrual at ten years of service. At the time these plans were adopted credit was given for past service. The President’s Plan provides for payments for a period of ten years beginning at retirement based on a percentage of annual compensation not to exceed an established cap. Full benefits become accrued at age 68 with partial vesting prior thereto. Both plans provide for full payments in the event of a change in control of the Company. The Directors’ Plan and President’s Plan are intended to be, and are, unfunded. The accrued liability of the Directors’ Plan and the President’s Plan were $779 thousand and $634 thousand and $965 thousand and $710 thousand at June 30, 2007 and 2006, respectively.

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

16. Commitments and Contingencies

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

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

Financial Instruments With Off-Balance Sheet Risk

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

Guarantees

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

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

Concentration of Credit Risk

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

Legal Proceedings

As previously described 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 from the Regional Municipal Securities Counsel in the Philadelphia Office of the Securities and Exchange Commission (the “SEC”). The subpoena arose out of a non-public SEC investigation titled “Hummelstown General Authority,” which Authority issued non-rated revenue bonds now in default, underwritten by the firm of a former director of Chester Valley and FFB. The SEC subpoena requested the production of certain documents concerning FFB’s involvement with non-rated municipal securities, including those issued to finance the Whitetail Golf Course by the Dauphin County General Authority and the Hummelstown General Authority, through the former director’s firm, and related matters. FFB previously produced documents to the SEC and certain officers of FFB provided testimony to the SEC in 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 defendant in the complaint filed by the SEC.

FFB is a party to three civil actions relating to some of the revenue bonds 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 a civil action against, inter alia, FFB. Boyertown Area School District v. First Financial Bank et. al., No. 0521799. A complaint was filed on November 9, 2005, asserting the following claims against FFB: Breach of Trust 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 the Court of Common Pleas, York County, Pennsylvania, against inter alia, FFB. Red Lion Area School District v. Bradbury et. al., No. 2005-SU1656Y01; No. 2005SU2544Y01. This case has been transferred to the Court of Common Pleas of Montgomery County, 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), Civil Conspiracy (Count 17), Civil Conspiracy—Alternative Legal Basis (Count 18), Breach of Common Law Duties as Trustee (Count 19), Tortious Action in Concert/Aiding and Abetting Fraud (Count 20), Breach of Trust Indenture (Count 21), Breach of Fiduciary Duties (Count 22), Vicarious Liability and Respondeat Superior (Count 23), Unjust Enrichment (Count 24), and Unjust Enrichment (Count 25). On March 16, 2006, Perkiomen Valley School District (“Perkiomen”) filed a complaint in the Court of Common Pleas, Montgomery County, Pennsylvania, against, inter alia, FFB Perkiomen Valley School District v. First Financial Bank et.al., No. 0606533. The complaint asserts the following claims against FFB: Breach of Trust Indenture (Count 1), Breach of Fiduciary Duties (Count 2), Vicarious Liability and Respondeat Superior (Count 3), Civil Conspiracy (Count 4), and Concert of Action (Count 5). The actions have been consolidated for discovery and case management purposes, but not for trial. The Bank’s answers were provided 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 its initial stages. The Company believes the above noted lawsuits are without merit and intends to vigorously defend itself in the suits.

On June 16, 2007, Cincinnati Insurance Company (“Cincinnati”) commenced a declaratory judgment action in federal court against the Bank, Red Lion, Boyertown, and Perkiomen seeking a declaration that Cinncinnati is not obligated to provide insurance coverage to the Bank in connection with the SEC subpoena 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 Bank’s answer was provided on September 20, 2007.

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

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

Other Commitments

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

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

17. Accounting for Derivative Instruments and Hedging

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

As part of the Merger, the Company assumed the responsibility for a $20 million notional interest rate swap whereby the Company paid a variable rate and received a fixed rate. The interest rate swap had been used to hedge certain Federal Home Loan Bank borrowings of the former Chester Valley. On the date of the Merger, the interest rate swap and the hedged borrowings were marked to fair value in purchase accounting. In September 2005, the hedged borrowings were repaid and $10 million notional amount of the interest rate swap was unwound with the counter-party. After performing the appropriate documentation of the derivative instrument, the Company designated the remaining $10 million notional amount interest rate swap as a fair value hedge of certain existing borrowings of Willow Financial Bank. The swap had the effect of converting a fixed rate borrowing to an adjustable rate borrowing. During the

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

Additionally, in August 2003, Chester Valley purchased a $30.0 million notional amount 3.50% six month LIBOR interest rate cap while simultaneously selling a $30.0 million notional amount 6.00% six-month LIBOR interest rate cap (“Interest Rate Corridor”) which was to expire in August 2008. Chester Valley paid a net premium, which entitled it to receive the difference between six-month LIBOR from 3.50% up to 6.00% applied to the $30.0 million notional amount. Upon consummation of the Merger, the Company assumed the Interest Rate Corridor and designated it to hedge certain borrowings of Willow Financial Bank, which were variable in nature and indexed to six-month LIBOR. The Interest Rate Corridor was being used to hedge the cash flows of this borrowing. Prior to October 23, 2006, the Interest Rate Corridor reduced the negative impact on earnings of the borrowings in a rising interest rate environment. The fair market value of the Interest Rate Corridor had two components: the intrinsic value and the time value 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 change in the time value of the option included directly as interest expense as required under SFAS 133. In addition, the ineffective portion, if any, would have been expensed in the period in which ineffectiveness was determined.

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

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

18. Regulatory Matters

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

At June 30, 2007, the Bank had regulatory capital, which was well in excess of regulatory limits set by the Office of Thrift Supervision. The current requirements and the Bank’s actual capital levels are detailed below:

	Actual Capital				Required for Capital Adequacy Purposes				Required to Be Well Capitalized under Prompt Corrective Action Provision
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of June 30, 2007
Tangible capital
(to tangible assets)	$	122,710	8.5	%	$	21,734	1.5	%	$	28,979	2.0	%
Core capital
(to adjusted tangible assets)	122,710		8.5	%	57,958		4.0	%	72,447		5.0	%
Tier I capital
(to risk-weighted assets)	122,710		12.7	%	N/A		N/A		57,769		6.0	%
Risk-based capital
(to risk-weighted assets)	134,284		14.0	%	77,025		8.0	%	96,282		10.0	%
As of June 30, 2006
Tangible capital
(to tangible assets)	$	114,061	7.8	%	$	22,028	1.5	%	$	29,370	2.0	%
Core capital
(to adjusted tangible assets)	114,061		7.8	%	58,711		4.0	%	73,426		5.0	%
Tier I capital
(to risk-weighted assets)	114,061		11.9	%	N/A		N/A		57,165		6.0	%
Risk-based capital
(to risk-weighted assets)	125,569		13.2	%	76,220		8.0	%	95,274		10.0	%

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

19. Fair Value of Financial Instruments

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

Limitations

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

significant assumptions (many of which involve events outside the control of management). Such assumptions include assessments of current economic condition, perceived risks associated with these financial instruments and their counterparties, future expected loss experience, and other factors. Given the uncertainties surrounding these assumptions, the reported fair values represent estimates only and, therefore, cannot be compared to the historical accounting model. Use of different assumptions or methodologies is likely to result in significantly different fair value estimates.

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

The following methods and assumptions were used to estimate the fair value of each major classification of financial instruments at June 30, 2007 and 2006:

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

These financial instruments have carrying values that approximate fair value.

Securities Available for Sale, Trading and Held to Maturity

Current quoted market prices were used to determine fair value.

Loans

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

Loans Available for Sale

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

FHLB Advances

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

Trust Preferred Securities

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

Commitments to Extend Credit

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

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

	June 30, 2007				June 30, 2006
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
Assets:
Cash and cash equivalents	$	58,728	$	58,728	$	37,219	$	37,219
Trading securities	1,176		1,176		902		902
Securities available for sale	188,339		188,339		196,925		196,925
Securities held to maturity	88,363		86,488		105,561		102,087
Loans available for sale	8,075		8,075		2,635		2,635
Loans, net	1,036,098		1,020,289		1,063,882		1,056,425
Accrued interest receivable	6,738		6,738		6,647		6,647
Liabilities:
Deposits with no stated maturities	758,383		758,383		683,611		683,611
Certificates of deposit	334,672		315,561		301,627		301,627
FHLB Advances	190,063		183,429		282,717		275,970
Trust preferred securities	25,525		24,537		36,149		36,149
Accrued interest payable	2,223		2,223		2,205		2,205

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

20. Comprehensive Income (Loss)

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

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

	Year ended June 30, 2006
	Before tax amount			Tax Effect			After tax Amount
	(Dollars in thousands)
Other comprehensive loss:
Unrealized holding losses during the period	$	(5,298	)	$	1,874		$	(3,424	)
Reclassification adjustment for losses included in net income	970			(340		)	630
Net unrealized gain on cash flow hedge	777			(272		)	505
Total other comprehensive loss	$	(3,551	)	$	1,262		$	(2,289	)

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

21. Segment Information

Under the definition of SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” the Company has two operating segments at June 30, 2007 and 2006; Willow Financial Bank and WIS. The Willow Financial Bank segment primarily provides loan and deposit services to commercial and retail customers through its network of 29 branch locations. The WIS segment, which was acquired on August 31, 2005 in connection with the Merger, operates a full service investment advisory and securities brokerage firm.

Segment information for the twelve months ended June 30, 2007 and 2006 is as follows:

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

22. Parent Company Financial Information (Willow Financial Bancorp, Inc.)

Condensed Statements of Financial Condition

	At June 30, 2007		At June 30, 2006
	(Dollars in thousands)
Assets:
Cash on deposit with subsidiaries	$	1,108	$	5,214
Note receivable from subsidiary	4,770		5,182
Investment in subsidiaries	218,648		206,076
Investment securities
Trading	1,176		902
Available for sale (amortized cost of $789 and $10,967, respectively)	827		10,881
Goodwill	6,526		6,526
Other assets	3,540		4,974
Total assets	$	236,595	$	239,755
Liabilities and stockholders’ equity:
Subordinated debentures	$	25,744	$	36,198
Other liabilities	5,516		159
Total liabilities	31,260		36,357
Total stockholders’ equity	205,335		203,398
Total liabilities and stockholders’ equity	$	236,595	$	239,755

Condensed Statements of Income

	For the year ended June 30,
	2007			2006			2005
	(Dollars in thousands)
Interest income:
Interest and dividend income	$	542		$	401		$	182
Total interest and dividend income:	542			401			182
Non-interest income:
Realized gain (loss) on investments	49			51			(57		)
Other income	2			48			—
Total non-interest income	51			99			(57		)
Total income	593			500			125
Expense:
Professional fees	14			281			452
Stationery and printing	—			27			28
Consulting services	—			38			744
Interest expense on subordinated debentures	2,434			1,109			—
Investor relations	14			70			134
Other expense	350			269			208
Total expense	2,812			1,794			1,566
Loss before taxes	(2,219		)	(1,294		)	(1,441		)
Income tax benefit	(129		)	—			(491		)
Loss before equity in income of subsidiary	(2,090		)	(1,294		)	(950		)
Equity in income of subsidiary	10,485			12,370			7,676
Net income	$	8,395		$	11,076		$	6,726

Condensed Statements of Cash Flows

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

23. Related Party Transactions

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

24. Dividend Policy

The Company’s ability to pay dividends is dependent, in part, upon its ability to obtain dividends from the Bank. The future dividend policy of the Company is subject to the discretion of the Board of Directors and will depend upon a number of factors, including future earnings, financial conditions, cash needs, and general business conditions. Holders of common stock will be entitled to receive dividends as and when declared by the Board of Directors of the 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, as a general rule, a financial institution may not make a capital distribution if it would be undercapitalized after making the capital distribution. During fiscal 2007, the Company paid cash dividends of $6.9 million, or $0.46 per share.

25. Quarterly Financial Data

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

	For the quarter ended
	06/30/06		03/31/06		12/31/05		09/30/05
	(Dollars in thousands, except per share data)
Total interest income	$	22,561	$	21,792	$	21,605	$	15,572
Total interest expense	9,326		8,586		7,971		6,355
Net interest income	13,235		13,206		13,634		9,217
Provision for loan loss	2,485		—		207		513
Total non-interest income	2,880		2,078		2,326		363
Total non-interest expense	10,290		9,503		9,767		7,842
Income tax expense	991		1,857		2,109		299
Net income	2,349		3,924		3,877		926
Earnings per share
Basic	$	0.16	$	0.25	$	0.26	$	0.08
Diluted	$	0.15	$	0.25	$	0.26	$	0.08

The results for the first through third quarters of the current fiscal year as reported on the Company’s Form 10-Q have been adjusted by the following amounts:

	For the quarter ended
	03/31/07			12/31/06			09/30/06
	(Dollars in thousands, except per share data)
Total interest income(a)	$	(87.0	)	$	(115.0	)	$	(21.0	)
Total interest expense(a)	386.0			347.0			70.0
Net interest income	(473.0		)	(462.0		)	(91.0		)
Provision for loan losses	—			—			—
Total non-interest income(b)	131.0			18.0			154.0
Total non-interest expense(c)	143.0			(286.0		)	355.0
Income tax expense(d)	(169.0		)	(54.0		)	(99.0		)
Net income	(316.0		)	(104.0		)	(193.0		)
Earnings per share:
Basic	$	(0.01	)	$	(0.01	)	$	(0.02	)
Diluted	$	(0.02	)	$	(0.01	)	$	(0.01	)

(a) Adjustments relate to items identified in various reconciliations for which reconciling items were not investigated in a timely manner.

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

(c) Adjustments relate primarily to stale-dated items identified in reconciliations as well as the accrual for paid time off.

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

Item 9. Changes in and Disagreements with Accountants and Financial Disclosure.

None

SIGNATURES

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

	WILLOW FINANCIAL BANCORP, INC.
Date: October 16, 2007	By:	/s/ DONNA M. COUGHEY
		Donna M. Coughey
		President and Chief Executive Officer

Date: October 16, 2007	By:	/s/ JOSEPH T. CROWLEY
		Joseph T. Crowley
		Chief Financial Officer